Why the discomfort over free trade

For whatever reason, the truth is that there are few cases in which the issue of trade liberalisation has been at the centre of an open democratic debate. It was certainly the case in Costa Rica, where the ratification of CAFTA was recently put to referendum - a low quality debate, to be sure, but a debate in the end. Maybe it was the case in Canada, where the ratification of NAFTA was intensely debated in the run-up to the 1988 election. And that’s it. In a way, trade liberalisation is affected by the same kind of democratic deficit that one sees, for instance, in the project of European integration, with many citizens feeling that they’re taken for granted.

The fourth point is crucial. While the effects of trade liberalisation on poverty are generally positive, its effects on income distribution are debatable at best. Trade liberalisation has come to be identified with growing income inequality, within and between countries.

The attraction of foreign direct investment, in particular, has tended to skew the salary structure in many countries. In places like Latin America, where income inequality is already unbearably high, this tends to anger people and, not surprisingly, they react either on the streets or at the polls by selecting leaders who are sceptical of free trade and, more broadly, globalisation. Income inequality can be socially explosive, not least because it’s empirically related with many social ills, including rising crime, a pressing issue in Latin America and elsewhere in the developing world.

One of the most remarkable and disturbing trends of inequality between countries is how the free trade discourse co-exists with truly punishing rules regarding intellectual property, which is held in most part by the developed world. Few would dispute that solid enforcement of intellectual property rights is essential for the production of knowledge. Yet, it’s highly dubious that the introduction of ever-stricter protections of intellectual property rights will lead to more welfare worldwide.

Unfortunately, of all the factors in development, the production of knowledge is concentrated in a few hands. According to figures of the World Intellectual Property Organization, 87 percent of the patents granted worldwide in 2005 came from the top 10 countries; only China and maybe South Korea can be considered developing countries. More than half of the total, 53 per cent, came from Japan and the US alone. One does not need to be a fortune teller to foresee this phenomenon perpetuating, indeed enlarging, income gaps between countries and regions.

The cause of free trade would gain immensely if each of these points is seriously addressed: if agricultural subsidies and tariffs in the developed world are drastically reduced; if trade liberalisation is decoupled from other free-market prescriptions that may be more controversial; if open democratic debates are held about trade liberalisation, even if some of those discussions are lost; and, finally, if we start taking inequality seriously, particularly when it comes to intellectual property rules. It’s a tall order, but until met, free trade will be doomed to live dangerously in the developing world, prevailing in scholarly debates and in little else.