By Nicholas Petsas
A disastrous decision during the Great Depression, enacted by the United States Congress, was to implement the Smoot-Hawley tariffs which caused an international pandemonium and trade to slow to a halt. Thankfully, the international community held back its desire to increase protectionism for the most part and did not add insult to injury. But now, a few years past the height of the recession, a global recession seems imminent and global trade is slumping which is cause for concern. The International Monetary Fund (IMF) has projected that trade growth will slow to 3.2%, compared to 12.6% two years ago . Attaining growth without an increase in trade would be unprecedented. Some of the decline is from a decline in demand such as China and Europe which is causing trade volumes to sink, but governmental interference also plays a role. To further diminish the possibility of a trade recovery, anti-trade sentiments in many countries, including the United States, are on the rise. The concerns over the negative effects of trade are ill conceived and pander to special interests over the global community, but a global trade decline is imminent but there are ways to prevent it.
First, it should be stated why free trade is valuable, not only to the United States but to the rest of the world as well. Trade is a basic tenant of economic liberalism and plays a part in every transaction. Freeing trade is beneficial because it increases people’s standards of living by enabling consumers to search the field for a wide variety of goods. Also, producers will compete to provide the best products at the lowest prices enabling consumers to buy more goods at lower prices. Greater competition will lead to innovations in new products which will begin the cycle over again. On a macro level, free trade enables each country to specialize in goods and services and global resources are allocated efficiently using a price system. This is why it comes as no surprise that global free trade would increase global income by nearly two trillion dollars according to Robert Krol from the CATO Institute Center for Trade Policy Studies. The United States alone is three-hundred million dollars better off because of importing goods and services according to CATO’s studies. Globally, millions of people have risen out of poverty and raised their standards of living as a result of a greater volume of trade.
Why all the negativity towards trade? Special interests (such as corn lobbies, businesses, manufacturing firms) would all benefit from protectionism that helped their particular industry. Their jobs would be safer and they could gain a greater market share. They make a good point; free trade doesn’t necessarily create jobs. Paul Krugman, a Nobel Laureate for his work in international trade, comments multiple times on his blog that free trade is about efficiency and does not create demand (Consumption + Investment + Government Spending + Net Exports is what makes up demand but net exports is about the difference not volume so employment isn’t bettered by a greater volume necessarily). But the special interest effect has net negative effects as well. Take for example the case of the corn lobby whose jobs are protected through protectionism. United States grows a vast amount of the world’s food crop but as a result of the Environmental Protection Agency’s mandate to produce and subsidize ethanol, corn has been diverted for fuel instead of food which has caused prices to skyrocket and the poor are most affected by price shocks. Foreign Policy Magazine reported in 2008 that government subsidies accounted for 33% of food price increases and led nearly 100 million people back below the poverty line. This policy is internationally rejected by all major organizations: the World Trade Organization, the International Monetary Fund, the World Food Program and more. The policy’s inefficiencies have caused prices to rise to a point that it becomes hard for people to sustain their own lives. US protectionist policies, as of late, have also caused global backsliding. Brazil, citing US “Buy America” programs, loose monetary policy and bailouts has justified a new round of protectionism on hundreds of goods (Review and Outlook, WSJ, 8/11/12). This will cause trade to slow even further as countries become more skeptical of the gains from trade when the US is perceived to be protectionist as well. Free trade works to create efficiency in markets to deliver goods to people, but protectionism limits efficiency and economic freedom which is why solutions are needed now.
Solutions to trade problems have been scant. The Doha trade rounds have been stalled for a decade, and bilateral and regional agreements have come to replace the authority of the WTO. These agreements are inherently discriminatory in practice and therefore violate one of the main principles of the World Trade Organization and free trade. But without any other solutions occurring, regional agreements look like the top choice. Before we settle for less, there are some other options on the table. Environmental protection (whether it is solar panels or ethanol) is coming under fire from trade. Being able to solve climate issues in a cheap and efficient manner should be a priority and that is why the Information Technology Agreement of 1996 and the Clean Technology Agreement should both be revaluated to boost trade in this area to link developing and developed countries concerns together. This might even benefit the Doha round as it would promote cooperation amongst parties. Until unique measures like these are taken, trade will continue to bicycle downhill along with economic efficiency and growth.
This post reflects the author’s personal opinions, not the opinions of Arizona Model United Nations.