With layoffs in the auto sector and bailouts in the housing sector, exports are one of the few bright spots in the American economy. Boosted by the weak dollar, they are saving us from an outright recession.
Begging the question: How can we sell even more?
Columbia University economics professor Jagdish Bhagwati, for decades a leading international scholar on trade theory and practice, has some ideas. And his first one, counterintuitively, is to scrap our free trade agreements like NAFTA. He argues that these preferential trade agreements, or PTAs, are damaging to our economy.
“Acting like termites, PTAs are eating away at the multilateral trading system relentlessly and progressively,” Bhagwati writes. “To use another analogy appropriate to what is happening, the proliferating PTAs are leading us inexorably to what might be aptly described as a trade wreck.”
Trade policy should instead be run on the basis of multilateral free trade agreements, where countries extend to all other nations the lowest tariff that it has on a product.
Many people have grasped the benefits of free trade, but falsely conclude that the more individual, bilateral agreements, the better off we are. But this just isn’t so. For instance, an American shopper might benefit if she bought a purse from Argentina, which makes many, less expensive leather goods, rather than from Mexico. But because of the existence of the North American Free Trade Agreement, purses are cheaper from Mexico, because tariffs don’t apply. So, in 2007, we imported $10.5 million of leather handbags from Mexico, and only $16,000 from Argentina.
Freer trade increases employment, because if our shopper spends less for that Argentinian purse she has more left over to spend, which boosts the overall economy. So she could buy a $40 purse from Mexico, or a $20 purse from Argentina and a dinner at a local restaurant.
The proliferation of preferential free trade agreements leads to what Bhagwati terms a “spaghetti bowl’ effect: “Crisscrossing PTAs, where a nation had multiple PTAs with other nations, each of which had its own PTAs with yet other nations, was inevitable . . . it would remind one of a child scrawling a number of chaotic lines of a sketch pad.”
This makes no sense, especially when traded products are made from international components. To use Bhagwati’s example, “if Canada imports and also produces steel ingots, how do we decide what imports went into the production of Toyota transplants in Canada?” Many products contain components from different countries, making the determination of the country of origin complex.
In addition, the United States and Europe harm developing countries through PTA negotiation by pressuring them to accede to “value-based” demands unrelated to trade. Prime examples are Western environmental regulations and labor standards, pushed by powerful unions and labor groups. Just because the United States is wealthy enough to put in place pollution controls and high minimum wages, it’s not the case that these same policies are suited for, say, Indonesia or Brazil.
Diana Furchtgott-Roth is the former chief economist at the U.S. Department of Labor.
Termites in the Trading System
How Preferential Trade Agreements Undermine Free Trade
by Jagdish Bhagwati
Oxford University Press