Free Trade And The Global Financial Crisis

I was rather disturbed by a few articles in this morning’s NZ Herald.  I will leave comment on the state of the airforce,disaster preparation plans and ACC to others, but I will focus on an article on page C5 by Barrett Sheridan which the Herald has lifted from Newsweek.

In this article Sheridan quotes a number of luminaries – such as Paul Krugman who suggest that because protectionism is relatively low freer trade isn’t going to make much of a difference to the global economic situation.  This I accept, but with the 1930s in mind I personally believe that freer trade is a goal that will send the right messaging about keeping markets open.  The article sort of accepts this, but the following paragraphs really annoyed me

Probably the most influential voice making this argument is Dani Rodrik, a Turkish economist at Harvard University. “We have a perfectly open trade regime,” he says. “In no sense does it keep any country behind in terms of restraining its growth potential.” The “astounding” changes in developing world tariff rates—down from 100 percent to 12 percent in India, for example—mean that most of the low-hanging fruit of trade negotiations has already been picked, says Rodrik.

New trade deals fail a simple cost-benefit analysis. Dropping tariff barriers and other forms of protection requires a highly complex piece of international choreography—the world’s trade representatives have been at work on the Doha round since 2001, for instance, and still have no agreement. And the potential benefits might not be earth-shattering enough to warrant all the trouble. In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.

The article goes on to talk to Bhagwati who does his best to debunk some of this rubbish – but he is too polite really.

As New Zealanders we know that we don’t have a free market out there.  We also know that our potential is being held back by protectionism in a number of markets – Japan, EU, US and Canada are good examples.  We also know that one of the most damaging policies to have been used in international trade – export subsidies – was not that much of a problem in recent times due to high commodity prices.  But with these settling back- in some cases quite sharply – these could become a significant problem again.  This WTO Round offers the chance to abolish these policies once and for all.  Domestic subsidies are also a major issue.  We saw how they caused such major distortions in global food supply when they were misapplied to the biofuels area.  These too can only be addressed properly in the WTO context.  While the EU, US, Canada and Japan might not be feeling pain because of trade policy protectionism, we are and the countries of sub-Saharan Africa are, and some in Latin America are.  For this mix of countries an outcome from the WTO negotiations is just the tonic needed to help get through the forthcoming financial crisis and allow an improved export environment to allow growth to occur again….


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