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Myth #2: Free Trade Requires Complex Treaties
April 24,2007Installment 2 of the 3 general things that pissed me off during the PurpleThink self-imposed hiatus.
At face value it sounds pretty good – negotiate a treaty with a nation (or bloc of nations) to ensure equal access to each other’s market. The North American Free Trade Agreement (NAFTA) and Central American Free Trade Agreement (CAFTA) seek to codify good economic policy for the benefit of all nations involved.
NAFTA took 7 years to negotiate and CAFTA is in its third year of negotiation at present. Hmmm. If the intent is “free trade,” why would one need to negotiate anything. It seems to us that if you desire to drop tariffs and subsidies in exchange for like behavior from others, then you just do it. Maybe you sign a piece of paper that says “we will not place tariffs on imported goods and services, nor will we subsidize our own goods and services at the expense of others.” Done!
Truth is, once governments decide to “negotiate,” they, by definition, allow tariffs and subsidies to continue in certain cases and/or for certain periods of time. Ta-da! Pandora’s box opened. Now enter the powerful Washington lobby machine. In addition to negotiating with foreign leaders, we must accommodate the powerful special interests. We all know how that story goes.
It’s bad here in the U.S., but special interests in other countries don’t just politically smear their opponents – they have a nasty habit of rubbing them out permanently. We unwittingly create a fertile playing ground for a small handful of nefarious business leaders that in smaller countries have a disproportionate stake in the overall running of a country. Corruption abounds.
Smaller nations typically have less bargaining power than the almighty U.S. They give-in to open-market demands on a variety of fronts in order to gain protection for one or two goods that may make-up 70-80% of non-tourism GDP. They think they’re helping themselves, but in reality they are stunting future growth. For example, when the inefficient Guatemalan coffee industry (it takes 500 workers to produce what 1 worker can do in Brazil) is protected, it doesn’t have to change in order truly compete on the world stage. What may make sense now will be disastrous in the future as technology continues to pass Guatemala by.
Protectionists in the U.S. cry foul and argue that the economy is hurt by truly free trade. Hogwash. Even if we open our markets and others fail to do so in return, we benefit. How? Raw material commercial products account for nearly ¼ of total U.S. imports. This results in a lower cost of finished goods that we can then both export and sell to domestic markets for lower prices and increased profit. But again, treaties hurt by putting limits on these benefits.
Perhaps the biggest danger in these treaties is that we lose our national sovereignty. As free trade blocs grow larger and more complex, they employ legal recourse for alleged transgressions. For example, the U.S. can be legally bound to WTO judgments that punish our industries, tax our exports, or otherwise cripple our economy by edict. And, because of these same treaties, nations otherwise sympathetic would be bound to the WTO themselves and must honor the new world order.
Bottom line is that free trade works, but free trade by treaty is not truly free.
Coming up:
Myth 3: Economic expansion, national defense, and global warming mitigation are mutually exclusive.
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