Expert says free trade must treat its casualties

By Yoke Har Lee

If there is one message that one of world's most die-hard free traders can pass on to the New Zealand Government, it is this: gaining public acceptance for the free trade concept will be just cheap talk.

Professor Jagdish Bhagwati, eminent scholar and one of the world's leading free trade theorists, is of the opinion that plans to free up trade must be backed by plans to take care of communities that get displaced.

"What I was arguing [in an Apec seminar] is, if we are going to have international trade, or more of it, then it is important to have the institutional mechanisms at home to help those who are going to be occasionally upset by the affected industries.

"You can't just say 'I believe in free trade, it is going to be good for everybody'. That is too abstract. It suggests a lack of compassion. It is only fair that if you are increasing the pie at someone's expense, then you give them a helping hand.

"They say in economic policy that if you actually compensate the guys who are losers, then they are still better off for it. If winners take everything and more, the losers are still left as losers," he told the Business Herald.

"Sometimes whole communities get upset, in the case of the car industry, it all happens in one area. In many cases like that in America, for instance, then you need to treat it like disaster really, because if a tornado hits a town, the Government brings in disaster relief.

"So you have to be responsive. You have to embed the liberal international trade system to a social political context where you are helping people who might be held back."

Professor Bhagwati served as economic policy adviser to Arthur Dunkel, who was director general to the World Trade Organisation's predecessor, the General Agreement on Tariffs and Trade, between 1991-1993.

He has published widely and holds the prestigious titles of the Arthur Lehman Professor of Economics and Professor of Political Science at the Columbia University of New York.

The US, he said, was not under threat from what he described as the old-fashioned trade protectionism of raising tariffs.

But the threat was to be found in domestic politics slowing down the world's biggest market's trade liberalisation agendas.

"I think the real danger is that the US won't go forward in liberalisation, not that it will go back into protectionism. If things really got tough, the US would be more like a bullock cart caught in a monsoon in Penang or India, neither moving forward or backward. And that would be a big pity."

The lamb lobby in the US against New Zealand, Professor Bhagwati said, was one example of domestic politics slowing down US free trade agendas.

The worst-case scenario, which would happen if the US went into a tailspin with a stockmarket crash, was for US industries to resort to anti-dumping measures which would be harder to deal with.

Rapid economic growth countries would be able to afford faster trade liberalisation because a contraction in any sector affected would be just a contraction with the overall economy still growing.

As to whether to pursue the shock therapy, like that promoted by Harvard professor Jeffrey Sachs, or to go for the gradualist approach, governments must decide according to domestic political conditions., he said.

"When your economy is growing slowly, managing the pace at which you liberalise can be tricky. In a democratic society, the pace has to be tailored to the rate the economy is expected to grow.

"It makes it a lot easier to do that. Regardless, you need to have domestic institutions in place so that there are welfare improving measures to help. If you put all this in an appropriate framework, you will get the best results and people will go with you."

A recurring message from Professor Bhagwati to the US administration was the need to provide a proper framework at the World Trade Organisation to deal with social and environmental issues derailing trade talks.

Human rights activists and environmental lobbies had taken their cases to the WTO, which should find proper forums to deal with these issues, he said.

In a lecture in April, he said that the Clinton administration seemed to have embraced the inclusion of a social clause, seeking to suspend or deny market access based on production and process methods.

He said he objected to the linking of social agendas in trade institutions. That devalued the morality of the social agendas, putting the developing countries in a defensive position in fear of competition.