Trade Negotiations and Trade Liberalization

World trade negotiations geared toward agreements and treaties for 'trade liberalization' have been taking place continually since 1986, with the inauguration of the Uruguay Round of negotiations in the framework of the General Agreement on Tariffs and Trade (GATT), which became the World Trade Organization in 1995. Since the founding of the WTO the negotiations have been highlighted by a series of 'Ministerial meetings' where major decisions are supposed to be made by the highest level of government officials (especially trade and/or finance ministers). These meetings have been failures — on their own terms — almost as often as they have been successful. Differences over the regulation of agricultural trade and farm subsidies played central roles in the most publicized of the failures, in Seattle in 1999 and in Cancún, Mexico, in 2003. On the other hand, in 2004 a partial agreement on some agricultural issues paved the way for an agreement at the 2005 Hong Kong Ministerial to continue negotiating, on the basis of damaging concessions by Third World countries and weak promises by the United States and Europe. This essentially saved the WTO from outright collapse, allowing stalled negotiations to restart.

Trade liberalization is the process of removing barriers to trade. The idea is to liberate trade and thus market forces from the taxes and regulations that hinder them — and government subsidies that distort them — creating incentives for businesses everywhere to produce more to take advantage of more easily accessible foreign markets. This is expected to generate more economic activity, jobs, and growth. According to the theory of 'comparative advantage' that some countries are good at producing one thing (like cars), while other are good at producing another (like coffee) — every country is supposed to benefit from freer trade. This is less than clear in practice however, and a global controversy has emerged as to whether we are on the right track or not.

Barriers to trade are any policy measures that alter — or 'distort' — the uninhibited flow of trade. Typical barriers 'protect' domestic production from the competition of cheap imports, and thus are called 'protectionism'. Barriers can take the form of tariffs (taxes on imports), but there are many other forms; as a group they are called non-tariff barriers (NTBs). Non-tariff barriers can be import quotas, local content requirements, production subsidies and price supports (because they make local products more competitive than unsubsidized imports), export subsidies (because they confer an artificial advantage on foreign products in importing countries), and a myriad of others. Many NTBs are difficult to identify at first. Even health and quality standards and labelling requirements can act as barriers, as can rules orienting governments to purchase locally or to support local or minority-owned businesses.

When governments remove barriers to trade (like import tariffs and quotas), they are 'opening' their markets to foreign competitors. The risk they take is that domestic producers may be driven out of business if the imports are too cheap. If that is because the same good can be produced more cheaply elsewhere because of 'pure' comparative advantage — climatic conditions, for example — then theory postulates it would be better in any event to be producing something else, where the home country has a 'true' comparative advantage. The problem is that in the real world, as we shall see, cheaper products are rarely cheaper because of 'pure' comparative advantage, but rather because of 'distortions' like subsidies, according to popular misconception, or more usually, because of the effects of market concentration and misguided government policies. And comparative advantage at home, for a typical Third World country, may be nothing more than a lower-paid, more exploited workforce.

Historical context

As we examine the issues behind this global controversy, we do well to keep in mind the historical context of trade liberalization. World economic history has long been characterized by cycles — or pendulum swings — between freer trade and protectionism. Swings toward trade liberalization are sometimes referred to as 'economic integration' — as in 'integrating the economies of Canada, the US and Mexico via NAFTA' — and the most recent swing has been dubbed 'economic globalization'.

It would be erroneous to presume that integration and globalization have never happened before. The clearest historical example is that of European colonialism, in which the economies of the colonies were integrated into the increasingly global economies of Europe. That 'swing' ended during the last century in the period marked by the two world wars, when a combination of war, national independence of former colonies, and economic nationalism reversed a century of trade liberalization. This ushered in an era of relative protectionism, which was to be reversed again in the 1970s and 1980s.

In the 1970s, businesses in the United States and Europe began to confront crises brought on by rising wages at home and excess productive capacity. In other words, they now found themselves with the ability to produce more than home markets could absorb. They needed access to Third World markets to move their excess production. This brought the issue of protectionism by Third World governments to the fore, precisely at the same time as these same Southern governments became enmeshed in the debt crisis. This set the stage for the renegotiation of the debt in venues like the World Bank and the International Monetary Fund (IMF), where both Southern and Northern countries were represented.

Structural adjustment: precursor to trade agreements

The 'South' wanted debt restructuring, and the 'North' wanted greater access to Southern markets. The solution was debt restructuring conditioned upon the adoption of Structural Adjustment Packages (SAPs) by Southern governments. A central feature of these SAPs was trade liberalization, including the slashing of import tariffs and quotas, steep cuts in domestic subsidies, and the start of across-the-board privatization...