By ARTURO BOQUIREN
President Gloria Macapagal-Arroyo was reported by news dailies to have said during the week that the country will pursue bilateral and regional trade agreements as second-best solutions.
President Macapagal-Arroyo made the statement before officers of the World Trade Organization (WTO) and the Asian Development Bank (ADB) in a conference designed to mobilize aid for trade.
If there are “second-bests,” there must be a first-best. In conventional economics, the first best is trade liberalization. However, is the first best really the best?
Notice the irony: in the news report, the United States is revealed to have been spending more than US$17 billion in farm subsidies.
The use of subsidies is protectionism, plain and simple. Subsidies or, in other words, financial support are used to keep industries alive, whereas free market principles say that government should allow industries to live or die in the market.
Free-market policy-makers say, “If industries lose or do not have profitability, let the industries die because allowing them to live would be inefficient.”
Protectionism is protecting local economy from foreign penetration. It means limiting the entry of foreign goods and services. The weapons used by protectionists include tariffs and outright restrictions on the entry of imports.
Tariffs are taxes on imports. Some of the forms of outright restrictions on imports are the quotas. A quota is the imposition of a limit on the quantity or volume of imports that may be made.
Non-tariff restrictions other than the quota are dubbed as non-tariff trade barriers. Examples of there are subsidies and the imposition of unreasonable administrative and technical requirements designed to restrict imports.
Notice another irony in the news report: developed nations who are the most aggressive and obstinate in promoting trade liberalization are backtracking and strengthening their protectionist walls or barriers to trade. They prescribe the bitter pill for underdeveloped countries to swallow but they refuse to take the pill themselves. The WTO even appears as a trap for developing nations to go into trade liberalization even if the developed nations are not essentially liberalizing.
Europe has not even join the fray. Instead of allowing itself to be gobbled up by trade liberalization and the WTO, it has integrated its economy: it harmonized fiscal and monetary policies, integrated the markets of member countries for labor and capital, and removed trade barriers among themselves but not with the rest of the world.
In essence, the European action is not an accommodation of trade liberalization. On the contrary, it is a defense against the trade liberalization promoted by the WTO. It is also their way of projecting themselves as champions of trade liberalization while basically practicing protectionism.
How does European economic unionism serves protection? What follows is an example. Member countries of the WTO are supposed to follow the “most-favored nation” rule among them. This means that any country granting a set of concessions to another nation is obligated to grant the same concessions to WTO member countries.
However, nations who are members of the European Union are exempted from the rule: WTO does not require them to grant to member countries of the WTO any concession they give to member countries of the EU because the EU is treated as a unitary economic unit. The EU is essentially an alliance of European countries vis-à-vis other countries of the WTO. It is fundamentally a form of protectionism vis-à-vis the WTO.
If it is true that free trade improves society’s welfare, then why does even the world’s most developed countries do not practice it? Instead, they make a lot of noise advocating and prescribing trade liberalization for less developed countries. They make a lot of effort to ram down the policy in the throats of the citizens of the third world. But in their homeland, what is practiced is not free trade but protectionism.
Conventional economics explains the situation as one where producers are dominant over consumers. However, there is a rival explanation: developed countries have never really practice trade liberalization and the banner of trade liberalization is merely used to open markets as developed countries practice protectionism.
For theory and policy to be correct, we must draw insights from history. Yet, the more popular books of economic do not appear to have a correct appraisal of history. In fact, they even ignore history.
One textbook in international economics say, for example, that there is no evidence that developed countries had exploited the less developed nations. This wrong appraisal of history and theory’s failure to accept inputs from history is an important reason why theory does a disservice to policy.
Nothing in this piece should be interpreted as an argument for autarky or for closing the doors of the nation to international trade.
However, it is correct to say that this discussion argues that we have to re-examine all dogmas, including dogmas advocated by conventional economics on international trade. #