Making trade work
Barack Obama's stance on free trade is in line with reputable economists who argue that it hinders development
Kevin Gallagher
Friday October 10 2008 19.30 BST
Recent work by leading economists suggests that a new consensus is emerging on free trade agreements. Gone is the doctrine of the Washington consensus which preached signing trade deals with any nation that is willing. A narrow but significant accord is emerging that says smaller regional and bilateral trade agreements are bad for the world economy. Perhaps then, Senator Barack Obama's call to rethink deals like Nafta is not so protectionist but really in line with contemporary economic thinking...
Why are these deals so bad? Bhagwati shows that they divert trade away from those nations with a true comparative advantage. Such advantages occur when every nation produces and exports from those sectors where their mix of land, labor and capital is most abundant. Liberalising tariffs and other barriers then means producers get access to more markets, and consumers have better choices and lower prices.
In this scenario all nations benefit because they produce where they have a comparative advantage. Throw in these small trade deals and all of a sudden we are buying shirts from countries like Honduras rather than from China and Mexico where they can be produced more efficiently and come at a lower price. The crux of Bhagwati's argument is that foregoing those lower prices costs us in terms of "trade diversion". Indeed, the World Bank's 2005 Global Economic Prospects puts the price of trade diversion due to deals like Nafta between $115bn and $150bn on an annual basis....
Developing countries often look at the example of the US and European economies, and more recently, the economies of South Korea and China. Such nations moved into the global marketplace slowly and strategically, protecting their major exporting industries in order to nurture them into world markets. Rodrik shows that nations have trouble doing this under the WTO and an even harder time under deals like Nafta.
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