Home The Washington Diplomat January 2009 Financial Crisis ThreatensClampdown on Free Trade

Financial Crisis ThreatensClampdown on Free Trade


Lost amid the fear and chaos of the global economic meltdown is the impact the crisis will have on free trade agreements and open markets. The free trade debate was difficult enough during good economic times — the 1999 riots in Seattle during meetings of the World Trade Organization come to mind. And that was even before the dot-com bubble burst and Sept. 11, 2001, terrorist attacks roiled the economy.

With America’s financial flu spreading abroad, many wonder if the downturn will lead to a revival of protectionism around the world as happened during previous global crises. And what should be the appropriate response of governments and businesses to reap the rewards of globalization while avoiding its pitfalls?

Economists on both side of the free trade coin have stepped into the debate over whether open markets are the solution or the problem. Regardless of the answer, most experts acknowledge that protectionism is a common response that will trump free trade in uncertain economic times.

“There is a well-known relationship between macroeconomic crises and the slowing down of trade liberalization,” said Jagdish Bhagwati, a professor at Columbia University and senior fellow in international economics at the Council on Foreign Relations. “Politicians, no matter how positive they feel about liberalizing trade further, are unable in democracies to take the risk of opening markets to further import competition when the economy is in unemployment and recession.”

Bhagwati pointed to the Great Depression as a warning of what may come, citing the imposition of tariffs and trade barriers as the United States and other leading economies sought to protect jobs and their domestic economies from competition, which he argues made the problem worse. Only with the creation of the General Agreement on Tariffs and Trade (GATT) following World War II was this damage undone, according to Bhagwati, who has served as an advisor for GATT, the World Trade Organization (WTO) and the United Nations.

“We have learnt that lesson and I expect no one will forget it,” said Bhagwati. “Also, remember that during the East Asian financial crisis in 1997, their policymakers did not throw the trade baby out with the financial bathwater.”

President Bush reiterated that sentiment recently at the annual Asia-Pacific Economic Cooperation gathering in Peru. “One of the enduring lessons of the Great Depression is that global protectionism is a path to global economic ruin,” said the outgoing president, who has pushed through 11 free trade agreements since taking office. “We refuse to accept protectionism in the 21st century.”

Still, Bhagwati and others predict that free trade will be on hold until the current turmoil is under evident control. And that is unlikely to happen quickly.

“For a year, I would expect neither liberalization nor protectionism,” he said. “The situation would be like that of an Indian bullock cart in the monsoon: Stuck in the mud, it moves neither forward nor backward.”

That doesn’t bode well for pending U.S. free trade agreements with Colombia, South Korea and Panama, which have been at a standstill despite strong support from the Bush administration.

Although an avid proponent of free trade, Bhagwati actually pillories these types of ad hoc trade agreements (know as preferential trade agreements, or PTAs), advocating for much broader pacts.

In his most recent book, “Termites in the Trading System: How Preferential Agreements Undermine Free Trade,” Bhagwati argues that these PTAs — now numbering around 300 — discriminate against non-participant countries, eating away at the larger multilateral trading system that works for the benefit of everyone.

This gets to another important question often lost in the free trade debate: whether largely bilateral pacts are the right way to push trade liberalization forward while broader agreements such as the WTO’s Doha Round of trade talks are at an impasse.

Bhagwati clearly stands on the side of multilateral agreements, which he says have been progressing, albeit slowly. He pointed out that much has already been done to gain worldwide approval for the seven-year-old Doha Round aimed at lowering trade barriers to pry open world markets. Likewise, in early December, top trade officials from Brazil and the European Union expressed optimism about the prospects for a Doha breakthrough to stimulate the world economy, as early as December.

However, one major remaining disagreement revolves around India’s desire to have a special safeguard mechanism for its 650 million small farmers, as well as the desire by the United States to hold onto a sizeable, if reduced, level of trade-distorting subsidies for its own farmers.

Bhagwati acknowledged that even more work on Doha will have to be done to smooth its way through a Congress firmly in the hands of union-backed Democrats who have gotten an earful from constituents about the impact of free trade on the local factory. Yet Bhagwati is optimistic. He noted that although American unions oppose free trade agreements unless demands on labor standards and the environment are included, they don’t insist on these demands in multilateral negotiations where big developing countries such as India and Brazil reject them out of hand as quasi-protectionist.

Bhagwati also pointed to President-elect Barack Obama’s arrival in the White House as hope that Doha may finally be signed and free trade put back on track.

“Both Obama and McCain had platforms which practically endorsed Doha,” he contends. “So the prospects for Doha are quite rosy indeed, as long as the world economy gets on top of the financial crisis and confidence is restored. Obama himself, by all insider accounts, is not an opponent of freer trade.

“The real question is whether he can provide the leadership that will contain the protectionism of the Congress and change its fearful attitudes toward an open economy. In this regard, the tsunami-like victory that he obtained should be important. It gives him the legitimacy to contain the enhanced protectionism in the new Congress,” Bhagwati said.

But some longtime free trade observers aren’t so sanguine. Deborah James, director of international programs at the Washington-based Center for Economic and Policy Research, recently observed the WTO talks in Geneva and came away with a more pessimistic outlook. She noted that the recent U.S. elections demonstrated a “resounding rejection of the failed NAFTA-WTO model” — a view supported by a Wall Street Journal/NBC News poll in March showing that nearly 60 percent of voters said the globalization of trade was bad for the U.S. economy, while only 25 percent thought the global economy created jobs because it “opened up new markets.”

As a result, James points out that “fair traders” have picked up a net of 26 seats in the House and five net seats in the Senate, with potentially more to come. One prominent fair trader is Sen. Sherrod Brown (D-Ohio), who — along with more than 75 co-sponsors in the House and Senate — has proposed legislation to review and possibly renegotiate existing free trade agreements to ensure they contain strong environmental, safety and labor standards. They also want the U.S. government to do more to prevent “dumping,” the sale of foreign goods in U.S. markets at prices below the cost of production, and to crack down on currency manipulation by other countries.

“While pro-WTO spin may have left many with the impression that the Doha Round was near concluded, the world has changed significantly since [it] was launched,” said James, who has worked extensively with farmers and unions on trade issues. “A more objective view would acknowledge the fact that its agenda is not compatible with the current direction of the world. The collapse this summer — one in an ongoing series of collapses — was due to forces far greater than individual countries’ positions. The food crisis, the climate crisis, the underlying crisis of persistent poverty and unemployment, and now the financial crisis have emerged as the dominant global economic themes.”

James argues that in all of these arenas, the WTO actually constrains governments’ abilities to solve such crises and has even contributed to several of them, such as the worldwide economic slowdown. She contends that the corporations who want to achieve global deregulation through the WTO are the same ones that pushed financial deregulation in the United States — a driving factor blamed for precipitating the current economic mess.

Even though the WTO’s leadership has acknowledged the need for global financial regulation, James supports an even deeper rollback of WTO liberalization, including a moratorium on further financial deregulation, as is being currently negotiated in the Doha Round.

James says that resentment in poor countries is growing toward global financial policies handed down by rich nations that caused the crisis, especially because many of them have gained freedom from the economic dictates of the International Monetary Fund (IMF) in recent years, whereas developing countries are still bound by them. All this, she argues, translates into even less hope for global trade liberalization pacts.

“Given the financial crisis, most governments realize they need concerted action, but that action must be geared toward global re-regulation, the development of regional monetary funds — not controlled by the U.S. Treasury, as is the IMF — and global fiscal stimulus — not more of the same policies that got us in this mess to begin with,” she said. “The financial crisis could very well be for the ‘neoliberal’ model what the fall of the Berlin Wall was to the collapse of communism.”

James further contends that old dichotomies of free trade versus protectionism are losing their usefulness, as pro-growth and development advocates look to capture the benefits of trade without its darker side.

“There are myriad ways to ensure beneficial trade flows between countries in a fair way that doesn’t leave us with poisoned food and toys, stagnant wages and out-of-control financial markets,” she insisted. “The issue isn’t whether or not to trade. The issue is whether to trade under rules that promote job growth, environmental sustainability, food safety and global stability, or under rules that spread the wealth upward and paved the way for the financial crisis.”

About the Author

Mark Hilpert is a contributing writer for The Washington Diplomat.