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Termites in the Trade System

Author: Jagdish N. Bhagwati
July 2, 2008
New York Sun

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Two different questions must be distinguished in the current political debate on free trade for America: Should we have free trade? If we agree that we should, how should we trade freely?

Often, the press announces that the consensus on the desirability of free trade among economists has disappeared. But in each instance, they have been disproven.

Today, the most potent argument is that free trade may increase income and wealth, but that it suppresses workers’ wages and even harms the middle class. Nearly all research shows that this claim also is mistaken.

My own research demonstrates that trade even may have moderated the fall in wages that labor-saving technical change is producing. There is little doubt that, on this issue, Senator McCain has the better of the argument over Senator Obama.

But Mr. McCain, like many others in America, is mistaken in thinking that freeing trade through Free Trade Agreements is a good idea. FTAs, which are better described as Preferential Trade Agreements, or PTAs, since they free trade for members only, is like freeing trade on a discriminatory basis. As I argue in my book, “Termites in the Trading System,” FTAs have several crippling downsides that must be recognized.

First, they will often divert trade from cheaper nonmember sources to more expensive member sources, bringing harm rather than good. Also, the enormous growth of such FTAs, now more than 350 and still growing, has led to a systemic effect: creating a “spaghetti bowl” of preferences and chaos in the world trading system.

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