Design for Trading

Design for Trading

Mini Teaser: Covert protectionism is spreading like kudzu. An open tariff might be better.

by Author(s): Martin Hutchinson

Naturally, countries that objected to the WTO's methodology would not be forced to join it; they would then not benefit from the access it negotiated to the major world markets. If they wanted such access, they would have to sign up to the WTO, thus both providing reciprocal access to their own market and subjecting themselves to the WTO's rules of the game in respect of subsidies, quotas and non-tariff barriers. Side deals, where a major WTO member granted preferential access to a non-member country without that country accepting the WTO's "fair-play" rules, would not be permitted. This reformed WTO would take decisions more effectively and would be mandated both to organize trade treaties between its members and, more importantly, to stamp out the protectionist growths that appear every time a country has an election coming up--namely, anti-dumping actions, new non-tariff barriers or the imposition of quota systems. Non-tariff barriers in the areas of labor and the environment should be permitted only if agreed by a 75 percent majority of the WTO. The principal function of the WTO would then be to act as a police court against election-driven special interest protectionism.

In order to cater for the special needs of poor countries, should the WTO discriminate between countries according to their wealth, as measured by GDP per capita? Poor countries, while compelled to lower their overall tariff levels, particularly against each other, might be permitted to maintain higher tariffs in limited sensitive areas where they have a great deal of low-skill traditional labor. They might also be allowed, for example, to discriminate moderately against foreign financial institutions that have an undue advantage of lower funding costs in the local market since they carry a better credit risk derived from their Western parent. (Such discrimination would be most effective by means of a "funding cost tax" to equalize the foreign-owned bank's funding costs with that of its local competitors.) As countries graduated to middle-income status, or their credit ratings moved above Standard & Poor's BBB level, however, the WTO would compel them to phase out the additional protections over a period of, say, three years.

Intellectual property is a particularly difficult area. Governments and producers in Europe and the United States try to build support for intellectual property restrictions by focusing public opinion on life-saving drugs. But intellectual property also includes trashy movies and popular music. Property rights are a fuzzy concept, not an absolute. One can accept that, if intellectual property in pharmaceuticals is violated, research will be hampered. But allowing intellectual property in "gangsta" rap merely produces more "gangsta" rap.

As in trade generally, poor countries would not be subject to the full rigors of copyright and patent law until they reached a middle-income wealth level, and could be expected to produce copyrightable or patentable material (whether scientific or, as in the case of Japan's Manga comics, literary) of their own. If producers in poor countries produced "pirate" copies, then international trade in such copies could be prohibited by the WTO, thus providing additional protection to copyright holders' interest in Western markets.

In the meantime, as is happening with aids drugs, Western charitable and supranational organizations would provide funding for Western-produced pharmaceuticals for the Third World, thus avoiding the problem of local producers of low-quality generics flooding the market with untested and dangerous alternatives. There would be no such eleemosynary organizations for "gangsta rap" or Manga comics.

Absent a reformed trade regime of this kind, a partial return to protectionism seems likely, since the United States has moved considerably toward such a policy in recent years, and the EU as a body never left it. (The European value-added tax, generally levied at rates around 20 percent, is also discriminatory, since it is not levied on exports, thus providing European producers with a substantial subsidy for exports as against production for internal consumption.) And while new WTO members such as China and emerging WTO members such as India are strongly committed to free trade in principle, in practice they use every artifice they can to preserve their own protectionist structures. A weakened WTO will hardly be able to prevent them from doing so. Meanwhile, labor and environmental non-tariff barriers are both likely to blossom in the years ahead--the normal bureaucratic impulse to "compromise" with the pernicious agenda of the trade protesters will see to that.

The United States may mitigate some of the effects of this by forming bilateral trade agreements with favored nations, as will the EU in their hinterlands of eastern Europe, Central Asia, North Africa and the Middle East. In practice, this will increase the danger of the world becoming divided into a small number of autarkic trading blocs that have relatively free internal trade and high barriers against outsiders. Inevitably, this will tend to impoverish further those Third World countries that have little to offer economically, thus perpetuating their downtrodden status.

Without a trade body wielding real power to regulate protection, trade barriers will be raised by domestic political processes. Hence, they will pay little regard to comparative advantage, ossify economic structures and push the growth of gross world product far below its potential. The "have-nots", with their rapidly growing populations, will end by having even less.

This unpleasant fate can be avoided, but it will require trade negotiations to rise above both domestic electoral pressures and the unrealistic dogmas of frustrated trade economists. In trade, as in philosophy, the best should not be allowed to become the enemy of the good.

Essay Types: Essay