Free Trade in the Balance

FOCUS ON TRADE
NUMBER 85, FEBRUARY 2003

BHAGWATI AND BELLO SQUARE OFF ON FREE TRADE AND FREE
MARKETS

(The debate between Walden Bello and Jagdish Baghwati was filmed
at Stanford University for the program Uncommon Knowledge and
moderated by the show's host, Peter Robinson. The show has been
airing on the Public Broadcasting System in the United States.)

Peter Robinson: Today on Uncommon Knowledge: free trade-win-win
or win-lose? I'm Peter Robinson. Our show today: free trade in the
balance. According to a recent study, over the last half century, nations
that were open to free trade experienced a rate of economic
development that was double that of those that were not. So why would
anybody oppose free trade? And yet many, particularly in the
developing world, do oppose free trade, believing that the rules of
global trade are rigged in favor of the rich, developed north and against
the poor, developing south. Who's right? And with President Bush's own
commitment to free trade unclear, he did after all enact a new tariff on
steel imports, where does the United States itself stand in this debate?

With us today, two guests. Walden Bello is executive director of Focus
on the Global South, a development policy program in Bangkok,
Thailand. Jagdish Bhagwati is a professor of economics at Columbia
University, a senior fellow at the Council on Foreign Relations, and the
author of the book, Free Trade Today.

Peter Robinson: Nobel Prize winning economist Joseph Stiglitz: "The
trade liberalization agenda has been set by the north (that is by the rich
countries) or more accurately by special interests in the north.
Consequently, a disproportionate part of the gains has accrued to the
advanced industrial nations. And in some cases the less developed
countries have actually been worse off." Free trade making the rich
countries richer and the poor countries poorer. Jagdish?

Jagdish Bhagwati: I think even a Nobel Prize laureate can be totally
wrong. I think it's fundamentally...

Peter Robinson: Totally mistaken.

Jagdish Bhagwati: Totally mistaken.

Peter Robinson: Walden?

Walden Bello: I think he's right on target. I think he's...

Peter Robinson: Ah, marvelous, we have just what a television host
likes to hear, a nice clean disagreement. Let's begin if we could with just
the sort of the fundamental, in effect, the classroom principles. What's so
special about free trade? As the argument goes, and you are one of the
planet's leading proponents of the argument, why should nations open
their borders to trade?

Jagdish Bhagwati: Fundamentally it's a question of sharing mutually
from exchange. If I have surplus toothpaste and you have surplus
toothbrushes and if we exchange one of each, teeth are going to get
whiter, right, provided we remember to brush our teeth. So
fundamentally that's the argument. That is really the underlying logic of
any trade transaction and I think there's empirical evidence of a very
substantial sort in the post war period, which underlies the wisdom of
this, including for developing countries.

Peter Robinson: So it's the same argument that you'd make for the
development of a nation's own economy. We should all simply
specialize in the tasks that we tend to do best in which we have
comparative advantages. And the argument is the same among nations
as it is among individuals or among firms?

Jagdish Bhagwati: Yes, but remember that the comparative
advantages can shift with a whole lot of policies like education. If I build
up an educated labor force in India then I can get a Silicon Valley there
like in Bangalore and then that becomes our comparative advantage.
So that shifts the argument a little bit further into what kinds of general
policies also you have for your society. But fundamentally wherever you
are at or wherever you're going to, having an open economy is really
going to be good for you whether you're poor or rich

Peter Robinson: Now do you have any disagreement with Jagdish in
principle?

Walden Bello: Well, I really would prefer to move from the theory of free
trade to the actual practice of free trade.

Peter Robinson: So you grant the principle that he just laid out?

Walden Bello: I'm agnostic on that but in terms of the practice of free
trade, what it has done really is that it has consolidated the advantages
of a number of countries, a minority in the world economy, and this has
created structural disadvantages for many of the late comers.

Peter Robinson: Let's see what Walden makes of the conclusions of a
1998 report on free trade by the Organization for Economic Cooperation
and Development: over the last half century, this OECD report says, and
especially over the last decade, the 90s are important here, "Nations
that have been more open to trade have experienced double the
annual growth rate of those that have been closed." The OECD report
goes on to draw a very sharp contrast between two regions of the world.
First, Asian nations of Korea, Taiwan, Singapore, Hong Kong, Malaysia,
Thailand, and Indonesia, they started with closed economies, gradually
opened them, and some three billion people in those countries have
been lifted out of poverty. Second, African nations such as Nigeria, Cote
d'Ivoire, and Tanzania, they start with closed economies and, by and
large, they keep their economies closed and they remain poor. Open
economies, look what happened in Asia. Closed economies, look what
happened with certain countries in Africa. Now how do you handle that
argument?

Walden Bello: Well...I would say this is that this is a very simplistic
picture that they're giving of Africa and Asia. If you look at the east
Asian
economies, these were not free trade economies, these were hard
hitting protectionist mercantilist economies with a great deal of state
intervention, state support, state subsidization, that in fact made them
blockbusters on the world markets. So, if you look at what, in fact, is a
much more accurate comparison. Compare these mercantilist,
protectionist, integrating to the world economy, East Asian economies,
to the Latin American countries, the African countries, and the Eastern
European countries that were subjected to structural adjustment by the
International Monetary Fund -- that is, radical free market reform -- and
it's fairly clear. The ones that, in fact, integrated into the world economy
with a sophisticated, non-free trade, strong state intervention type of
model, perform much better than the radical free trade economies. So
this is why I think that this sort of statistics and this sort of picture is
inaccurate-let me just say that there's all the world of a difference
between a free trade economy like Haiti, and Vietnam.

Peter Robinson: Now I have to say I know so little about Vietnam.
Vietnam in other words has a strong state sector?

Walden Bello: Sure.

Peter Robinson: It is engaging in importing and exporting but the
government is directing that to a large extent.

Walden Bello: It's a very heavily regulated economy like China is.

Peter Robinson: And it's growing at leaps and bounds.

Walden Bello: It's growing by leaps and bounds, it has become...

Peter Robinson: And in Haiti you have almost no functioning
government as I make it out-almost no system of laws.

Walden Bello: Right, sure.

Peter Robinson: So they're open and there's no government-so your
argument is Haiti in some sense should be a libertarian's dream?

Walden Bello: They're open and dead just like Argentina is open and
dead.

Peter Robinson: Open and dead. All right, there's a nice term, open and
dead.

Jagdish Bhagwati: I think Walden is making a mistake in saying that it's
too simplistic. It is true that one can be overly simplistic but you can
have a lot of governmental intervention for creating infrastructure for
helping initially to an import substitution phase for industries and so on.
But, essentially, what the Far Eastern economies did, for instance, was
to have a lot of intervention. It was not a libertarian hands-off
government, but the question was what was the nature of that
intervention? They consistently routinely made it clear to their people
that outward orientation was the important way to go. And open
economy in the sense that you are not fearful of world markets, not
fearful of direct foreign investment, you use the external world to learn
from it, to profit from it. So, you take countries like the four Far Eastern
economies, South Korea, Taiwan, Hong Kong, and Singapore. Hong
Kong is the most libertarian in a way, but even that has a substantial
amount of intervention, but it's pure free trade. Singapore is almost pure
free trade-no intervention of any kind on the trade front, which is really
what we're talking about. South Korea and Taiwan went through a phase
of import substitution for a while, but then they turned outward. And the
secret of their success was that they went in for very rapid expansion of
exports.

Peter Robinson: What about Walden's example of countries that are
open but dead-Haiti and Argentina, they're quite different countries.

Jagdish Bhagwati: But you can die-I mean, you know, despite being
open because being open helps you but it doesn't prevent you if you're
dying of cancer. Or, you know, having fresh air might be great for you in
terms of your general health, but it's not going to do anything if you're
dying of cancer. So you've got civil strife for instance like in most of
Africa, which is another of Walden's examples. Or you've got dictatorial
governments, which are really printing money, spending it through the
budget, having massive inflations. I mean you have inflation during the
period in which Walden was I'm sure talking about in South America,
which was four digits, it makes your mind boggle actually if you're an
Asian. Now those are the things which unsettle their economies. It has
nothing to do with being outward oriented or inward oriented.

Peter Robinson: Back to an earlier question: is Walden philosophically
opposed to free trade or not? Other things being equal, that marvelous
phrase that makes any argument that follows completely artificial. But
other things being equal-so you have a country-well, you have two
countries which are in every way identical and one of them engages in
free trade and the other does not. In your judgment, which country is
making the right policy decision?

Walden Bello: Well this is exactly what I'm trying to say Peter, is that
it's
not accurate, it is fundamentally mistaken to say that Taiwan and Korea,
or China, in their periods of rapid growth were free trade economies.
What I'm trying to say here is that these were extremely protectionist
when it came to their domestic market. I mean you know, it's only been
in the last ten years that you have had Japanese cars come into Korea.
I mean this is amazing. What I'm trying to say is they're not free trade
economies, certainly they opened up, but they opened up while they at
the same time protected their domestic markets.

Peter Robinson: Let me put on the table a question for the two of you
because what you have now is a layman who has a problem. We look
at the experience of the so-called Asian Tigers, and Jagdish says that
good news is taking place because they're free trade and in spite of
occasional protectionist interventions by the government. And Walden
is saying, no, no, no, the good news is taking place almost in spite of the
free trade, largely driven by the protectionist interventions and other
kinds of economic interventions of strong central governments. So the
question is, is there some statistical approach, is there some way to-
you're both looking at the same picture and giving opposing accounts
of why that took place, is there some way to settle this-some objective
way to settle it?

Jagdish Bhagwati: Walden is both right and wrong. I mean, there has
been massive protection to begin with in these systems. Certain types
of protection, like on the car industry, on heavy industries, continued. But
there's a great deal of literature now which shows that this is exactly the
wrong kind of industrial policy because as long as those interventions
were reinforcing the comparative advantage in light manufacturers,
Korea managed to reinforce what, in fact, the market would have done
anyway by choosing light manufacturers, just the way Japan did. When
it started going into industrial policy and interventions for the heavy
industry sector, ship building and a variety of things, that's when it lost
its
way like most people do.

Peter Robinson: Where they did not have a comparative advantage in
the international marketplace in the first place.

Jagdish Bhagwati: And there was no clear signal from the marketplace
as to where you want to go.

Peter Robinson: Right. The market wasn't screaming for ships from
Korea.

Jagdish Bhagwati: So at some stage, if you look at Japan for example,
and industrial policy in these countries, where it does seem to be
succeeding is where, in fact, they're trying to predict the comparative
advantage evolution.

Peter Robinson: Next topic, how badly have recent American actions
damaged the movement toward freer trade? In recent months, President
Bush has taken a couple of actions that bear on free trade. First he
imposed tariffs of up to 30 percent on imported steel, which The
Economist magazine called "America's most protectionist single action
for two decades." And a few months after that he signed a farm bill that
raised subsidies to American farmers by 80 percent, providing them
something like $170 billion over the next decade. Now, it's not just in the
United States. The overall level of subsidization of agriculture in the
OECD countries, which is basically the industrialized countries, doubled
from 182 billion in 1995 to 362 billion in 1998. So, the question here -- at
least as regards agriculture and also as regards other politically
sensitive industries- why I was talking about steel? steel-politically
sensitive, the president imposes a tariff-the rich countries are not
playing fair. So is Walden correct that free trade is something that the
poorer countries ought to think twice about? That they're going to get
ripped off by these rich countries.

Jagdish Bhagwati: But you don't get ripped off. I think that's the wrong
way to look at it. My old teacher, a great radical, Joan Robinson at
Cambridge used to say, if you throw rocks into your harbor, that's no
reason for me to throw rocks into my own. Essentially what she was
saying was that it's good for me to have no restrictions-or reduced
restrictions on trade because trade leads to gains-true. If your door is
closed, you know, I would get less by their trade. But it doesn't mean that
I should then close my own door because then I get doubly hurt. But I
would simply go on to say also, to be partly on Walden's side but in a
nuanced way, which is because today we are all sort of saying, look
here are all the statistics which you read out. Right. And things are even
getting worse and what is bad about the U.S. actions is that while we are
entering a multi-lateral trade negotiations post-Doha, we have actually
used the WTO consistent procedures to increase protection. So we are
sending out all the wrong signals. My worry is not about this in itself,
because they're hurting themselves and they're hurting the rest of the
world too, but...

Peter Robinson: The Americans are and the Europeans who subsidize
agriculture are.

Jagdish Bhagwati: But the real problem is that when we do things like
that and we are supposed to be the ones who are most free trade
oriented, the big proponents of free trade, ideologically and so on, when
we do this it's very difficult for President Arroyo of the Philippines, for
the
Prime Minister of India, who are all trying to move a little closer to free
trade. We are never going to be at free trade, but you know, we are
trying to liberalize here and there as the democratic processes permit,
then you see all the people who oppose liberalization. And then you
say look the big dog on the block is doing something which is
hypocritical and that makes our life more difficult in the developing
countries.

Walden Bello: Well I think definitely, whatever our respected positions
on free trade, I think Jagdish and I have a consensus on the double
standards that, in fact, operate in the world economy. Basically what the
United States does is that when it suits me I'll do free trade, but I will
also
be unilateral. But for you guys out there, okay, you only have to bring
your tariffs down. You guys have to practice free trade.

Peter Robinson: So would Walden support free trade if he thought the
rich countries were playing fairly? Are you opposed to free trade or is it
simply the hypocrisy that you see in an action like this by President
Bush-the hypocrisy that you see in the European Union by saying to the
so-called Third World, you must engage in pure free trade while we
subsidize our farmers and every other political group that we need to
get elected. Is that what really annoys you? If the first world would
behave better, would you then be more in favor of free trade?

Jagdish Bhagwati: You see that reinforces the point I was making which
is that when people like Walden pick on this sort hypocrisy or double
standards, when intellectuals, I mean he's one of the influential
intellectuals in the Third World, they will reinforce the lobbies, the
industrial lobbies, and so on, which don't want to have reduced
protection. So in that sense, it is an extremely important downside of
what President Bush has been doing.

Walden Bello: Well, I think in response to your question Peter, as I said,
you know, I'm not really that hung up on, you know, the theory of free
trade. I'm a pragmatist, you know. I don't oppose trade. I'm for trade but
it all depends on what the rules are for trade and I'm for fair trade, and
this is what I'm trying to say here. That the history of East Asia shows,
you know, that interventions, even protectionist interventions, in fact,
build up capacity so that at a future time these countries like Korea, were
able to become efficient, effective, economies. So what I'm saying here
is that we really, really need to be pragmatic about trade policy. There
are times when you're a protectionist and that's the rational thing to do,
there are times when you liberalize. But the important thing is the
national interest that guides you in terms of developing your economy.
So basically Peter I'm saying, I would put above everything else as
somebody from the Third World, development over trade. Thus trade,
certain trade policies assist in development, if they do, fine. If they
don't,
then I'm not going for that. And certainly the so-called structural
adjustment free trade policies that have been imposed by the IMF and
the World Bank, they have consistently eroded the capacity of Third
World countries like the Philippines to be able to develop.

Peter Robinson: How would you grade the IMF and the World Bank?
Walden has several times now said that they have imposed rigid,
liberal in the sense of small government free market regimes, or
attempted to do so, imposed these strictures on Third World countries
and that's caused trouble and resentment and so forth. How would you
grade the World Bank?

Walden Bello: And not only on trade but on capital.

Peter Robinson: Capital, right. Monetary policy...

Jagdish Bhagwati: The policies extent of the IMF extend not just to trade,
which is very minimalist, but to pushing countries rapidly into capital
account convetability or, as it is sometimes called, financial
liberalization. So our financial firms can, you know, go in, you know, and
basically operate without any restrictions but people can take their
monies out and so on. And that was very imprudently done and there...

Peter Robinson: You give them a low grade?
Jagdish Bhagwati: I'm afraid I do. A low grade is, a low grade-no, I
would expel them from...

Peter Robinson: Ah, that bad.

Jagdish Bhagwati: ...university.

Peter Robinson: Because it seems to me...

Walden Bello: Very significant quote!

Peter Robinson: Walden is saying I'm a pragmatist; I want to know what
works. And it strikes me, listening to Walden, that in the developing
world it would be easier to see that free trade works if there were not this
overlay of the western world pushing it, backing, trying to jam it down
their throats-the IMF, the World Bank, and then President-this entire
overlay that just makes it hard to take.

Jagdish Bhagwati: I think the last few years they were going by analogy with
trade as far as financial liberalization was concerned. And one thing you
learn in the classroom is that, you know, there are similarities between 
financial liberalization and trade liberalization, but they are 
fundamentally...

Peter Robinson: Quite different.

Jagdish Bhagwati: So the differences are much more important. When you're
dealing with financial liberalization, unless you're very prudent and
cautious and putting monitoring in place, adapt the local institutions 
like the banking procedures, debt equity ratios, you're playing with 
fire and then the analogy is playing with fire. It's good for you, 
you know, but on the other hand, it can burn down where you're living.

Peter Robinson: Last topic, predictions about the future of free trade. The
Economist magazine again: "The lesson of the early twentieth century is that
globalization is reversible." Globalization is reversed by the First World
War and then it's reversed by economic policy, trade policy, during the
Depression-people become protectionist and so forth. I continue the
quotation, "This time, the current time, global integration might stall if 
the risk and cost of doing business abroad rises, perhaps as a consequence 
of fears about security," that is the terrorist threat, "or if governments 
once more turn their backs on open trade. Either of these threats could 
prove decisive." So, the question is, this is not a question of ideology 
or even of principle or even really of past practice, but a question about 
the future. Has the movement toward freer trade already crested, perhaps 
in the 1990s, and might we see a reversal in the years ahead? Walden?

Walden Bello: Nothing is determined...things can, in fact, be reversed. But
what I would say is that I think countries would like to integrate into the
world economy, but what they're asking for are good rules, okay, that are
very sensitive to the different places where countries are in the world 
economy. And I think that if the North, if the developed countries are 
willing to see that they're not going to jam down doctrinal rules about 
free trade on countries, but instead look into the needs of these countries 
that, in fact, they need to develop, and that has to be respected so that 
you can't have a one shoe fits all type of trade regime, then I think the 
south countries, you know, will integrate...

Peter Robinson: Are you optimistic that it'll actually happen that way in
the coming three years, four years, five years?

Walden Bello: Well, I'm not optimistic precisely because I think that there
is in the North either a doctrinal view about free trade or there is this 
very, what we've already talked about, this sense that I can be unilateral 
if I want to and I can be a free trader when I want to. And this is in 
fact what you have in Washington at this point. So, I would say here 
Peter that there's a lot of dissatisfaction in the South at this point 
because we were sold a bag of goods like free trade that has created 
enormous problems for our economy. And beyond that there's also the 
hypocrisy.

Peter Robinson: Jagdish, are you an optimist on this matter?

Jagdish Bhagwati: Yes, I think I am at the moment because I think it's
fundamentally a lot of things of changed compared to the, you know, to the
early part of the twentieth century. And the policymakers are still keen in
the developing countries, not necessarily all the intellectuals that certainly
Walden doesn't buy into that, but I think the policymakers have tried
alternate models and are now saying look, we were too fearful of the outside 
world, we want to use it the way the far eastern economies did. Let us, 
like the Mexicans looking across Rio Grande, you know. Porfirio Diaz said 
years ago, "Poor Mexico, how far from God and how near the United States." 
Today they turned it around and said, look what a wonderful thing, Mexico 
is next to the United States. It gives us opportunities.

Peter Robinson: Jagdish Bhagwati and Walden Bello, for Uncommon Knowledge,
thank you for joining us.