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The Fair Play Debate: Fair Trade

April 25, 2008 Topic: Economics Tags: AcademiaEconomic LiberalismFree Trade

The Fair Play Debate: Fair Trade

Mini Teaser: The odds are against developing countries when it comes to trade. Social safeguards level the playing field.

by Author(s): Joseph E. Stiglitz

In addition, beyond the terms of the investment agreements, the intellectual-property provisions, too, are onerous on developing countries. In fact, the intellectual-property-rights regime that is being foisted on developing countries is not only bad for developing countries; it is not good for American science and not good for global science. What separates developed from less-developed countries is not only a gap in resources but a gap in knowledge. The intellectual-property provisions reduce access to knowledge, making it more difficult to close the knowledge gap. And even beyond their impact on development, the provisions make it more difficult for developing countries to gain access to lifesaving medicines by making it harder for them to obtain generic drugs, which sell for a fraction of the price of the brand-name ones. The poor simply cannot afford brand-name prices. And because they cannot afford these prices, thousands will needlessly die. At the same time, while the drug companies demand these high prices, they spend little on the diseases that afflict the poor. This is hardly surprising: the drug companies focus on profits; one of the problems of being poor is that you have no money-including no money to buy drugs. Meanwhile, the drug companies have been reluctant to compensate the developing countries adequately for the genetic material that they obtain from them that often provides the basis of new drugs; and the intellectual-property regimes almost never provide any protection for developing countries' traditional knowledge, giving rise to worries about biopiracy. The United States, for instance, granted patents for basmati rice (which had been consumed in India for generations), for the healing properties of turmeric and for many uses of neem oil. Had India recognized and enforced these patents, it would have meant, for instance, that every time an Indian had eaten his traditional staple basmati rice, or used turmeric for healing an ailment, he would have had to send a check to the United States in payment of royalties.

Recent bilateral trade agreements are, of course, even worse in many respects than the earlier multilateral ones: how could one expect a developing country to have much bargaining power when negotiating with the United States? As several trade negotiators have told me bluntly, the United States demands, and they either take it or leave it. The United States says, if we make a concession for you, we would have to make it for everyone. In addition, not only does the array of bilateral and regional agreements undermine the multilateral trading system, but it also weakens market economics, as countries must look not for the cheapest inputs, but for the cheapest inputs satisfying the rules of origin. A Mexican apparel firm might be able to produce shirts more cheaply using Chinese buttons, but if he turns to the lowest-cost provider, his shirt will no longer be considered sufficiently "Mexican" to warrant duty-free access to the United States. Thus, the bilateral trade agreements actually impede global trade.

In both the multilateral and bilateral agreements, there has been more of a focus on liberalization and protection of capital than of labor; the asymmetry alters the bargaining power of labor versus capital because firms threaten that if the workers don't accept wage cuts, they will move elsewhere, contributing to the growing inequality around the world.

The cards are stacked against the developing countries in other ways as well. The WTO was a step in the right direction, creating an international rule of law in trade; even an unfair rule of law may be better than no rule of law at all, where the big countries can use their economic muscle without constraints. But the legal process is expensive, and this puts poor countries at a disadvantage. And even when they win, there is little assurance of compliance. Antigua won a big case against the United States, but has no effective way of enforcing its victory. The WTO has ruled that American cotton subsidies are illegal, yet the United States continues to provide them-twenty-five thousand rich American farmers benefit at the expense of millions of very poor people in the developing world. It is America's and Europe's refusal to do anything about their agricultural subsidies, more than anything else, that has stalled the so-called Doha Development Round.

But even in its conception, the Doha Development Round was a development round in name only; it was an attempt by the developed countries to put old wine into new bottles while hoping the developing countries wouldn't notice. But they did. A true development round-a trade regime that would promote development-would look markedly different.1 It would, for instance, allow freer movement of labor-the global gains from labor-market liberalization are in fact much greater than from the liberalization of capital. It would eliminate agricultural subsidies. It would reduce the nontariff barriers, which have taken on increasing importance as tariff barriers have come down. What the trade ministers from the advanced industrial countries are trying to sell as a development round looks nothing like what a true development round would look like.

 

Trade Agreements and America's National Interest

THE GAP between American free-trade rhetoric and the unfair managed-trade reality is easily exploited by the critics of markets and of America. It provides an all-too-easy target. In some countries, America's trade agreements have helped promote democracy: citizens have been so aroused by America's unfair bilateral trade agreements that they have activated civil society, uniting disparate groups to work in unison to protest against the United States. The reason we wanted a trade agreement with Morocco was not because of the importance of our trade relations but because we wanted to build better relations with a moderate Arab country. Yet, by the time the U.S. trade representative put forth his largely nonnegotiable demands, the country had seen its largest street protests in years. If building goodwill was the intent of this and other trade agreements, the effect has been, at least in many cases, just the opposite.

None of this is inevitable. We could easily manage trade liberalization in a way in which there are more winners and fewer losers. But it is not automatic, and it is not easy. We have to devise better ways of safeguarding the losers-we need social protections, not protectionism. To take but one example: America is one of the few advanced industrial countries where there is reliance on employment-related health insurance, and it has, at the same time, a poor unemployment-insurance system. A worker who loses his job, whether as a result of foreign competition or technological change, loses his health insurance; and the paltry sums he gets in unemployment insurance make private purchase unaffordable for most. It is understandable why Americans are worried about losing their jobs as the economy slips into recession. But with most Americans today worse off than they were eight years ago, this recession is beginning even before fully recovering from the last; Americans are seeing their life savings being wiped away by the ever-declining price of housing (their one and only asset). It provides these Americans little comfort to know that someone making more than $100,000 a year, who has just gotten big tax breaks in 2001 and again in 2003, may be better-off as a result of trade liberalization. Vague promises that in the long run they, too, will be better-off provide little comfort-as Keynes quipped, "in the long run we are all dead." The median American male in his thirties has a lower income today than his counterpart thirty years ago. Trade may not have been the only reason for the decline, or even the most important one, but it has been part of the story. Individuals can't do anything about technology; they can do something about trade. If there are benefits from trade and the winners want to sustain support for trade liberalization, they must be willing to share more of the gains with the losers.

If more developing countries are to benefit more from trade liberalization, we need a fairer trade regime; and if more people are to benefit from trade liberalization, we need to manage trade liberalization better. The United States should move toward a more comprehensive agenda for fairer trade and better-managed trade liberalization.2 This agenda will ensure that the fruits of trade are shared by both the poor and the rich, in both the developing and developed countries. Without it, we should not be surprised about the backlash we are seeing, both in the United States and abroad.

 

Joseph E. Stiglitz is University Professor at Columbia University. He served as the chief economist of the World Bank from 1997 to 2000. He is the author of Making Globalization Work (W. W. Norton, 2006), and most recently, with Linda Bilmes of Harvard's Kennedy School, The Three Trillion Dollar War: The True Costs of the Iraq Conflict (W. W. Norton, 2008).

 

1In my book with Andrew Charlton, Fair Trade for All (Cambridge: Oxford University Press, 2005), we describe in more detail what this regime would look like.

Essay Types: Essay