Monday, October 10, 2005

Do or die

There is a sense of a turning point in the upcoming Ministerial Conference of the WTO, to be held in Hong Kong this December. The Doha Conference of 2003 provided a mandate and framework for negotiations on critical trade issues, such as agricultural trade, trade in services, intellectual property, and the environment. However the preceding conference in Cancun failed to build a consensus on making progress on the Doha round. The Hong Kong conference seems to be the last chance to restart the stalled trade talks.

Anti-globalists warn that this may be their last chance to throw a monkey wrench into the system:

We are entering the most dangerous period of the negotiations, when a deal will either be struck or killed. The next four months will determine whether the WTO gets consolidated as the engine of global trade liberalization and we enter a Brave New World of even greater liberalization, or the process of reversing trade liberalization gains momentum and the WTO is crippled as a mechanism of globalization.

All types of trade restrictions (tariffs, quotas, discriminatory product standards, and so forth) are obstacles to countries specializing in their comparative advantage (discussed in yesterday's post). In short, products are not going to be produced where their opportunity cost is lowest. This is to the detriment, not only of the global economy as a whole, but also of individual countries.

Of course when I say "country" I mean the citizenry as a whole, consumers and producers taken together. For sure there are vested industrial interests which stand to lose from trade liberalization. Continuing Ricardo's example: in England the wine-makers stand to lose profit from the influx of Portuguese wine. So they would spin out all manner of ingenious fallacies to oppose international trade. All manner of power and influence is exerted upon the state regulators to restrict trade. The result? England as a whole, and Portugal as a whole forfeit gains from trade.

At least the wine-makers are happy. Will the "wine-makers" gain the upper hand (again) in Hong Kong? Or will states finally realize who they are really representing, and act accordingly?


Amadeo said...

Any serious student of International Trade would know that comparative advantage is the primary basis why nations trade. But we should also be aware that even in well-intentioned organizations like WTO, some members are just more equal than others. USA and China readily come to mind. If the smaller and less capable nations are not allowed initially some slack to make them competitive, then the most likelihood is that those behemoths could easily run them over in the competition business.

To illustrate, those in the agricultural sector very well know that China, and even Australia, have at some point in the current environment been able to both legally and illegally (through smuggling, like the technical kind maybe) send their cheaply-priced produce into the local markets, in sufficient quantities to adversely affect the local fledgling industries.

Thus, what about the recommendation to allow similarly-situated countries to form some kind of regional intra-alliances within the WTO, so their inherent handicaps can be neutralized somewhat? Shouldn’t this appease somewhat the sincere anti-globalists?

Econblogger said...

If they send their cheaper products over here, so much the better for the consumers, don't you think?

This rationale holds even if the products from Australia are artificially cheaper due to subsidies. Then indirectly the Aussie taxpayer is subsidizing the Filipino consumer.

Meanwhile Filipino producers switch to where the private opportunity cost of production is lower than in the world market. The case of subsidies is no doubt a misallocation of resources, but only because the Aussie taxpayer is coerced into footing the bill.

Amadeo said...

I beg to disagree. Firstly, I do not believe that markets are that elastic and resourceful so that resources can be promptly re-allocated to other endeavors when cheaper alternatives are provided for local products. And one cannot discount the fact that economic dumping may also be involved, or even undue advantage such as you mentioned, subsidies. Of course, in due time when rational economic policy is brought to bear on theses issues, then maybe we can attain some parity.

Secondly, in free trade there are winners, and there are losers. And the most likely losers are the less developed and less capable countries. And these same losers are the least capable to provide and implement the recommended safety nets. So, how does the WTO go about trying to address these imbalances or inequities, or at least aim for some correction to improve competitiveness?

BTW, how do you assess China's position in the WTO given that it had only recently started to float its undervalued yuan?

Econblogger said...


Indeed resources take time to shift. But eventually they will - you can count on good old self-interest for this.

Yes, there are winners and losers. But a country as a whole cannot lose from trade. Individual sectors in each country do lose from trade - in fact the stick of loss (as well as the carrot of profit) are precisely the requirements for moving resources towards more efficient uses. However the gain in efficiency signifies that losses are more than offset by gains elsewhere.

China is a trade powerhouse, whether or not it is a member of the WTO. The titanic Chinese market is a marvellous opportunity for Filipino exporters. The coming yuan correction augurs well for rising Chinese demand for foreign goods.