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Free Trade Today

Article in Comparative Economic Studies · December 2003

DOI: 10.1057/ces.2002.24 · Source: RePEc

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 BOOK REVIEWS

Free Trade Today

Jagdish Bhagwati
Princeton and Oxford: Princeton University Press, 2002, 128 pp.

None of the usual jokes about economists apply to Jagdish Bhagwati.

The Columbia University professor is as personable, charming, and pro-
vocative in print as he is in person, and all those attributes shine through
in his new book, Free Trade Today.
Bhagwati’s latest book is based on three lectures he delivered recently
at the Stockholm School of Economics. That is the same venue where he
gave another series of lectures on trade in the late 1980s that became the
book Protectionism, a minor classic in the bibliography of free trade. This
new book, Bhagwati tells us in the preface, is “a sequel to Protectionism,
an equally short, accessible, wide-ranging work that brings the case for
free trade to the skeptics and the critics today.”
In the first section of the book, Bhagwati explains why free trade is still
the first best policy despite two centuries of theoretical challenges.
Economists have known since the 1840s that a nation can improve its
welfare, in theory at least, by deviating from free trade. If a nation has
enough weight in international markets, it can (in theory) force down
global prices with a tariff, extracting more producer and revenue gain
from the rest of the world than it gives up in lost efficiency or consumer
welfare. Or it can (again, in theory) nurture “infant industries” behind a
tariff wall to reap greater productivity gains later. In more recent years,
we discovered “strategic trade policy,” the idea that a country could (once
again, in theory) benefit by protecting a strategic industry that could then
bring home monopoly profits in the global marketplace.
Most of the justifications for deviating from free trade fit under the
banner of “market failure.” Free trade would be fine in an ideal world of
perfectly competitive markets, the theorists concede, but we all know
that markets are hardly ever perfect, and thus free trade is hardly ever the
best policy. Bhagwati spends most of this short but pithy book demon-
strating that even in this messy, imperfect world, free trade remains,
almost always and everywhere, the best policy.

Cato Journal, Vol. 22, No. 1 (Spring/Summer 2002). Copyright © Cato Institute. All rights
reserved.

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CATO JOURNAL

Despite the frequent shouts of “Market Failure!” in our theater of

public policy, Bhagwati makes a persuasive case that trade protection is
almost never the right fire hose to reach for. First, market failure may be
less of a problem than we think. He credits Chicago School economists
for employing the tools of econometrics to measure how markets actually
work, demonstrating that markets usually act “as if” competitive even if
they do not fit the textbook description.
Second, even where domestic market failure exists, trade protection is
not the right remedy. That is always true in purely domestic markets,
where remedies should be aimed directly at fixing the distortion, through
taxes, subsidies, or some other direct intervention, not through the indi-
rect channel of trade protection.
Third, even if distortions exist in the international market, where pro-
tectionism could in theory be the right policy response, deviating from
free trade will likely cause more problems than it solves. Here Bhagwati
raises the public choice phenomenon of government failure. Trade in-
tervention may in theory be able to raise national welfare, but politicians
are more inclined to listen to lobbyists seeking special favors than econo-
mists when crafting trade policy. Thus, intervention to correct market
failure is likely to result in government failure that only makes matters
worse. “In short,” Bhagwati concludes, “the invisible hand may be frail,
but the visible hand is crippled.”
In his second lecture, Bhagwati subjects America’s obsession with
“unfair trade” to a withering analysis. Calling it “the American Virus,” he
argues that fair-trade thinking has “intruded heavily into the political
space, aiding the cause of protectionism—since virtually any asymmetry
with another country can be cited as tantamount to unfair trade.”
Fair traders see threats everywhere—in Japanese industrial policy, in
low labor and environmental standards in poor countries, in relatively
higher trade barriers abroad—all resulting in an “un-level playing field”
that allegedly puts American producers at a disadvantage.
Against that mindset, Bhagwati defends the right and need of nations
to pursue differing domestic policies. The proper mix of labor and en-
vironmental laws for the United States will not necessarily be the right
mix for Mexico or other less developed countries. He finds no empirical
evidence for a global “race to the bottom” in social standards. If anything,
it is protectionism that hurts the environment. As evidence, he points to
the overuse of pesticides in rich countries because of farm-import bar-
riers (with Europe’s Common Agricultural Policy being Exhibit A).
Bhagwati warns against using trade sanctions to enforce U.S. standards on
the rest of the world. Trade sanctions are poorly suited to achieving non-
trade objectives. As a general rule, policymakers should wield as many policy
instruments as there are policy objectives. But reaching for trade sanctions
is like trying to kill two birds (free trade and social agendas) with the single
stone of trade policy. A far more promising approach would be to pursue
free trade through trade policy and social agendas through other instru-

180
 BOOK REVIEWS

ments, such as international agencies and treaties aimed more directly at

environmental and other social problems.
Organizations such as the International Labor Organization have the
expertise to address specific international social problems that is utterly
lacking in the World Trade Organization. To the charge that the ILO
lacks the “teeth” needed to enforce its findings, Bhagwati replies: “I
would argue that God gave us not just teeth but also a tongue; and a good
tongue-lashing, based on evaluations that are credible, impartial, and
unbiased, can push a country into better policies through shame, guilt,
and the activities of NGOs that act on such findings.”
After rebutting the latest objections to free trade, Bhagwati in his final
lecture examines alternative ways to achieve it. Here he praises unilateral
and multilateral liberalization, while condemning “aggressive unilateral-
ism” and regional and bilateral agreements.
Good unilateralism is when a country lowers its own trade barriers for
its own economic benefit, regardless of what other countries do. This
form of “going alone” cuts through the nonsense of insisting that other
countries lower their barriers first before we allow ourselves to reap the
benefits of more competitive markets. It may also encourage other na-
tions to liberalize, either in immediate response or later after they witness
the benefits of open markets. Bhagwati notes the long list of countries,
from China and India to Australia and New Zealand, that have liberalized
unilaterally in the last two decades. “In short, we need to remember that
if we refuse to reduce our trade barriers just because others do not
reduce theirs, we lose from our trading partners’ barriers and then lose
again from our own,” Bhagwati writes. In contrast, bad unilateralism is
when a country like the United States uses its weight in the global
economy to bully other nations into liberalizing their own markets
through threats of trade retaliation.
Multilateral trade negotiations through the WTO are consistent with
good unilateralism. They reinforce the benefits of import liberalization at
home by opening up markets abroad, thus multiplying the economic
gains and bringing domestic exporters into the free-trade coalition. But
Bhagwati draws a sharp distinction between nondiscriminatory multilat-
eral agreements and what he calls “preferential trade agreements.” PTAs
(such as the North American Free Trade Agreement, Mercosur, the
European Union, or the proposed Free Trade Area of the Americas)
reduce barriers between members but otherwise discriminate against
exporters from nonmembers.
Bhagwati heaps nothing but scorn on such arrangements. PTAs can
“divert” trade away from more efficient producers outside the agree-
ment, costing members more in lost tariff revenue than they gain from
lower prices. They can also create a confusing “spaghetti bowl” of over-
lapping agreements that undermine the principle of nondiscriminatory
trade. The worry about trade diversion, Bhagwati writes, “pales in com-
parison with the damage that PTAs now impose on the world trading

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 CATO JOURNAL

system, overwhelming multilateralism and its central tenet of nondis-

crimination.”
The wisdom of regional and bilateral agreements is one of the few
subjects that can sharply divide free-trade economists, and here, I be-
lieve, the great free-trade economist doth protest too much. PTAs are not
optimal, but they are not the scourge on global free trade that Bhagwati
makes them out to be. Evidence of trade diversion is small, and the
benefits from major PTAs such as the European Union and NAFTA are
palpably large. Regional and bilateral trade agreements provide a kind of
safety valve in case the multilateral track becomes blocked, as seemed all
too likely during the tortuous Uruguay Round and after the 1999 WTO
ministerial in Seattle. As long as external tariffs are kept from rising, most
PTAs seem to be incremental steps toward freer trade, not away from it.
But on the fundamental question of whether free trade is good policy,
Bhagwati could not be on more solid ground. His sophisticated, far-
ranging, and practical defense of free trade places the doctrine on a more
solid footing than ever. When we consider that government officials often
lack sufficient information or pure motives, free trade becomes the first,
best policy—even if a higher state of domestic welfare could be reached
in theory if just the “right” policies were implemented. Two centuries
after Adam Smith, free trade remains a broad, secure, and accessible
ledge high up the mountainside of good government policy. Jagdish
Bhagwati wisely warns us in Free Trade Today that those final icy feet to
the summit are not worth the risk.
Daniel T. Griswold
Cato Institute

Free Market Environmentalism

Terry L. Anderson and Donald R. Leal
New York: Palgrave, 2001, revised ed., 241 pp.
In the first edition of Free Market Environmentalism, Terry Anderson
and Donald Leal of the Political Economy Research Center sketched an
environmental vision that eschewed government mandates in favor of
markets, and replaced regulatory prohibitions with property rights. At the
time, 1991, this was radical stuff. Ostensibly conservative policymakers
had controlled federal environmental agencies for over a decade with
little to show for it. Though the authors were reluctant to admit it, free
market environmentalism (FME) was still a fringe idea. Environmental-
ists remained wedded to the use of government, and the federal govern-
ment in particular, to achieve environmental goals. Some economists and
policymakers used the language of economics in discussing environmen-
tal problems, or professed fealty to “market incentives,” but few were
prepared to unleash unfettered markets on the ecology. Genuine free
market environmentalism—that is, the use of market institutions, par-
ticularly property rights, voluntary exchange, and common law liability

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