Beyond the free-trade spin

You find ‘free trade’ is covering up a lot of special deals that may or may not be good for the economy. This is the conclusion I draw from the paper What do trade agreements really do? by a leading US expert, Professor Dani Rodrik.” So wrote Ross Gittins in the March 3-4 2018 issue of The Sydney Morning Herald. I have followed him for decades, as he is a most perceptive analyst.

He accepts the benefits from international trade. “… we all benefit from specialising in a particular occupation we’re good at, then exchanging goods and services with people in other specialities, so further ‘gains from trade’ can be reaped by extending specialisation and exchange beyond our borders to producers in other countries.”

In relation to NAFTA, Gittins quotes Rodrik as saying that recent research suggests the deal “produced minute net efficiency gains for the US economy while severely depressing wages of those groups and communities most directly affected by Mexican competition. So there’s a huge gap between what economic theory tells us about the benefits of free trade and the consequences of highly flawed, politically compromised deals between a few countries.”

Rodrik: “How can economists be so certain the gains to the winners far exceed the losses to the losers – and that the winners have compensated the losers?” Gittins: “What many economists don’t realise is that the international battle to eliminate tariffs and import quotas has largely been won (though less so for the agricultural products of interest to farmers).” Ignore ‘Trumpology’ for the moment.

Gittins also points out that “… so-called free trade agreements are more about issues that aren’t the focus of economists’ simple trade theory: “regulatory standards, health and safety issues, investment, banking and finance, intellectual property, labour, the environment and many other subjects besides.” Rodrik names 4 components of agreements that are worrying.

First, intellectual property (IP): Gittins points out that “the US just happens to be a huge exporter of intellectual property –in the form of pharmaceuticals, software, hardware, movies and much else.” “… with IP the rich countries’ gains are largely the poor countries’ losses.”

“Second, restrictions on a country’s ability cross-border capital flows.” “… it’s a good thing for less-developed economies to retain some control.”

“Third, ‘investor-state dispute settlement procedures.’ … They allow foreign investors – but not local investors – to sue host governments in special arbitration tribunals and seek damages for regulatory, tax and other policy changes merely because those changes reduce their profits. How, exactly, is this good for economic efficiency, jobs and growth?”

“Rodrik concludes that ‘trade agreements are the result of rent-seeking, self-interested behaviour on the part of politically well-connected firms.’ ... They may result in greater beneficial trade, but they are just as likely to redistribute income from the poor to the rich under the guise of ‘freer trade.’”

(Does not economic theory support the view of certain nations that only the rich save to invest, and thus take their economy forward?)