Countries always get richer when they are more open. Why has this lesson been forgotten?by Jagdish Bhagwati, Pravin Krishna / April 6, 2018 / Leave a comment
Donald Trump’s assault on multilateralism and on the World Trade Organisation, aided and abetted by an equally misguided team of advisers, requires a spirited response from free traders such as Paul Krugman and Douglas Irwin (both students of one of the authors of this article).
But Trump also attacks free trade itself, embracing the notion that it is a pernicious public policy. This “protectionist fallacy” is unfortunately not his alone. In fact, it is widely shared by many in the US, including by many Republicans, Democrats and US journalists.
We address here first the widely-shared common fallacies, especially those on the political left. Our belief is that throwing reasoned light on a subject where ideological heat is otherwise the rule, we will strike a needed blow against mindless protectionism.
Trade openness harms the overall economy
Much evidence opposes this proposition: see for example the postwar experience when progressive trade liberalisation coincided with increasing prosperity. This was interrupted only by periods of economic difficulties resulting from phenomena such as the success of Opec and consequent jump in oil prices and the deflation in the world economy, brought about by the policies of Paul Volcker, then chair of the Federal Reserve.
The main liberalisation occurred in the developed countries, under many rounds of negotiations associated with GATT, the General Agreement on Tariffs and Trade, which persisted from its inception in 1947 to its eventual replacement in 1994 by the WTO. Developing countries (under the GATT provision of Special and Differential Treatment) were exempted from making trade concessions of their own while enjoying the benefits of trade liberalisation by the developed countries. Thus, they profited from greater market access offered by the latter’s liberalisation.
Trade openness with poor counties produces poor in the rich counties
This belief has led unions to endorse trade openness between like-wage countries—for example between US and Canada—but to oppose it between high- and low-wage countries (to include Mexico in NAFTA). But this is a fallacy.
To see this, remember that we have two alternative narratives here: one anti-trade and the other pro-trade. The anti-trade narrative assumes that cheaper labour-intensive goods from the poor countries will harm labour in the labour-intensive industries of the richer nation—what economists call the Stolper-Samuelson effect.
Certainly there is a…