Updated: March 1, 2011 12:57 IST

The real impact of free trade

K. Subramanian
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The Doha development round of WTO negotiations is stuck in a deadlock. Except for WTO Chief Pascal Lamy and India's Commerce Minister, nobody seems to have any hope of its resumption. Even the United States, which was bludgeoning other countries into compliance, seems to have lost faith in free trade. Economists such as Arvind Subramanian and reputed journalists like Paul Blustein have already written epitaphs for it.

Until the last decade, openness to trade and investment flows were not viewed simply as components of a country's development policies. But, as Dani Rodrik explained, they were “mutated as the most potent catalysts for economic growth known to men.” (Foreign Policy, March/April 2001) Experts from the World Bank, International Monetary Fund, the WTO, the European Union and many other agencies repeated the message of openness as the highway to nirvana, i.e. growth and poverty reduction. How sustainable or true were those claims?

As Clive George describes in this book, it was at “the battle in Seattle” that the juggernaut ran aground. The meeting at Seattle was publicised as the most historical event of the Clinton era to push global trade forward. Unfortunately, the tide had turned.

A disaster

Campaigners at the gates of the conference fought for justice and feared that further liberalisation of trade would not end poverty but would increase it. Environmentalists were worried about ecological damage by way of loss of biodiversity, pollution, deforestation, climate change, etc. Unemployed labourers and displaced tribals were there in large numbers demanding their right to live with honour. For the WTO, Seattle was a disaster and, since then, negotiations under the WTO have not recovered.

George describes at length how this came about. He has the right academic credentials and experience. He served as principal adviser to the World Bank and as consultant to the OECD and the NEP, besides others. He was at the centre of the EU's 10-year research programme on the impact of trade liberalisation, known as the sustainability impact assessment (SIA). The SIA programme was drawn up in response to the Seattle battle. The European Commission spent around €10 million on it.

The book draws heavily on the research results of the programme. However, it is unclear what the real intention of the SIA was. As the author himself says, the SIA failed in its objective in educating the public about the benefits of open trade and in allaying their concerns over adverse environmental consequences; “In terms of heading off the Seattle confrontation it achieved nothing.” Senior negotiators of the EU like Peter Mandelson seem to have dismissed the SIA cynically. What is shocking is that, with so much of the research findings questioning the benefits flowing from trade opening, the EU negotiators could engage in double talk and twist the arms of weaker negotiators from developing countries to make deeper concessions.

In Part II of the book, the author offers an analysis of the impact of trade opening on various sectors: manufacturing, agriculture, and services. It reads more like a whistle-blower's deposition, though rather late in the day.

Uneven gains

On all counts, the gains from opening are insignificant and uneven. Developed countries which had climbed the ladder were shielded behind protectionist walls for a century or more. And they were attempting to remove them when developing countries need them badly.

Historical evidence, especially the recent East Asian growth, does not lend to credence to any sudden opening. Even the meagre gains from opening, when discounted for other impacts, suggest a negative picture. In agriculture, “the overall impact of agricultural liberalisation on sustainable development is decidedly negative.” In services, the claims are overstated. They do not reckon with the instability or volatility as has happened since 2008. Dealing with other areas of negotiation such as TRIPS, and Singapore Issues, he takes the balanced view that these are not trade related; they are trade distorting. What surprises, even shocks, an analyst is that, with so much of research evidence stored in their files on the real impact of trade-opening, how the EU could pontificate to emerging economies and take tough stands on various issues being negotiated in the WTO.

Considering that the developing countries are better informed, it is no wonder that the Doha round remains deeply stuck. The solutions offered by the author seem unrealistic and they will amount to reopening the negotiations de novo.

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