Has there been a free trade breakthrough?

Remember that old saying, something like “Things are never as bad, or as good, as they seem.” It applies to international trade as well.

Numerous reports suggest that the WTO has achieved a breakthrough. The core deal appears to suggest that many poor countries will lower their tariffs on manufactured goods and the rich countries will limit or eliminate export subsidies and protection for agriculture. But there is more here than meets the eye.

The first worry is an obvious one. There is no date given for the change in agricultural policies. Keep in mind that the rich countries are masters of obfuscation and delay on this issue, if not outright obstruction. Plus the rich countries can exempt “special” products, if they so choose.

Arvind Panagariya suggests that our concerns should run deeper:

Current production and export subsidies flood world markets with the subsidised products and drive their prices down. The removal of these measures will raise the prices of the products in question. This will benefit the exporters and hurt the importers of these products. Food products happen to be among the most heavily subsidised items and as many as 45 of the world’s least developed countries are net food importers, according to calculations by the economists Alberto Valdes and Alex McCalla. Even when we consider all agricultural products, 33 least developed countries are net importers.

A counter-argument may be that, once the subsidies are eliminated and world prices increase, the least developed countries will become net exporters of the products. But this is doubtful for two reasons: such a change can turn at most only a handful of these countries into net exporters and the switch from net importer to net exporter status by itself is not enough to bring an overall benefit. As food prices rise, so will losses on food imports. Only if a country becomes a sufficiently large exporter will it be able to offset these losses.

In other words, even if reform comes about, the main beneficiaries will be the taxpayers in the rich countries. Export subsidies benefit consumers abroad, even if they do not maximize aggregate value.

Nonetheless it is trickier than Panagariya indicates. Many agricultural interventions keep world prices up, not down, by preventing the reallocation of farming to its most productive geographic venues. Nonetheless it is not obvious that the very poor countries would be big winners in any competitive reshuffling of sectoral specializations. In fact we might expect technology to make agriculture increasingly high-tech. We are then back to the case where export subsidies hurt taxpayers in rich countries but help consumers in poor countries.

Also keep in mind that many poor countries already enjoy free bilateral access to EU markets for many agricultural commodities, with rice, sugar, and bananas being prominent exceptions. So if liberalization causes food prices in Europe to fall, agricultural exporters in the poor countries may again be worse off.

I am all for free trade, as loyal readers of MR will know. But it is a common myth to think that agricultural free trade will cause say, Africa, to blossom or achieve significantly greater gains from world markets. Even if African consumers end up paying lower prices for food, African producers will see very mixed results. And how effectively do we expect the damaged producers to be reallocated to other sectors? Africa as a whole could still benefit in the longer run, given the theory of comparative advantage, but this is hardly the scenario that everyone has in mind.

Addendum: Ben Muse offers an analysis and extensive links.


Comments for this post are closed