Generally speaking, the cause of free trade has it rough in the world today. Despite the compelling theoretical arguments that one can muster in favour of free trade, it’s increasingly unpopular in the US and even more so in much of the developing world, certainly in Latin America.
In all likelihood, part of the answer lies not in the notion of free trade itself but how trade liberalisation is pursued worldwide, too often linked with hypocrisy, guilt by association, democratic deficit and disregard for inequality. And this, I must warn the readers, is written by someone who favours trade liberalisation and fully understands the rewards that free trade could help us reap.
Unease with free trade in the developing world stems from at least four key reasons:
First, there is the perception that the whole discourse and architecture of international trade smacks of double standards and hypocrisy. When it comes to free trade, we can certainly paraphrase George Orwell’s memorable quote: We are all equal, but some are more equal than others.
Simply put, emerging economies, whose weight and importance in the world economy are becoming all too evident these days, are simply not willing to play along in a charade of free trade organised by the developed countries. The world has changed.
At this point it’s become clear to everyone that trade happens to be freest in those sectors where the developed countries have crushing comparative advantages. That’s why there is a lot of freedom of movement for capital, but hardly any for labour. That’s why there is no free trade when it comes to agriculture, which is exactly why the Doha Round has stalled. That’s why free trade agreements come, somewhat strangely, with evermore restrictive rules regarding intellectual property, a point to which I will return.
And besides all this, there is some annoyance with the reluctance to acknowledge that, no matter what the long-term benefits of free trade may be, trade liberalisation entails serious economic and social disruptions in the short run, which in the case of many developing countries require at least some compensation aid. Such a commitment to support the transition towards free trade with development aid seems to be conspicuously absent from most trade agreements, notably those signed by the US. The developed world subsidises their own farmers to the tune of US$500 billion a year, about five times as much as the total sum available for Official Development Assistance.
Second, in a large swath of the developing world - most notably in Latin America - trade liberalisation carries a kind of “guilt by association”. Trade liberalisation was one of the recommendations of the so-called “Washington Consensus” alongside fiscal responsibility, focalisation of social expenditure and, generally speaking, a shift towards a leaner state. Most notably privatisation of public enterprises and utilities was part of the package, and this partly explains the problem.
According to Latinobarómetro 2007, a regional survey, only 35 per cent of Latin Americans believe that the privatisation of public firms over the past 20 years or so has been beneficial to their country. In general, privatisation in Latin America was seen as an orgy of corruption and, in some cases, as the replacement of state monopolies with private monopolies, with few tangible benefits for citizens.
It’s crucial to understand that in places like Latin America discussions on trade liberalisation are never about trade liberalisation alone. Other factors are thrown into the mix, and some can be very negative.
Third, when pursuing trade liberalisation, and particularly when signing free trade agreements, democratic discussion has been muted. This is not casual. There are real problems with the political economy of trade liberalisation that make it difficult to win an open discussion about it, no matter how compelling the theoretical arguments may be. The first hurdle is a typical collective-action problem: the groups that stand to lose from trade liberalisation tend to be defined and organised, while the winners of trade liberalisation - consumers, for instance - tend to be dispersed and unorganised.
The second problem is one of uncertainty. Dani Rodrik and Raquel Fernández in a 1990 paper point to the idea that free trade is unpopular because it’s nearly impossible to identify ex ante the winners of the reform; therefore it’s very difficult to mobilise political support for trade.