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Sebastian Mallaby, Columnist

More Than Free Trade

By Sebastian Mallaby
Monday, April 18, 2005; Page A17

Five years ago free-traders had a lazy time: Anti-globalization protesters were crude, their arguments easily deflated. Today a harder debate is underway. Troubling questions about trade are being raised by globalization's defenders. The risk is that politicians will seize hold of those questions and provide the wrong answers.

The first question is whether some poor countries lose from trade liberalization, a possibility illustrated by the end of global quotas on textiles and apparel at the start of this year. In the 1980s and early 1990s, developing countries pressed for these quotas to be lifted, hoping to boost exports to rich countries. But in the 15 years between their demanding this reform and getting it, the emergence of China as a trading superpower has altered the picture. Many poor countries would have been better off keeping their quotas, meager as they were, rather than venturing into a quota-free world in which China corners the market.

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This phenomenon isn't true only for textiles. Lots of poor countries enjoy protected access to rich markets, extended via special bilateral and regional trade deals; global trade liberalization would erode the value of those preferences. If the United States abolished its sugar quotas, for example, efficient producers such as Brazil, Thailand and Colombia would gain market share. But inefficient producers, some of which actually import sugar in order to reexport it to the United States because of the quota-induced price gap, would be cut out of the market.

What's true for quotas is also true for subsidies. Ending rich countries' agricultural subsidies would reduce farm output in the United States and Europe, and less output would boost global prices. That would be great for developing countries that export food, such as Brazil and Argentina. But as Arvind Panagariya of Columbia University points out, nearly all of the world's poorest countries are net importers of food. Higher global prices might actually hurt them.

The second troubling question concerns the impact of free trade within poor countries. Even if a country as a whole benefits, the poorest groups or regions in that country may not. For example, suppose that rich countries abolish farm subsidies and quotas, so that global food prices rise. This will benefit farmers in developing countries who produce more food than they need to feed themselves -- their surplus produce will bring in more revenue. But it will harm farmers who grow too little to feed themselves and who do non-farm work to earn wages and top up their diet. Most African farmers fall into this second category.

Rich-country politicians, who already bend over backward to please domestic protectionist interests, will no doubt seize on these questions to justify further obduracy. But this is exactly the wrong reaction. For one thing, the gains from trade outweigh the losses; for another, today's losers may become tomorrow's winners, given time to adapt to liberalization. Moreover, the conundrums that I've described don't show why trade is bad. They show why it has to be backed up with complementary policies.

Some of these policies are comfortable extensions of the free-trade philosophy. A formidable team of economists directed by Berkeley's Ann Harrison is about to come out with a volume titled "Globalization and Poverty"; a central message is that free trade works best for countries with labor mobility. For example, India's dramatic trade liberalization in the 1990s produced equally dramatic strides against poverty. But because Indian workers move surprisingly little between industries and regions, people in sectors that contracted as a result of the lifting of tariffs were trapped. Liberals who seek to "soften" trade deals by writing mobility-restricting labor regulations into them need to rethink their strategy.

But the other policy necessary to complement free trade may force new thinking on some parts of the right, because it comes down to more development assistance. Rather than maintain farm subsidies that punish Argentine and Brazilian exporters, for example, rich countries should get rid of the subsidies -- and then cushion the blow to food-importing countries by increasing aid to them. If just half of the $350 billion currently spent on farm subsidies were converted into development aid, official foreign assistance would triple. By spending a chunk of that money on agricultural research targeted at Africa, a woefully neglected field, rich countries could score a triple win -- for African farmers, for Brazilians and Argentines, and for their own taxpayers.

Equally, aid offers the best way out of the trade-preferences dilemma. It's tempting to rig the rules so that China doesn't corner the market in textiles: Central America is nearer to home, Africa is especially poor, the Middle East has terrorism. But rewarding friends with trade preferences can be self-defeating in the end. Pretty soon so many regions get "special" access that nobody is really special. Moreover, preference deals generate onerous red tape: African-made clothing gets duty-free access to the United States, but to qualify it has to show that its constituent parts were not made in China and then assembled in Africa, and arguments as to what constitutes a constituent part can employ battalions of lawyers. It's far better, in other words, to grant everybody access free of red tape, and then to give some regions a helping hand with carefully designed aid programs.

Five years ago, large chunks of political opinion believed that trade was bad for poor countries; thankfully, that delusion has receded. But today, we must guard against the opposite mistake. Trade, though good, is not a panacea.


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