For a Trade Arrangement of the Democracies

George F. Paik

When the value of democracy is challenged by fundamentalists and suicide bombers, democratic nations should show that their democracy binds them together.  They should share the broadest of common agendas.  Trade issues too often cast democracies as adversaries, when the real contentions often lie between corporations.  And these issues all too often get framed as "free trade versus virtue" or "us versus them."

Free trade has never ever existed anywhere.  Economic interest and governmental favor have been intertwined since the dawn of history.  Even today, NAFTA, a “free trade” agreement, features three telephone book-sized tariff schedules, plus three volumes of text and supplements.  The economic ideal of free trade, a world without the distortions of tariffs and trade barriers, is just a template, a concept extracted from reality to describe a theoretical ideal.  As with all such ideals, those who pursue it should do so for the journey and not stake too much on reaching the destination.

Countries pursue trade liberalization by pushing each other to drop restrictions and reduce tariffs.  One wonders why a push would be necessary; tariffs and trade barriers are essentially taxes.  In economic theory and statistics, they reduce the general welfare of the country imposing them.  A trade lawyer once likened trade negotiations to a showdown of two gunmen, each shooting himself in the foot and threatening to keep shooting until the other guy stops.  

Put another way, trade negotiations push governments to extricate themselves from commitments conferring tariff- or restriction-driven benefits on certain of their industries.  Trade barriers do help specific economic sectors in the country that imposes them.  Those companies and industries receive competitive advantages over firms based abroad.  When the tariff or restriction in question becomes a subject of international dialogue, the competitive advantage conferred on a firm or sector becomes a national interest; companies co-opt their governments' agendas through trade policy.  Trade liberalization talks allow governments to hash out which of these co-optations they will abrogate, in return for other governments' going through similar exercises in political pain.  Again, they are trying, in economic terms, to stop shooting themselves in the foot. 

One criticism that has been leveled at trade agreements in general and at the World Trade Organization (WTO) in particular is that it favors abusers of the environment and exploiters of workers, encouraging production in places where wages are low and environmental laws lax.  In particular, anti-globalization activists object to WTO limits on trade sanctions for purposes other than trade retaliation.  We commonly think of such sanctions as punishment for genocide, aggression, and other offensive behavior; embargoes and boycotts have a long history.  Much of today's anti-globalization animus stems from a decision under the General Agreement on Tariffs and Trade (GATT) against US bans on tuna caught by setting nets on schools of dolphins.  Environmental groups objected that their particular cause seemed excluded from a GATT-approved list of non-trade purposes for sanctions.  Developing countries worried that rich countries would use environmental restrictions as a pretext to stifle competition. 

Labor activists hold a twofold interest.  Certainly, trade liberalization leads to the sort of change that disrupts industries, companies and workers.  Gains in the form of lower prices on imports and growth of export industries may outweigh losses from elimination of jobs in existing but less competitive industries.  But the gains do not preclude the losses; workers do lose jobs.  Increased trade efficiency should lead to jobs in other sectors, but timing lags and changes in requisite skills will necessarily mean displacement and hardship as the process plays out.  There is another related concern, that cheaper labor abroad is extracted through exploitative or abusive means.  This is a real human rights issue in many places.  But poor countries fear that rich countries might use sanctions over labor conditions to protect noncompetitive industries and hamper development abroad.

Questions of environment and labor rights are heightened for wealthy countries in trade with poor countries.  They are lesser issues in trade among developed countries.  Advantages for imports from, say, France would likely reflect non-wage features.  Production processes there will likely follow environmental regulation like ours.  Trade issues among developed economies generally boil down to business competition between firms that happen to be based in different countries. 

Given the similarities in wage, environmental, and other expectations in developed economies, why should firms and sectors based in developed countries be able to convert industrial competition into international disputes among their governments?  This condition appears particularly unseemly when one realizes that the most developed countries are democracies of long standing.  If labor and environmental issues are negligible, and, if trade restrictions are about governments shooting themselves in the foot for the sake of certain industries, barriers among developed democracies are merely special interest considerations.

The international trade agenda today generally revolves around two themes, the Doha Round of WTO trade liberalization talks, and various efforts around the world to negotiate free trade agreements.  The Doha Round is also called the development round, as its professed goal is to help the poorest countries in their quest for economic development.  The biggest trade policy obstacles to this goal are EU and US farm subsidies, which artificially induce surplus production that crowds out agricultural goods from poor countries.  There are other issues; the September meeting of WTO members in Cancun collapsed before agricultural subsidies reached the table.  But the biggest catalyst of collapse was an alliance led in coordinated effort by China, Brazil, and India, demanding bigger developed country reductions in farm subsidies. 

Free trade agreements or FTAs, on the other hand, involve specific pairs or groups of countries, rather than all 148 members of the WTO.  Currently, US trade diplomacy espouses a Free Trade Area of the Americas (FTAA) and the Doha Round, but exerts pressure in both forums by pursuing bilateral FTAs.  The strategy is to offer access to the US market to entice individual countries into FTAs with us; those countries will then have less to gain from Doha or an FTAA.  Proponents of an FTAA or a Doha Round result will either have to move those discussions toward US positions or lose support for their goals as countries get their own channel to the US market.  One major target of this strategy is Brazil, which wants a leadership role in trade politics, forcing greater US concessions on agricultural subsidies and other matters.  This political impulse is motivated Brazil's alliance with India and China at Cancun.  US bilateral FTAs with other Latin American countries could undermine FTAA talks as a vehicle for Brazilian influence if countries opt for their own  “US” FTA.  Bilaterals with other countries might likewise pressure the EU to further reduce their agricultural subsidies in the Doha Round.

The 1990's saw enough contention over trade issues, in GATT negotiations, disputes over anti-dumping duties, and other matters, to raise perceptions of deep divisions between the US and other democracies.  A competition of FTA signings could fuel this perception. 

Instead, democracies should work together, and should eliminate barriers by which private interests co-opt their governments into adversarial roles.  Disputes over trade matters should be vigorously pursued but politically quarantined in forums of technical economic and policy competence, casting minimal political shadows on overall relations among the democracies.  A trade arrangement - not necessarily an FTA – among the democracies, centered on such a dispute resolution forum, would further this objective.  Trade differences could be managed as the special interest issues that they often really are.  The idea is practical; issues engendered by wage differentials and environmental abuse need not block consensus among the established democracies.  Agricultural issues would require work, but debate could create a common agenda as the democracies address the implications of farm subsidies for third world development.  Such debate may even get Brazil and India into a constructive dialogue with developed democracies.

Above all, a trade arrangement of the democracies would show free people ascribing primary value to democracy.  Fundamentalists claim that freedom corrupts and that democracy fails to satisfy its citizens' deepest needs.  Mechanisms like this convert contentions among the democracies into collaborative efforts.  Success will make durable contributions to the case for freedom and democracy.

George F. Paik spent seven years in the US Foreign Service, and has worked in capital markets for banks in New York and Pittsburgh.