First Principles October 2006

The Fruitful Lie

Trade agreements have always been greased by deception about who benefits. Now they’re failing because leaders have come to believe their own lies
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Apparently, it was everybody else’s fault. After almost five years of grinding negotiations, the Doha Round of global trade talks was suspended this summer, amid a flurry of reciprocal finger-pointing by many of the world’s leaders. Almost certainly, this round—which once promised to significantly reduce barriers to trade in agriculture, manufactured goods, and services—is dead.

It shouldn’t have played out like this. When the talks were launched, in November 2001, the world’s governments called them a response to 9/11—the Doha Round would demonstrate a new ambition to work together for the common good. This time, the developing countries, especially, would benefit. Indeed, this was to be the “Development Round.” Economic gains alone had been enough to ensure the success of prior rounds. This round was buttressed by geopolitical concerns as well, and by humanitarian purpose. Why, then, did it all go wrong?

The United States mainly blamed the European Union, for its reluctance to cut tariffs on farm imports. The European Union mainly blamed the United States, for its reluctance to cut farm subsidies. America and Europe wanted developing countries to lower their barriers to imports of manufactured goods. Many of those countries, led by Brazil and India, said they wouldn’t unless Europe and America conceded more on farm trade.

Whichever side you take, this kind of explanation only makes the impasse more mysterious. The United States would, after all, be better off if it cut its farm subsidies. Those subsidies cause waste, and it is Americans, not foreigners, who pay for them. Ditto for the European Union and its farm-import tariffs. Citizens of the EU would be better off if they could buy cheap imported food; the main victims of Europe’s farm policies are Europeans. And the same goes for Brazil and India, and their tariffs on manufactured imports. If they lowered these fees, both countries would enjoy a higher standard of living, and their economies would eventually grow faster because their producers would be forced to greater efficiency by foreign competition.

There are short-term adjustment costs to consider, but the case for free trade that you read about in economics textbooks is the case for unilateral free trade. The real mystery is why complex rounds of reciprocal trade-policy promises—“We’ll concede this if you concede that"—should ever have been necessary in the first place.

The standard answer is politics. The gains from freer trade—cheaper imports, mainly—are big, but they’re thinly spread and hard for individual consumers to see. The losses are smaller than the gains, but they’re concentrated in particular industries and thus more keenly felt. The losers—people who own or work for companies facing foreign competition—get organized and resist. To face them down, governments have to build opposing coalitions of winners—classically, exporters seeking lower trade barriers overseas. Starting in the 1940s, this is how successive rounds of trade talks worked. And they really did work. Again and again, the export interest defeated the protectionist interest, and trade surged. Few would deny that every participating nation benefited greatly.

It was a fruitful lie, this idea that the gains from trade come mainly from the exports you sell, not the imports you buy. But it was still a lie; the textbook case for free trade really is correct.

The interesting question is, Why has the lie stopped working? It may be that governments have just become more stupid about trade. Perhaps they’ve forgotten that the whole process—the Gener­al Agreement on Tariffs and Trade, the World Trade Organization, all that stuff—was just a ruse. They have come to believe their own mercantilist propaganda, and have embraced the misconception that their countries’ interests are served only if they can get the other guy to make concessions bigger than their own. Look at the way they walked away from the Doha Round—regretful, but with comical pride, heads held high. (India’s commerce minister said, “We don’t mind competing with American farmers, but we cannot take on the U.S. Treasury"—which subsidizes them.) All sides stood firm. Well, of course they did: they had forgotten why they were there.

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