Commentary

The Terms of Trade: A Coalition of the Willing?

The Doha round has been stalled over liberalization of agricultural trade. Expectations for the ministerial meetings of the World Trade Organization in Hong Kong are being talked down. Some are suggesting that the best hope for the meetings is that there is no blowup. But the stall may be a blessing in disguise; it presents an opportunity for governments to rethink their trade strategy and return to the proven policy of unilateral trade liberalization.

The price of global trade talks has been rising while the benefits have been falling. The price is paid in concessions to trade laggards, and protection for favored industries and political clients; then it’s paid again when vote-trading requires a president to agree to all manner of pork to secure a majority of votes for a trade deal. Let us not forget that steel tariffs imposed by the Bush administration were sold to us, in part, as necessary to secure votes for trade promotion authority (TPA). Every steel-user suffered the effects of those tariffs, but we have yet to see a payoff on TPA.

The falling returns from WTO rounds are measured in the tough issues that are set aside until The Next Round. Agriculture was a perennial set-aside in these talks, an issue too sensitive to negotiate. Doha was going to bring a deal on agriculture: And yet, those talks have stalled over that very issue. In the face of this reality, a group of 17 agriculture-exporting countries was formed to advance global trade liberalization, under Australia’s leadership: The Cairns Group, including Argentina, Brazil, Canada, Chile and New Zealand has lobbied within the WTO for lowering barriers to trade in foodstuffs. Some members, however, also moved unilaterally.

Beginning in the 1980s, Australia and New Zealand moved from a highly protectionist model to one of open markets. Australia liberalized over a more extended period of time, while New Zealand did so more rapidly; in both countries, governments changed but the commitment to economic liberalization did not. Today they are among the most productive agricultural producers in the world. The OECD computed agricultural support in Australia and New Zealand at below 5% of farm receipts. New Zealand has the lowest level of support among OECD members. Payments are made only for pest control and climatic disasters. And as Sara Cooper of the American Institute for Economic Research has demonstrated, unilateral opening reinvigorated rather than eviscerated domestic agricultural producers. Farmers switched to higher-valued goods (such as wine in New Zealand), cut costs and became globally competitive.

According to the IMF, the Western Hemisphere has the lowest share of countries that are open to trade. That has many indirect consequences aside from trade. Financial integration tends to accompany trade liberalization, for example. Open economies attract foreign investment; the converse holds true for closed economies.

The poor of Latin America, for instance, suffer twice for the defects of the global trading system. First, the markets of the developed world are closed to their exports. Second, they must finance their own development without full access to global capital markets. At the recent Summit of the Americas, some Latin leaders wanted to talk about development rather than trade. That is a total disconnect from reality: Trade is development for these countries. What the governments of the South can and must do is to stop waiting for the U.S. or the WTO to act. As in developing countries generally, much of the trade pain in Latin America is self-inflicted. The countries close off trade intra-regionally as well as with the North. And they need look no further than their own region for an inspiration.

Prof. Jagdish Bhagwati of Columbia has identified Chile as a leader in unilateral tariff reduction. Chile’s tariff rate is low and, with some exceptions, uniform at 6%. That greatly simplifies customs and diminishes the corruption in complex tariff schedules. Other countries in the region would do well to follow Chile’s example, for the great benefit to their citizens. It is imports that are the benefit of trade, not a country’s exports. (Trade-deficit Cassandras, take heed.) Adam Smith taught us that “consumption is the sole end and purpose of any production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

Political leaders in Latin America should make lemonade out of the trade lemon, and advance the interest of their citizens by initiating unilateral tariff reductions. And then invite their counterparts to follow suit in a kind of coordinated unilateralism.

Five years ago, John Hulsman of the Heritage Foundation and I proposed a Global Free Trade Association (GFTA), which we envisioned as a coalition of the willing. Countries most committed to open markets would join together to advance trade. They could do so in two ways. First, by adopting “best practice” within the group: One round of trade liberalization would thus initiate further rounds among the other members. By contrast, in global trade negotiations, which operate by consensus, one holdout can block a deal.

Second, the growing prosperity of the GFTA members would attract others wishing to join the group. That would be especially true if a large trading country like the U.S. were a member. The beauty of this coalition is that it would establish a positive trade dynamic. One trade opening leads to another, instead of the current trade dynamic, in which one bad trade action, whether on steel, bananas or lumber, leads to tit-for-tat retaliation.

Good models of trade liberalization are not lacking. In Latin America, Chile and Mexico have each forged the way forward in the past. In the Asia-Pacific, Australia and New Zealand continue doing so through Free Trade Agreements and regional influence. One could only imagine the impact if China ever committed to open markets. All that is required is one country to take the leadership and begin the process. If coordinated unilateralism also helped move global trade negotiations along, so much the better.

Gerald O’Driscoll is a senior fellow at the Cato Institute and a former director of policy analysis at Citigroup. This is the fourth in a series this week on world trade.