Bhagwati vs. Bhagwati on Trade Liberalization

Jagdish Bhagwati, one of the world’s finest and most renowned trade economists, gave some of his thoughts on the Doha Round and prospects for trade liberalization in yesterday’s Cato podcast. Professor Bhagwati, who is also on the Board of Advisers of Cato’s Center for Trade Policy Studies, spoke more in depth on the subject at a Cato policy forum last month titled, “U.S. Trade Policy in the Wake of Doha: Why Unilateral Trade Liberalization Makes Sense.”

Unlike most trade policy observers, Bhagwati believes the Doha Round can still succeed. The key to success, he suggests, is for U.S. negotiators to embrace a concept he calls “relaxed reciprocity.”  Rather than seek a highly ambitious outcome by demanding all participants accept maximum “concessions,” U.S. negotiators should improve their own offer while accepting whatever level of reform other countries are willing to undertake.  The logic of this approach rests in the fact that most of the gains from trade liberalization come from opening one’s own market (access to cheaper inputs for business, greater competition and choice, productivity gains, lower prices for consumers), and thus, such reforms are not concessions at all.  Greater export market access for U.S. companies is just the icing on the cake, and the prospect of a lightly frosted cake is no reason to forego the entire dessert. His conclusion, then, is that U.S. negotiators should offer to open the U.S. market as wide as possible and accept minimal openings from abroad for the sake of achieving an agreement.

I concur with Professor Bhagwati that the United States should open its market without the condition that similar measures be undertaken abroad. Admittedly, my opinion is shaped in no small part by the arguments put forth by Bhagwati over the years.  But I think the United States probably has more to gain by doing so unilaterally and not partaking of an agreement that memorializes bold U.S. reform alongside marginal reform abroad. 

Any agreement, regardless of how minimalist foreign reform is, will be an invitation for the United States to bear the brunt of the blame for any adjustment costs or continued economic problems that persist in developing countries (even if those problems have nothing to do with the agreement).  Any agreement, no matter how bold or meager, will subject the United States to claims of arm twisting and bullying, regardless of the merits of those claims.  Such developments are precisely what the United States, with its tattered international reputation and credibility, does not need right now.  The costs of such fallout, although measured differently, could easily surpass any benefits associated with an agreement that requires nothing more than window dressing abroad.

Unless our trade partners are willing to agree to ambitious reform (which will undoubtedly cause adjustment costs but will also undoubtedly help spur economic growth and provide U.S. exporters with better terms) there is little point in the U.S. agreeing to a new deal.  On the contrary, by liberalizing independent of other countries, we reap the benefits of our openness, give the developing world better access, correct the reality and perception that U.S. trade barriers are a cause of developing world poverty, and remove the capacity for the United States to serve as a scapegoat for developing country stagnation.

The determinative calculation is whether the prospective net benefits of the marginal offerings of our trade partners exceed the net benefits of unilaterally liberalizing without any demands on our partners.  Of course that depends on how much reform is ultimately offered up abroad. 

In my view, the benefits from unilateral liberalization in terms of reversing growing hostility toward the United States and softening the ground for international receptivity to U.S. foreign and security policy objectives could be quite significant and could easily exceed the net benefits (marginal export benefits minus the costs of being perceived as an agreement’s strongman) of an agreement based on relaxed reciprocity.

Implicit in Bhagwati’s call for relaxed reciprocity is the idea that an agreement, regardless of the feebleness of the commitments it extracts, is valuable beyond the trade flows it may spur.  Agreements do produce greater certainty and without an agreement, the WTO and the verdicts of its dispute settlement system could lose crediblity among its member states.  After all, a multilateral trade negotiating round has never failed to produce an agreement.

Those are legitimate concerns.  However, I don’t believe U.S. unilateral liberalization would be an end in itself.  I believe such a policy, if commenced by the U.S., would inspire what Professor Bhagwati himself calls “sequential reciprocity.” If U.S. policymakers were to unconditionally open the U.S. market, others would likely follow suit.  Quite frankly, most countries have no choice but to open up well beyond what they are offering in the Doha Round.  In this highly integrated world of just-in-time supply chains, where countries are competing with each other for investment and markets, only the most transparent and efficient ones will succeed.  And it’s not like developing countries don’t know this conclusively.  Many are quite familiar with unilateral liberalization themselves.  In fact, the World Bank reports that between 1983 and 2003, developing countries reduced their weighted-average tariffs by 21 percentage points.  Nearly two-thirds of that reduction was achieved through unilateral reform.

Alas, unilateral liberalization or even relaxed reciprocity is unlikely to be embraced by this or the next Congress.  The concept remains foreign, even preposterous, to U.S. policymakers.  Last week, U.S. Trade Representative Susan Schwab acknowledged that even though imports are good for the economy, the winning formula does not entail convincing decision makers of that truth, but requires that the voices of those who will benefit from enhanced export access drown out the voices of those who will suffer from import competition, and that’s why an all-encompassing, ambitious agreement is the only one that will work politically in the United States.

We have a long way to go to change minds, but here’s the argument in a 24-page nutshell.