Negotiating Freer Trade, Or Bigger Bureaucracies?

The collapse of WTO talks in Cancun was predictable. The “rich” wanted to discuss customs rules so as not to discuss farm subsidies; the “poor” wanted to discuss farm subsidies so as not to discuss investment regulations. They all left vowing to negotiate bilateral or regional deals, better suited to their fragmentary idea of free trade –and their political interests.

There is something bizarre about governments negotiating trade deals. After all, it is not governments but citizens who trade. One wonders what effect the tangle of trade negotiations in the Western Hemisphere would have on Richard Cobden, who brought prosperity to Britain after forcing the repeal of the Corn Laws in the mid-19th century and took up Washington's advice: “the great rule of conduct for us in regard to foreign nations is—in extending our commercial relations—to have with them as little political connection as possible.”

Whether it is the Free Trade Area of the Americas, the Central American Common Market, the South American Common Market (Mercosur) or the Andean Community of Nations, we have 34 countries locked into contradictory or overlapping accords. They also take part in the Doha Round –again, bargaining with each other!

It is a reverse case of Russian dolls –each doll contains a bigger doll inside! No wonder commerce between the U.S. and Latin America is, with the exception of Mexico, ridiculous (exchanges with gigantic Brazil amount to no more than $26 billion, almost seven times less than with Japan).

This nonsense is the child of the post-WWII trade ethos. After the war, world leaders committed the original sin of treating trade as peace treaties: through State-to-State negotiations. Since then, three so-called Rounds have gone by –the Kennedy Round (1967), the Tokyo Round (1979) and the Uruguay Round (1994)- and a fourth one is in progress. Half a century of trade talks has produced no free trade.

Politicians have encouraged a false debate over the multilateral versus the regional path. When GATT sanctified regional deals through “Article 24”, a multitude of trade blocs sprang up in the Americas during the 1960s (the Latin American Free Trade Association, the Andean Pact, the Central American Common Market and so on), none of which let people engage in commerce freely. After a hiatus, the U.S. revived the regional and bilateral mode in the 80s by negotiating trade agreements with Israel and Canada. Today there are more than 150 FTAs worldwide.

Multilateralism and regionalism are excuses to direct, not liberate, trade. The U.S. avoids liberating agriculture with the excuse that the matter is reserved for the World Trade Organization and Brazil does the same with telecommunications and banking.

Trade blocs divert more trade than is gained. Mercosur imposed tariffs of 10 percent in Argentina for products that used to pay no duty. No wonder less than 10 percent of Chile’s trade involves neighboring Argentina. Andean countries will also lose trade because of common external tariffs as high as 20 percent.

Trade diversion is coupled with bureaucracy. Mercosur entails 35 commissions, subcommittees and secretariats. NAFTA takes up 2,000 pages of rules and Central American Common Market regulations include 300 articles, each with a preamble, five parts, six titles and five sections, divided into many chapters.

While the hemisphere pays lip service to free trade agreements, Brazil enforces tariffs of 16 percent against the U.S., while, through anti-dumping penalties, phytosanitary measures and quotas, the U.S. punishes Brazil with duties of 45 percent, making a mockery of the official average tariff of 3 percent. When the Bush administration increased steel protection, Brazil was granted a quota that surpassed usual shipments. The problem is that shipments had been expected to increase substantially!

While some agreements may be better than nothing, gains are offset by losses. Producers from third countries are excluded, to the detriment of consumers in the protected market. When domestic producers operate in high-cost environments, the exclusion of third nations means that consumers have to subsidize businesses benefiting from predatory politics. That was the result of common external tariffs as high as 20 percent set by Mercosur countries.

Through delayed phase-outs, governments assume domestic producers will in future produce at lower costs (sacrificing the present generation). How can interventionist governments guarantee that future regulations will make business less costly or that no crisis will affect, say, fiscal policy? Differentiated tariff reductions presuppose different business environments within a same country. U.S. quotas on the import of Chilean sugar will rise by only 5 percent a year over a long period. Duties on beef, poultry, wine, butter, milk powder, copper and tires will see a slow phase-out. What these arrangements reflect is the relative lobbying powers of the interest groups affected, not different business environments!

Because consumers and taxpayers fail to make the connection between mercantilism and their pockets, politicians prefer to limit trade than to affect cronies. In a trade negotiation, a government represents only its powerful class.

The Western Hemisphere would be better if countries did away with tariffs and duties. Economic activity would grow, more resources would be available for investment and consumption, and incomes would expand. If consumers preferred imports, it would mean domestic resources would create more value through new businesses elsewhere in the economy. Power would be in the people’s hands.

Should tariffs be eliminated unilaterally? Yes. Would people then import everything and export anything? No. In the absence of Statism, a country can only buy imports with the proceeds from selling abroad and with foreign investment. If they sell little and attracted scant capital, their currency loses value, making exports attractive again!

The Western Hemisphere should take Cobden’s suggestion and take politics out of commerce all together.

- Based in Latin America, Alvaro Vargas Llosa is a research fellow for The Independent Institute in Oakland, California, for which he is currently working on a new book about Latin American economic and political reforms in the 1990s.

- Also from The Independent Institute this week

"Pyrrhic Victories on Iraq", by Ivan Eland:
http://www.independent.org/tii/news/031022Eland.html

"A Civics Lesson Under One Roof," by Brigid O'Neil:
http://www.independent.org/tii/news/031020ONeil.html

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