European Affairs

Letter to the Editor: The Many Benefits of Freer Trade     Print Email
Thomas J. Duesterberg

In his article in the Spring 2001 issue of European Affairs, Supachai Panitchpakdi has done a service by illuminating the requirements of developing countries if they are to support a new round of trade liberalization negotiations in the World Trade Organization.

I fear, however, that his main premise - that the single goal of trade is the creation of employment - is too narrow to overcome opposition to a new round in both the developed and developing world.

Supporters of liberalization need a broader approach, encompassing both economic and political arguments, to reach the goal we all share: substantial progress in opening markets around the world to freer movement of goods, services, and capital.

In the United States, we promoted both the North American Free Trade Agreement and the Uruguay Round on the basis of their job creation potential. We now have enough empirical evidence to show that these agreements have succeeded in enhancing growth, wages, and job creation.

We also know that any widening of the wage gap is due more to the creation of higher paying jobs in advanced, export-oriented industries, such as aerospace, information technology, health, and telecommunications, than to a decline in wages in lower-paying, import-sensitive industries.

Nonetheless, domestic opposition to a renewal of ñfast trackî Presidential trade negotiating authority and to a new round remains robust, partly because it is rather a simple matter to en§ame opinion by citing the inevitable examples of jobs lost as a result of comparative advantage.

Evidence of a positive impact of open trade on jobs in the developing world is equally strong. The examples of trade-oriented economies such as Taiwan, South Korea, Singapore, Malaysia, Mexico, Chile, and, increasingly, China surely demonstrate this.

Yet fear of competing with other developed countries - probably exacerbated by their often-selective market-opening policies - as well as political fears of losing an iron grip on local economies has made the developing world wary of a new round.

To capture the maximum positive impact of trade, the dialogue must be broadened to include other benefits: lower consumer prices, the inexorable efficiency gains from global competition, increased foreign direct investment (FDI), technology transfer, and the increased personal and institutional freedoms associated with market forces.

Recent research shows that direct investment by North American companies in the developing world has substantial political, as well as economic, net benefits for the recipient nation.

FDI frequently results in large-scale training of local employees in modern management techniques (including environmental management), higher wages, adoption of nondiscriminatory hiring practices, technology transfer, and access to the Internet. Many of the most successful developing countries have embraced FDI as a part of their development strategy.

Widening the analysis of the impact of trade should help reduce resistance to a new round. Dr. Supachai's constructive suggestion of a one-off ministerial meeting ought to consider some of these factors in addition to job creation.

Yet even this may not be enough to overcome North/South tension, lingering Transatlantic friction - despite the promising efforts by Robert Zoellick, the U.S. Trade Representative, and Pascal Lamy, the European Trade Commissioner, to lower the temperature - and local resistance to global competition by affected parties. The addition of environmental and labor issues further complicates the agenda.

Even if we do not succeed this year in starting a new round, we should seize targets of opportunity in the bilateral, sectoral, and regional arenas to reduce barriers and build confidence again in the benefits of liberalization.

Japan is signaling a new openness to bilateral agreements, the new Chairman of the Finance Committee in the U.S. Senate, Max Baucus (D-Montana), is supporting this path, and existing regional agreements in Asia, Europe, and the Americas are gaining new momentum. Sectoral accords in telecoms and information technology are already producing positive results. We should not let the perfect be the enemy of the good.


This article was published in European Affairs: Volume number II, Issue number III in the Summer of 2001.

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