Joseph Stiglitz and Andrew Charlton suggest that free trade helps promote better economic development worldwide.

Monica McNeil

2021-09-15 11:36:00 Wed ET

Joseph Stiglitz and Andrew Charlton suggest that free trade helps promote better economic development worldwide.

Joseph Stiglitz and Andrew Charlton (2006)

 

Fair trade for all: how trade can promote development

 

Nobel Laureate Joseph Stiglitz and Andrew Charlton prescribe what a multilateral trade agreement can include to promote better economic development worldwide. Stiglitz and Charlton indicate that most OECD countries should open the markets for labor-intensive goods and services with fewer farm subsidies. These economic policy prescriptions are quite familiar and sensible. More controversially, however, Stiglitz and Charlton propose that all WTO members (both OECD and non-OECD countries) should completely open their markets to all smaller and poorer countries. Moreover, Stiglitz and Charlton focus on preserving U.S. domestic economic policy options, dropping WTO intellectual property rules, and keeping restrictive rules off the future global trade negotiations. To the extent that this trade liberalization tends to maximize trade diversion, most WTO members may prefer to differentiate their national discretions and commitments in response to the Stiglitz-Charlton fair trade proposal.

Because the WTO operates by consensus, any multilateral trade agreement needs to be acceptable to all members at the end of the day. From time to time, political considerations constrain trade liberalization policy proposals. Stiglitz and Charlton present persuasive suggestions in terms of what a true trade development agenda should look like in due course. As trade policy advocates, both Stiglitz and Charlton tend to prescribe a clear-cut, simple, and persuasive course of action for the WTO. As academic trade economists, however, Stiglitz and Charlton often cannot resist the temptation to connect the dots between trade reality and empirical evidence in a rather complex way. As a result, this conflict tends to confuse trade policymakers. Cross-country heterogeneity still represents a conceptual challenge to a true trade development round for the WTO. In a nutshell, Stiglitz and Charlton argue that free trade helps promote better economic development worldwide.

 

Cross-country heterogeneity precludes the Washington consensus from the WTO true trade development round.

Stiglitz and Charlton critique that the Washington consensus seems to require free trade liberalization worldwide overnight. Stiglitz and Charlton further reject the view that developing countries have no responsibility for trade liberalization at all. There is overwhelming evidence of a positive relation between global trade and economic development. However, perfectly free trade or laissez faire cannot help explain this cross-country evidence. Many OECD countries and non-OECD countries seem to have all applied a fair dose of domestic protectionism for the central industries and national champions. Therefore, the most important global trade questions relate to the incremental steps of trade liberalization at each stage of both economic growth and development. Stiglitz and Charlton further pace a sequence of trade questions. What can be done before both OECD and non-OECD countries open and liberalize their markets? How fast should these countries implement the trade liberalization agenda? What would be the essential inclusive institutions, governance standards, social responsibilities, and environmental protocols for trade liberalization? These important questions help illuminate global trade engagement and country-specific protectionism. In a true trade development round, the WTO has to strike a delicate balance between requiring all developing countries to assume trade liberalization commitments and equipping these countries with sufficient flexibility to reflect their own unique economic policy circumstances.

In a remarkable Market Access Proposal (MAP), Stiglitz and Charlton propose that all WTO members commit themselves to providing free market access to all goods to all developing countries. Under this rather radical trade proposal, all developing countries would expect free access to all markets with higher real GDP and greater real GDP per capita. For instance, a middle-income country like Egypt and Taiwan would receive free market access to all OECD countries such as America, Britain, Canada, Europe, Japan, and Singapore etc. At the same time, the middle-income country like Egypt and Taiwan would need to provide free market access to poorer countries such as Uganda and Mozambique. China would receive little additional free market access to most other developing countries. In a similar vein, small but relatively rich developing countries such as Antigua and Barbuda would not have to open up to most other developing countries. An advantage of this trade proposal is that most developing countries would participate in global trade liberalization. In stark contrast, a core downside risk is that the same trade proposal would probably distort the level playing field for global trade partners, rivals, and competitors.

As Stiglitz and Charlton argue, multinational corporations in small countries should be able to protect themselves from other multinational corporations that derive key comparative advantages from the size of the respective domestic market (such as America and China). Global trade liberalization can generate substantial scale and scope economies and tax-efficient responses for most multinational corporations. For instance, American and Chinese multinational corporations (such as Microsoft, Apple, Google, Amazon, Alibaba, Baidu, Tencent, and so forth) derive substantial scale and scope economies and tax-efficient solutions and therefore become more competitive than their smaller rivals and competitors in Switzerland, Sweden, and South Korea etc.

Stiglitz and Charlton fine-tune their trade proposal to help minimize trade diversion. It can be politically attractive for developing countries to consider granting regional trade preferences to each other, especially if the free market ideology dictates that OECD countries tend to exploit non-OECD countries. The highest trade barriers in most developing countries are typically in the same agricultural and labor-intensive goods that several other developing countries export worldwide. It would therefore be particularly harmful for these countries to offer selective unilateral preferences to smaller and poorer developing countries.

The Stiglitz-Charlton Market Access Proposal (MAP) would not only inflict damage on the exports of large poorer countries, but would also harm developing countries that provide regional trade preferences. For instance, both China and Egypt would be economically worse off if Egypt chose to offer tariff-free market access to goods made in Uganda when China might be able to export the same products in a more cost-effective manner. Due to the cookie-cutter nature of the Stiglitz-Charlton MAP, one size cannot fit all. In light of this special feature, some proponents understate the reality that most developing countries need scope to determine their own trade liberalization strategies for better home-host harmonization.

Stiglitz and Charlton argue that it is not so difficult for WTO members to devise the general formula for gradual tariff reductions that would achieve significant market access into both rich and poor countries. The Stiglitz-Charlton MAP thesis can still accommodate scope for infant-industry protectionism with national discretions and exemptions. Sometimes the WTO cannot differentiate developing countries on the sole basis of real GDP per capita. Several WTO rules grant special exemptions for some developing countries but not other countries. For some developing countries, there are more generous tariff delays and reductions for adopting some WTO rules. Some developing countries even enjoy special preferences such as the European trade reforms on almost everything but arms. Most WTO members have the basic right to self-identify themselves as developing countries for special and differential trade treatments and negotiations.

In the WTO, most members can choose to keep their tariffs below particular bound rates. Many successful developing countries have bound their rates far above the applicable tariffs. As a result, these developing countries agree to large bound tariff reductions, but continue to keep their tariffs at their current levels. In many cases, the WTO fails to track actual trade liberalization. This failure seems to turn the fair market access reform into a global trade farce. A pervasive precondition for a true trade development round would be to ensure that all countries commit to enforcing the applicable tariff reductions in accordance with the free market ideology.

Because the definition of a developing country in the WTO can be imprecise, this imprecision allows some rich developing countries to avoid making significant tariff reductions and concessions. The diversity among developing countries has rather profound policy implications for the WTO rules that these countries should accept in due course. Better enforcement of intellectual property rules, for example, would benefit developing countries with the opportunity to innovate in most efficient ways. The resultant transfers of technological advances would be detrimental to several developing countries that have copied foreign technological advances in the past. Trade agreements for new regulatory regimes would better boost the stock market and operational performance of some multinational corporations. At the same time, however, these trade agreements may inadvertently impose unnecessary burdens on others. Again, one size cannot fit all. There are usually many different ways for economists and policymakers to skin the cat, and all roads eventually lead to Rome. However, no one can build Rome in one day.

With the exception of tax subsidies given to foreign firms, Stiglitz and Charlton tend to focus on the importance of preserving domestic policy options to keep restrictive rules off the agenda. Specifically, Stiglitz and Charlton propose moving most WTO intellectual property rules back to World Intellectual Property Organization (WIPO). Stiglitz and Charlton favor empowering core developing countries to subsidize their target infant industries. On a bilateral basis, capital investment agreements should be part of their respective free trade agreements. In addition to constructing a core variable geometry, Stiglitz and Charlton propose modifying the current WTO rules by granting rich and poor developing countries generous market share exemptions and export subsidies.

In light of free trade barriers on agricultural products and labor-intensive goods and services, Stiglitz and Charlton advocate giving priority to the trade liberalization of low-skill labor-intensive services, eliminating tariff peaks, and also reducing tariffs on farm exports in agriculture. Stiglitz and Charlton assess and analyze the gradual tariff reductions rather than immediate tariff elimination. The latter may or may not be politically realistic. Again the heterogeneity among developing countries causes problems. Moving toward freer trade through a Pareto improvement is not easy as some countries lose substantially from removing the current tariff distortions. From a logical viewpoint, the first potential losers are the net consumption countries that benefit from low-cost food prices due to OECD-country tariffs, subsidies, and other trade barriers. The second potential losers are the exporters and manufacturers of high-quality goods from developing countries that enjoy preferential market access nowadays. Stiglitz and Charlton recognize these problems and hence propose that OECD countries apply export subsidies to compensate those developing countries with critical industries and high-skill workers. When push comes to shove, the basic law of inadvertent consequences counsels caution. Cross-country heterogeneity precludes the Washington consensus from the WTO true trade development round. Stiglitz and Charlton therefore argue that fair trade helps promote better economic development in the long run. Both OECD and non-OECD countries should adopt this prescient economic insight to build inclusive institutions for fair trade.

 

The fair trade thesis focuses on the global distribution of free trade benefits, rather than the competitive conditions of free trade.

Stiglitz and Charlton tend to focus on the global distribution of trade benefits, rather than the competitive conditions of free trade. In practice, only fair trade agreements can benefit both sides. Specifically, Stiglitz and Charlton view as unfair agreements any trade pacts that benefit non-OECD countries less than OECD countries. The main measure should be the net efficiency gains as some fraction of real GDP per capita. For instance, the total trade liberalization of agriculture by core high-income countries with no or few protective farm tariffs and subsidies would provide these countries with net benefits of at least $110 billion. By comparison, most low-income countries would receive net benefits of no more than $12.5 billion. Because OECD countries already enjoy real GDP about twice as high as non-OECD countries, the trade redistributive results would not be progressive. Stiglitz and Charlton therefore argue against these unfair trade pacts as part of the WTO multilateral negotiations. Removing trade barriers on farm goods would provide net benefits to both OECD and non-OECD countries. There is no good reason for economists and politicians to avoid trade liberalization altogether simply because the net benefits are greater (even as some fraction of national income per capita) to most OECD countries. In practice, these OECD countries should provide some forms of foreign aid (or trade development assistance) to compensate non-OECD countries in pursuit of better trade liberalization. In the long term, both OECD and non-OECD countries would benefit from greater economic growth and sustainable development due to unique comparative advantages in central industries and high-tech clusters etc. From this fundamental viewpoint, both OECD and non-OECD countries can benefit from fair trade agreements as these countries build their own national champions.

Stiglitz and Charlton want to ensure that free trade policies lead to fair redistributive results. To achieve this goal, Stiglitz and Charlton advocate the use of trade policy impact assessment with general equilibrium econometric analysis. For non-OECD countries, the net efficiency gains and benefits from agricultural trade liberalization would be much smaller than the efficiency benefits from service trade liberalization. Recent econometric evidence supports this consensus view. The same economic thread further applies to most OECD countries with complex comparative statics, capital adjustment costs, income tax distortions, fiscal deficits and restraints, weak safety nets, and inappropriate redistributive risk mechanisms. Stiglitz and Charlton suggest that most countries should take the redistributive results from fair trade as upper bound estimates of the efficiency gains of any trade pacts. To the extent that free trade agreements promote better economic development, most countries can develop brand-new high-tech clusters, national champions, distinctive capabilities, core competencies, and disruptive innovations. Good examples include the North American Free Trade Agreement (NAFTA) and some recent free trade pacts made among Singapore, South Korea, Taiwan, and western countries from Australia and New Zealand to France, Germany, and Spain. Future free trade endeavors should help both OECD and non-OECD countries to ease carbon emission, environmental degradation, and climate change in the lofty pursuit of long-run environmental and social governance (ESG) in due course.

 

Stiglitz and Charlton emphasize the right balance between trade liberalization and cross-country heterogeneity in inclusive institutions and social responsibilities.

Good free trade agreements should provide new opportunities for governments to anchor inclusive institutions, social responsibilities, and credible economic reforms. For most trade policymakers, the actual changes in tariff schedules are often only a small part of the dual transformation process. What is often at stake is a deeper transformation of behavior within the public sector. Through the trade reform, the government renews its relation with the private sector and the rest of the world. In this light, trade liberalization is much more than some change in relative prices. In practice, this trade reform usually results in the launch and introduction of inclusive institutions for robust economic growth and development in the longer run.

Economic development is often a dynamic process and therefore reflects a unique set of both behavioral responses and trade policies. Free trade agreements often offer new opportunities for economists and politicians to introduce complementary team efforts in accordance with long-run economic growth and development. For some countries, WTO free trade agreements can help anchor more consequential domestic economic reforms. For some other countries, however, WTO adjustment burdens can overwhelm both efficiency gains and redistributive results. Stiglitz and Charlton emphasize the right delicate balance between fair trade liberalization and cross-country heterogeneity in inclusive institutions and social responsibilities.

WTO free trade agreements can involve a more variable geometry with plurilateral agreements on capital investment, antitrust competition, and intellectual property protection etc. In some special cases, most OECD countries can use farm export subsidies, injury requirements, and de minimis exemptions to compensate several non-OECD countries for better infant industry protectionism. Such alternative trade mechanisms often prove to be more efficient than blanket prohibitions in terms of cross-country trade Pareto improvements over time.

Stiglitz and Charlton would like to subject all sorts of free trade proposals to general equilibrium econometric analysis. This analysis takes into account both efficiency gains and redistributive results worldwide. Progressive free trade agreements tend to tilt the more dynamic trade benefits from several OECD countries to non-OECD countries. High-income countries should find politically feasible solutions to better compensate low-income countries, especially if these low-income countries share some large fraction of free trade costs on a global scale. Some countries learn to better balance fiscal-monetary policy coordination in the domestic economic policy space before these countries participate in WTO fair trade negotiations. The recent bilateral trade agreement between American and China serves as a good example of trade reciprocity. The Trump administration approves an interim phase one trade agreement with China. In return, China seeks to purchase $40 billion to $50 billion U.S. farm exports to better balance the current Sino-American terms of trade. The U.S. government expects to phase out gradual tariff reductions for Chinese imports. Meanwhile, the Trump administration reduces tariffs on $120 billion to $160 billion Chinese imports from 15% to 7.5%, but the separate 25% levies would remain on $250 billion Chinese imports. On the brighter side, the current trade accord proves to be mutually beneficial to both sides. The major U.S. and Chinese stock market indices such as S&P 500, Nasdaq, Dow Jones, MSCI USA, and MSCI China surge in response to this great deal. The greenback depreciates a little against a broader basket of U.S. free trade partners in response to this trade pact. On the darker side, Chinese 5G technology now crystallizes as a clear challenger to the U.S. business model. A bifurcation of supply chains has gone from a new niche to a mainstream consensus view. It is important for the new Biden administration to strike a delicate balance between fair trade details and tech advances over the next decade.

Nobel Laureate Joseph Stiglitz and Andrew Charlton prescribe what a multilateral trade agreement can include to promote better economic development worldwide. Stiglitz and Charlton indicate that most OECD countries should open the markets for labor-intensive goods and services with fewer farm subsidies. These economic policy prescriptions are quite familiar and sensible. More controversially, however, Stiglitz and Charlton propose that all WTO members (both OECD and non-OECD countries) should completely open their markets to all smaller and poorer countries. Moreover, Stiglitz and Charlton focus on preserving U.S. domestic economic policy options, dropping WTO intellectual property rules, and keeping restrictive rules off the future global trade negotiations. To the extent that this trade liberalization tends to maximize trade diversion, most WTO members may prefer to differentiate their national discretions in response to the new Stiglitz-Charlton fair trade proposal.

Because the WTO operates by consensus, any multilateral trade agreement needs to be acceptable to all members at the end of the day. From time to time, political considerations constrain trade liberalization policy proposals. Stiglitz and Charlton present persuasive suggestions in terms of what a true trade development agenda should look like in due course. As trade policy advocates, both Stiglitz and Charlton tend to prescribe a clear-cut, simple, and persuasive course of action for the WTO. As academic trade economists, however, Stiglitz and Charlton often cannot resist the temptation to connect the dots between trade reality and empirical evidence in a rather complex way. As a result, this conflict tends to confuse trade policymakers. Cross-country heterogeneity still represents a conceptual challenge to a true trade development round for the WTO. In a nutshell, Stiglitz and Charlton argue that free trade can help promote better long-term economic development worldwide.

 

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