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

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.

And the Doha Round failed for another reason. Global trade talks are extremely complex, and a single government can veto the whole deal. So the proceedings need to be firmly led. They used to be—by America—but for a variety of reasons the task has become more difficult, and Washington no longer brings as much energy to it. Recent administrations developed an alternative: hub-and-spoke trade pacts like the North American Free Trade Agreement. Again, the thinking behind this strategy is purely mercantilist: maximize exports for any given increase in imports. Regional trade deals serve that purpose because they let the United States use the bargaining power of its huge domestic market more effectively, and thereby wring bigger concessions from its trading partners.

This local activity drains commit­ment from the wider global process. Worse, it creates new interests op­­posed to global liberalization. Mexico extracted hard-won privileges to sell goods on favorable terms in the United States as part of the NAFTA talks (at the “cost,” remember, of opening its own markets to American exports). Universal trade liberalization would diminish the value of those privileges by sharing them more widely—America would turn to other developing countries for some of the imports it currently buys from Mexico under those special arrangements. In effect, NAFTA has given Mexican exporters an interest in resisting a generalized lowering of trade barriers. And NAFTA is only one of many regional free-trade agreements that have the United States at the center.

How much does it matter that the Doha Round has failed? It depends on what happens next. The failure to liberalize is certainly expensive: estimates of the worldwide losses stemming from trade barriers vary, but over time the cost will surely run into the trillions of dollars. And the biggest losers will be developing countries, including Brazil and India. That is the saddest aspect of this breakdown. The United States and other rich countries have already opened most of their markets to trade; their remaining protection, costly as it is, is mostly confined to particular industries, like farming and textiles. For the most part, that’s not true of developing countries. Their tariffs and other import barriers are still relatively comprehensive and high, keeping imports expensive and sheltering manufacturers from the foreign competition that would raise productivity and growth.

The global cost of the Doha Round’s collapse will be even greater if previous commitments to liberal trade start to unwind. Up to now, the World Trade Organization has acted as an obstacle to backsliding, by policing the promises made by members and arbitrating frequent disputes. Its ability to do that is not yet in question, but it soon might be. At a minimum, the use of global treaties to spur further liberalization looks unlikely at the moment.

So are we at an impasse, or even a breaking point? We need not be. The end of the Doha Round doesn’t force any country to maintain its trade barriers. There is no law against lowering barriers unilaterally. That would be a great idea, and now would be a good time for it to catch on. But it would also require political courage of a sort we’ve not seen lately—from any country—and greater honesty about the true nature of trade’s benefits.

Clive Crook is a senior editor of The Atlantic.
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