Thursday, April 10, 2008

Free Trade and Colombia

Matthew Yglesias writes,
As best I can tell (peruse the text if you're interested) [the FTA agreement] actually involves very little changes on the US side at all. In essence, Colombian goods already flow very freely into the United States except for in our more famously protected sectors (agriculture, etc.) and what we're offering Colombia here is a very solemn promise to keep it that way.
And Kevin Drum writes,
(1) Trade is pretty damn free these days. There's really only a limited amount of progress left to be made. (2) We've had sluggish wage growth for the past seven years and we're now entering (or about to enter) a recession. Expecting public support for trade agreements at a time like this is just quixotic. There's really not much point in banging our collective heads against the free trade wall right now. (3) We've been hearing forever that we should pass trade agreements today and fix their harmful impact on the working class tomorrow. But tomorrow never seems to come, does it? Maybe it's time to switch that policy sequence around for a while. (4) There's not really any danger of seriously regressing on trade. The worst that's likely to happen is a slowdown in new agreements. We'll all live through that. (5) A lot of us who supported NAFTA are sort of wondering what happened to all the benefits that were promised. As near as I can tell, there's a pretty widespread agreement that NAFTA, on balance, hasn't really had much net impact.
To which Daniel Drezner responds,
It also explains why ratifying this FTA is a good idea -- it locks in U.S. policy. As I've posted previously, the reason these agreements are a good idea is precisely because they prevent the drift towards protectionism that is otherwise inevitable in a pluralist political system. ...The biggest benefit of the FTA with Colombia has little to do with economics and everything to do with our bilateral and regional relationships. Go back to NAFTA. Kevin is right to point out that the agreement's economic effects were not terribly large. On the other hand, even skeptics of trade liberalization -- Dani Rodrik, Paul Krugman, and Joseph Stiglitz -- supported NAFTA because it locked Mexican economic reforms, promoted political reforms, and cemented a stronger bilateral relationship.
The idea of trade agreements being used as instruments of U.S. policy, and not as methods of improving economic well-being, is dubious to me. Drezner argues that locking in U.S. policy towards a more free-trade oriented economy is good because it prevents protectionist sentiment from becoming actual U.S. policy. I tend to think that bad trade deals, however, will end up contributing more to protectionist support than the "locking in" of such deals will prevent. Kevin notes that the benefits of NAFTA are not seen -- this leads to a lack of support for other trade deals that might be beneficial. So although NAFTA might be "locked in," trade deals in the future might not garner enough support as a result of NAFTA's lack of perceived success. Drezner goes on to write,
FTAs matter more than unilateral reductions of trade barriers because they decrease the likelihood of policy reversals
Yet if unilateral reductions of trade barriers lead to substantially larger economic gains than do bilateral free trade agreements, implementing unilateral reductions of these barriers, considering the economic gains that will be seen from them, will do more to generate support for free trade than will ineffective bilateral agreements. Yes, unilateral trade policies are easier to reverse than are free trade agreements, but the desire to reverse them will not be there if they are actually seen to be doing good. On the other hand, free trade agreements are lumped together with all free trade policies, so ineffective free trade agreements will lead to less support for more effective unilateral measures. That all being said, free trade agreements are not necessarily bad - indeed, some can be effective. On the whole, NAFTA is probably a net-good - but the trade policies that are espoused in NAFTA are not nearly as effective as unilateral reductions in barriers to trade in the United States would have been. Indeed, trade agreements are oftentimes (or perhaps always) a consequence of geopolitics rather than a pact intended to accomplish true economic good. Trade agreements implemented on political, instead of economic, grounds are prone to have poor economic consequences. As Joseph Stiglitz points out,
Developing countries may be even more disadvantaged in one-on-one bargaining with the United States; a series of such agreements may leave many developing countries worse off than they would be even with another unfair multilateral agreement. ...Trade negotiations entail a myriad of proposals for changing the rules of the game, and developing countries are often at a disadvantage in assessing the impact of each of these proposals on themselves, let alone the general equilibrium impact on the global trading system.
So essentially the scenario is: 1) The United States has its own geopolitical interests in mind when negotiating free trade agreements, not the economic interests of other parties, 2) The United States has considerable leverage with developing nations, enough to force them to accept trade agreements, and 3) Developing nations are oftentimes unable to determine whether a trade agreement is good or bad for them.

Such a situation will result in trade agreements that are, in all likelihood, not good for the United States economically, not good for the developing nation economically, and enforced by the strong hand of the United States. This is supposed to be good for stemming the protectionist tide?

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