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Free Trade Ad Nauseam

Author: Jagdish N. Bhagwati, Senior Fellow for International Economics
February 29, 2012
Project Syndicate

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NEW YORK – So much has been written, by so many, against the muddled ideas that have now overwhelmed good sense on trade policy in the United States government that one wonders whether there is anything left to say. Yet it is worth recalling what Pierre-Joseph Proudhon reportedly told the Russian intellectual Alexander Herzen: "And do you imagine that once a thing has been said, it is enough?....It has to be dinned into people, it has to be repeated over and over again."

What we need now is a primer on the major misconceptions in the hope that, unlike Gresham's Law, which says that bad money drives out good money, good economics will drive out bad economics. Four, in particular need to be corrected.

The first misconception is that exports create jobs, while imports do not – a fallacy that the great trade economist Harry Johnson traced to mercantilism, and which the US has resurrected. In fact, in a world where parts and components come from everywhere, interference with imports imperils competitiveness. The success of parcel-delivery companies, for example, depends on imports, which must be brought from the borders inland, as well as on exports.

Second, the credo "Trade, not aid" has given way to the mistaken belief that trade matters less than foreign assistance. The labor constituency, ever fearful of import competition, has undermined trade policy. It has also shifted aid policy in directions that assign priority to areas where the returns to US efforts are relatively minuscule.

Thus, the US State Department has ceased being an advocate of multilateral trade liberalization, despite decades of massive gains from the removal of trade barriers. Instead, its aid arm, the US Agency for International Development, has now retreated into low-yield programs conceived as randomized experiments. That technique impresses Bill Gates, and the new USAID administrator, Rajiv Shah, has experience with it. But, even if all such programs succeeded, their benefits would not add up to a fraction of the documented gains that have accrued from trade and other macro-level policies in which the US has lost interest.

Third, many believe that manufactures deserve preferential support. This is practically the mantra of US President Barack Obama's administration, and it has cost him the support not only of much of the economics profession, but also of Christina Romer, who chaired his Council of Economic Advisers. In a recent newspaper commentary, she refuted virtually all of the arguments advanced by manufacturing lobbyists for special treatment.

Add to the critiques that of Nobel laureate Robert Solow, a staunch supporter of Obama's Democratic Party. He agrees that there are activities that yield higher social returns than private returns. The problem, he notes, is that neither he nor anyone else can possibly know which ones they are, whereas the lobbyists claim that they know this precisely.

Proponents of a "manufacturing first" policy argue that "clusters" of businesses are more productive than individual businesses are. But big clustering effects are hard to find. The economists Glenn Ellison and Edward Glaeser have found that clustering is only marginally greater than if businesses are allocated randomly. Besides, it is hard not to accept that, in the economist Frances Cairncross's famous words, we are increasingly seeing the "death of distance."

Finally, the financial sector has come to be viewed as the bane of morality. In a world of financial fraud and insider trading, it is easy enough to believe this, and to accept that the financial sector must be taxed. But morality cuts across sectors. There are plenty of honest people in all walks of life, and crooks as well. The quasi-Marxist view that our morality stems from our economic position overlooks the moralizing role of family, religion, culture, and art.

Given these misconceptions, protectionism has re-emerged as a formidable foe. In 1999, when the ministerial meeting of the World Trade Organization erupted into bomb threats and mayhem, I asked then-Director-General Mike Moore whether we ought not to be prepared to die for the great cause of free trade. I should have said: we ought at least to be prepared to live for it.

Between old and new muddle, and the certain prospect that the demolition of each bad idea merely allows others to take root and grow in its place, the task of the free trader is never finished.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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