Page 196 - The Principle of Economics

198 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE
IN THE NEWS
The Case for Unilateral Disarmament in the Trade Wars
ECONOMIST JAGDISH BHAGWATI ARGUES that the United States should lower its trade barriers unilaterally.
Free Trade without Treaties
BY JAGDISH BHAGWATI President Clinton and 17 other Asian- Pacific leaders are meeting today in Vancouver. Rather than the convivial photo-op they’d planned, however, they must contend with worrisome trade news. A spate of Asian currency devalu- ations has raised the specter of renewed protectionism around the world. South America’s Mercosur trade bloc, led by Brazil, just raised its tariffs some 30 per- cent. And Congress turned its back on the president and refused to approve fast-track authority for him to negotiate further free-trade accords. [Author’s
note: Fast-track authority would allow the president to negotiate trade deals that Congress would consider without the ability to attach amendments.]
In light of all this dismaying news, what are the prospects for free trade? Is the future bleak, or will the postwar trend of dramatic liberalization continue to ac- celerate despite these setbacks?
The immediate prospects for more U.S.-led multilateral trade accords do in- deed look grim after the defeat of fast- track. But that doesn’t mean that free trade itself is on the ropes. A large por- tion of the world’s trade liberalization in the last quarter-century has been unilat- eral. Those countries that lower trade barriers of their own accord not only profit themselves, but also often induce the laggards to match their example. The most potent force for the worldwide freeing of trade, then, is unilateral U.S. action. If the United States continues to do away with tariffs and trade barriers, other countries will follow suit—fast- track or no fast-track.
To be sure, the General Agreement on Tariffs and Trade, the World Trade Or- ganization, and other multilateral tariff re- ductions have greatly contributed to global wealth. The WTO has become the international institution for setting the “rules” on public and private practices
that affect competition among trading nations. Much still needs to be done in that mode, particularly on agriculture tar- iffs, which remain too high around the world. A future U.S. president, if not Mr. Clinton, will certainly need fast-track au- thority if another multilateral effort, such as the “millennium round” called for by Sir Leon Brittan of the European Union, is to pursue these goals.
But the good news is that even if organized labor, radical environmental- ists, and others who fear the global economy continue to impede fast-track during Congress’s next session, they cannot stop the historic freeing of trade that has been occurring unilaterally worldwide.
From the 1970s through the 1990s, Latin America witnessed dramatic lower- ing of trade barriers unilaterally by Chile, Bolivia, and Paraguay; and the entire continent has been moving steadily to- ward further trade liberalization. Merco- sur’s recent actions are a setback, but only a small one—so far.
Latin America’s record has been bettered by unilateral liberalizers in Asia and the Pacific. New Zealand began dis- mantling its substantial trade protection apparatus in 1985. That effort was driven by the reformist views of then-Prime Minister David Lange, who declared, “In
they do today if people could consume only those goods and services produced in their own states. The world could similarly benefit from free trade among countries.
To better understand economists’ view of trade, let’s continue our parable. Suppose that the country of Isoland ignores the advice of its economics team and decides not to allow free trade in steel. The country remains in the equilibrium without international trade.
Then, one day, some Isolandian inventor discovers a new way to make steel at very low cost. The process is quite mysterious, however, and the inventor insists on keeping it a secret. What is odd is that the inventor doesn’t need any workers or iron ore to make steel. The only input he requires is wheat.