Is Free Trade Dead?

From IBD:
Posted 7/24/2006

Globalization: "World Trade Talks Collapse" is the typical headline, greeted mostly by yawns, on dispatches from the so-called Doha round in Geneva. Yawns aside, the news is an ominous sign for the world economy.
To say that the prosperity the world has enjoyed since World War II has been due largely to the growth of trade is not an exaggeration. The growth of trade has been largely due to successive rounds of talks that have lowered barriers and slashed tariffs from an average 40% in 1946 to about 4% today.

Despite that record, the Doha round of talks — named for the city in Qatar where they commenced in 2001 — fell apart Monday. Their demise after five years of nearly nonstop bickering sadly leaves a big question mark over the World Trade Organization and the future of free trade.

In the end, the talks collapsed because no one could agree on what should have been easy: reducing support for farm goods. Not surprisingly, the U.S. once again came in for harsh condemnation for the failure.

"Surely the richest and strongest nation in the world, with the highest standards of living, can afford to give as well as take," said European Union Trade Commissioner Peter Mandelson. That view was enthusiastically seconded by India and Brazil.

To be sure, the U.S. does deserve some blame. Last year, the U.S. government imposed tariffs and subsidies worth $28 billion to U.S. farm producers. This not only distorts output here but also makes it harder for developing nations to compete in our markets.

But Europe, India and Brazil, among other U.S. critics, are far worse than the U.S. And they refuse to bend.
U.S. trade support — subsidies, tariffs and the like — amounts to about 0.4% of GDP. For the 15 core nations of the EU, support is about four times that.

Nor do developing nations stack up well. They complain bitterly — and correctly, we think — about being kept out of U.S. and European markets by protectionism. Fair enough.

But those countries then protect their own markets while failing to protect things like copyrights and intellectual property. The latter results in hundreds of billions in lost sales for U.S. firms.

World Bank data show that tariffs in developing countries, for example, average about 14%; by comparison, tariffs in industrial economies average about 5%. Both sides have plenty of cutting left to do.

Just removing barriers on farm trade would add about $142 billion to developing nations' economies, the World Bank estimates. But guess what? More than $110 billion of that gain comes from those countries cutting their own tariffs — something developing countries refuse to do, despite the obvious benefits.

Beyond the rhetoric, the bottom line here for everyone is growth. The annual "Economic Freedom of the World" report recently quantified how free trade works. From 1980 to 1998, the report found, the 12 countries with the freest trade averaged per capita GDP growth of 2.5% a year. The average for those with the least-free trade? A paltry 0.3% a year.

The difference is huge, and the stakes are high. At those rates, free trade countries double their per capita income in about 29 years — once a generation. For nonfree countries, it'll take about 240.

To keep free trade alive, the U.S. will have to make some sacrifices. But in the end, we too will benefit. Indeed, we already have.

A recent study by trade economist Gary Hufbauer assessed the value to Americans of 50 years of free trade deals. He found free trade added about $10,000 to the average household's income. A separate University of Michigan study predicted that cutting trade barriers by a third would lift Americans' incomes an additional $2,500.

From farm goods to movies, computer chips to airplanes, the U.S. economy is driven by trade as never before. Today, nearly a fifth of factory jobs depend on exports. Those jobs pay 13% to 18% more than similar ones, trade officials estimate.

We agree with U.S. trade representative Susan Schwab, who said no trade deal is better than a bad trade deal. But free trade is too important to the world economy to let go.

So here's our suggestion: Acknowledge that we all failed, take the rest of the summer off (Europeans don't work in August anyway) and then get right back at it, either later this year or early in 2007. Failing this, we might greet 2007 with a global recession — which would be a lot more painful than making a few subsidy cuts.