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Will the WTO Back True Free Trade?

Mises Daily: Wednesday, November 14, 2001 by

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For free traders, the advent of the World Trade Organization was always a two-edged sword. On one side was the possibility that the bureaucracy might deter arbitrary acts of protectionist folly, if only by its ability to draw attention to them and debate them in a forum attended by political elites around the world. To some extent, it may have done that (though counterfactual history is tricky business).

Sadly, the true victims of protectionism, consumers of the world, do not have a voice at the WTO. This fact provides a clue to the second and much sharper edge of the sword: the WTO’s inability to act radically to eliminate trade barriers, and its related tendency to ratify, entrench, and even expand traditional protectionist and regulatroy policies. That second edge is the one that is prevailed at this year’s meetings in Doha, Qatar.

Across the Third World, the demand has arisen for governments of industrialized countries to increase access to their countries for foreign agricultural exporters. In this market, protectionist policies prevail. Ten years ago, government subsidies accounted for 40 percent of the value of farm output from members of the OECD. Today, long after the WTO was supposed to institute freedom and fairness, the percent is exactly the same. The industrialized world spends exactly $1 billion per day on agricultural subsidies, according to Nicholas Stern, chief economist for the World Bank.

The hell of it is that rich nations, the ones that wield the most influence over the WTO, are protecting the very sector in their own countries that the Third World is most suited to export. There is a perverse logic to this: the very reason the industrialized world so heavily protects agriculture is precisely because it is the sector most vulnerable to erosion via the import market.

The average tariff in the U.S. is only 5 percent, but that figure obscures the protectionist reality below the surface. For 130 products, the tariffs still reach as high as 35 percent and higher, and among those 130 products, 100 are from the agribusiness sector. Hence the very products that the Third World specializes in producing--sugar, fruit, cocoa products, tobacco, and dairy products--are the ones that the U.S. keeps out.

We tend to think of trade as low-grade war with winners and losers, but the reality is otherwise. A vibrant trade in agriculture with the Third World would mean that the masses of people in both the developed and developing worlds would benefit: the Third World would gain a new market for its products which would allow its producers to benefit from its comparative advantage, even as consumers in the industrialized world would enjoy vastly lower food prices and hence a higher standard of living.

Yes, some special interests in agriculture would no longer benefit through their longtime practice of looting taxpayers to prop up their economically unwarranted businesses. At the same time, as farms go out of business, their labor and capital resources are made available for other lines of productive industry. Be aware that these subsidies benefit mostly the largest producers, which in many sectors ranges between 12 and 24 large firms, most of which would be losing money were it not for subsidies.

In any case, a trimmer agricultural sector would accelerate a century-long trend that inevitably follows growing prosperity. In 1850, two-thirds of American workers were found in the agricultural sector (including related occupations such as ranching, fishing, forestry, mining), while today that percentage is down to less than 2 percent. Agriculture directly employs fewer than 1 percent of workers today. Yet the entire nation is forced to pay absurdly high prices for food in the interest of that 1 percent.

Just as seriously, these protectionist measures keep the Third World poor and give rise to complaints that the industrialized world is "exploiting" the world’s poor. To the extent that U.S. policy prevents poor countries from marketing their most viable exports, the claim is exactly right. The tragedy is further compounded when antiglobalism protestors, noticing the disproportionate power wielded by the U.S., conclude that the system of free trade itself should be scrapped.

It’s not as if the U.S. is insensitive to this issue. For years, it has blasted agricultural subsidies in Europe on grounds that they are incompatible with free trade. Meanwhile, the U.S. refuses to do anything about its own subsidies. We are very good at noticing grains of sugar in other people’s eyes but loath to take notice of the lump in our own!

When the WTO does something to curb U.S. protectionism, we can start to take it seriously as a force for free trade. Meanwhile, the world’s most obvious form of trade restrictions--NATO’s embargo of Iraq, which paved the way for terrorism and war--were not even mentioned during its proceedings.

The political right proclaims some attachments to free-trade theory while making exception for sanctions against countries it doesn’t like. Meanwhile, the political left calls for repeal of sanctions against Iraq while rejecting free-trade theory generally. And these days everyone seems to agree that the WTO ought to be used to expand environmental and labor regulations, which also contradict free trade theory.

The WTO is not only a participant in this hypocrisy; it is its breeding ground, and the primary force for retaining the protectionist and regulatory status quo.


Jeffrey Tucker is vice president of the Mises Institute. Send him MAIL.  Also, see his Mises.org Articles Archive.