The Not-So-Invisible Hand of Free Trade

Mallaby's conclusion is as follows:

Rich-country politicians, who already bend over backward to please domestic protectionist interests, will no doubt seize on these questions to justify further obduracy. But this is exactly the wrong reaction. For one thing, the gains from trade outweigh the losses; for another, today's losers may become tomorrow's winners, given time to adapt to liberalization. Moreover, the conundrums that I've described don't show why trade is bad. They show why it has to be backed up with complementary policies.

Some of these policies are comfortable extensions of the free-trade philosophy. A formidable team of economists directed by Berkeley's Ann Harrison is about to come out with a volume titled "Globalization and Poverty"; a central message is that free trade works best for countries with labor mobility. For example, India's dramatic trade liberalization in the 1990s produced equally dramatic strides against poverty. But because Indian workers move surprisingly little between industries and regions, people in sectors that contracted as a result of the lifting of tariffs were trapped. Liberals who seek to "soften" trade deals by writing mobility-restricting labor regulations into them need to rethink their strategy.

But the other policy necessary to complement free trade may force new thinking on some parts of the right, because it comes down to more development assistance. Rather than maintain farm subsidies that punish Argentine and Brazilian exporters, for example, rich countries should get rid of the subsidies -- and then cushion the blow to food-importing countries by increasing aid to them. If just half of the $350 billion currently spent on farm subsidies were converted into development aid, official foreign assistance would triple. By spending a chunk of that money on agricultural research targeted at Africa, a woefully neglected field, rich countries could score a triple win -- for African farmers, for Brazilians and Argentines, and for their own taxpayers.

Equally, aid offers the best way out of the trade-preferences dilemma. It's tempting to rig the rules so that China doesn't corner the market in textiles: Central America is nearer to home, Africa is especially poor, the Middle East has terrorism. But rewarding friends with trade preferences can be self-defeating in the end. Pretty soon so many regions get "special" access that nobody is really special. Moreover, preference deals generate onerous red tape: African-made clothing gets duty-free access to the United States, but to qualify it has to show that its constituent parts were not made in China and then assembled in Africa, and arguments as to what constitutes a constituent part can employ battalions of lawyers. It's far better, in other words, to grant everybody access free of red tape, and then to give some regions a helping hand with carefully designed aid programs.

Five years ago, large chunks of political opinion believed that trade was bad for poor countries; thankfully, that delusion has receded. But today, we must guard against the opposite mistake. Trade, though good, is not a panacea.