Wednesday, March 19, 2008

What happens if the U.S. balks at "free trade"?

A little late, but here’s the big news: Economists Rethink Free Trade.

While ordinary Americans have mostly been cold on the idea of free trade, economists – not used to slogging around looking for work – have often sung a different tune. Until now. Well, kind of.

“[S]omething momentous is happening inside the church of free trade: Doubts are creeping in, writes Jane Sasseen in Business Week. “We're not talking wholesale, dramatic repudiation of the theory. Economists are, however, noting that their ideas can't explain the disturbing stagnation in income that much of the middle class is experiencing.”

What’s more important for the rest of the world is this debate has found its way into the U.S. Presidential election.

The rumble of academic debate is already having an effect on the Presidential campaign. In an interview with the Financial Times late last year, Hillary Clinton agreed with economist Paul A. Samuelson's argument that traditional notions of comparative advantage may no longer apply. "The question of whether spreading globalization and information technology are strengthening or hollowing out our middle class may be the most paramount economic issue of our time," her chief economic adviser, Gene Sperling, recently wrote. Barack Obama's adviser, the University of Chicago's Austan D. Goolsbee, is not convinced free trade is the culprit behind the squeeze on incomes. But he believes many U.S. workers aren't sharing in the gains from open markets and fears a political blowback unless something is done.

On the other hand, presumptive Republican nominee has asked the important question: If one begins pulling out of free trade agreements – although neither Clinton nor Obama said they would – “What are other countries going to think about the agreements we’ve negotiated with them?”

From Africa
For one free trade prospective regarding Africa, the African Growth and Opportunity Act, AGOA, has increased trade between the continent and the United States 143 percent since its creation in 2000. (Admittedly, much of this has to do with oil imports.) Trade between the U.S. and Africa now stands around $70 billion, which is last year’s number.

There’s very little chance that even the most protectionist of presidents would cancel something as harmless as AGOA. I say harmless because few African companies presently will be competing directly with American firms. That doesn’t mean AGOA is not without its benefits. For example, creating more trade capacity for some African countries, like increasing government regulation and boosting health (and quality) standards for African commodities.

From Public Agenda:

"There is a perception out there that the AGOA, through its strict and high standards and requirements, is intended to prevent commodities from Africa reaching the US, what do you say to this? " a curious journalist asked Ms Constance Jackson, Associate Administrator of the United States Department of Agriculture (USDA) and leader of the mission.

Ms. Jackson rebutted the claim, saying that the standards are "reachable and attainable and that AGOA standards are not for only African countries, they also apply to US businesses". She added that AGOA and other dispensations are meant to ensure open trading system mutually beneficial to both the US and her trading partners.

It would be recalled that, President John Agyekum Kufour at the Sixth US-Sub-Saharan African Trade and Economic Co-operation Forum in Accra last year, appealed to the US government to consider extending the AGOA initiative, which expires in 2015 to another 20 years.

What free trade?
The one area where Africans have comparative advantage is agriculture, and that's why so many Africans may find this debate rather funny. Very few Africans would agree that the U.S. engages in free trade at all when you take into account the $164 billion its government has spent on agriculture subsidies since 1995. It's these subsidies (along with agriculture tariffs) from rich nations that have held up the Doha round of free trade.

The question is: to what effect? Culled from the Heritage Foundation:

  • The Institute for International Economics has calculated that moving from today's trade environment to one characterized by perfectly free trade and investment would generate an additional $500 billion in annual income for the U.S., or about $5,000 per household each year.
  • A University of Michigan study concludes that reducing agriculture, manufacturing, and services trade barriers by just one-third would add $164 billion, or about $1,477 per American household, annually to U.S. economic activity. Completely eliminating trade barriers would boost U.S. annual income by $497 billion.
  • The World Bank estimates that the continued reduction of tariffs on manufactured goods, the elimination of subsidies and non-tariff barriers, and a modest 10 percent to 15 percent reduction in global agricultural tariffs would allow developing countries to gain nearly $350 billion in additional income by 2015. Developed countries would stand to gain roughly $170 billion.

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