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Saturday, July 04, 2009
Canadian termites in the global trading system?
Matthew Johnston recently reported on the recent bilateral free trade agreement signed between Canada and the European Free Trade Association, which includes non-EU member states Iceland, Liechtenstein, Norway and Switzerland. I am of course a great believer in the benefits of free trade. But there’s a problem here. This agreement falls under the recent trend of bilateral preferential trade agreements (PTA's) that more and more countries have been signing as the Doha Round of trade liberalization talks at the WTO breaks down.
In short, PTA’s are not unambiguously good. The Doha Round
aimed to bring down the barriers to all markets at once, and this would have
brought immense benefits by reducing distortions in prices between domestic and
foreign goods and between goods in
competing foreign countries. By contrast, bilateral PTA's are often not even a
decent second-best solution. They may actually do harm and this is how: By not
bringing down the barriers to all markets, they distort the relative prices of
imports and exports from different countries. This can lead to less efficient
producers' winning out solely because of differences in bilateral trading
relationships. This is of course to be weighed against the benefits that come
from removing the differentials between the domestic and preferred trading
partner. But often the benefits do not outweigh the costs.
I first saw this argument presented at a lecture at the LSE by notorious free trade advocate and all-around brilliant economist Jagdish Bhagwati, and it can be found in his recent book Termites in the Trading System. There is thus a compelling reason for free traders to regard bilateral PTA’s with ambivalence: They may not actually improve economic efficiency. This is also one more reason why the talks at the WTO are still the best chance for bringing about the potentially immense benefits of freer global trade.
So the failure of the Doha Round really is worth lamenting, and it is also worth remembering the main reason why it has failed: the unwillingness of Western nations to give up their unjustifiably generous support for their agricultural sectors. Canada is hardly the worst culprit in this game, but keeping the Wheat Board around is not really a sign of a willingness to contemplate freer global trade in agricultural products. If Western governments are interested in what could be a real global economic stimulus, they should consider revising their positions on the Doha Round, particularly their intransigent commitment to protecting their agricultural sectors from global competition.
Posted by Malcolm Lavoie on July 4, 2009 | Permalink
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