Thursday, April 10, 2008

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Thoughts on the Colombia trade deal

Kevin Drum and Matthew Yglesias have posts up on the free trade agreement with Colombia and wonder whether it's worth all the trouble it's going to create. Let's respond!

Kevin's post boils down to the following facts: a) Trade contributes somewhat to rising inequality and stagnant wage growth at the lower end of the wage spectrum; b) There's little appetite among the American people for freer trade; and c) Trade is pretty free anyway, so why worry about piddling deals like the one with Colombia. In conclusion, Kevin paraphrases Senator Clinton: "Taking a breather to rethink how we approach trade seems pretty reasonable at the moment."

Matt's post helps to rebut the first charge. As he observes:

[The FTA] actually involves very little changes on the US side at all. In essence, Colombian goods already flow very freely into the United States except for in our more famously protected sectors (agriculture, etc.) and what we're offering Colombia here is a very solemn promise to keep it that way.
The Colombia FTA is hardly unique in this regard -- this is pretty much what the state of play was prior to NAFTA as well. So the effect of these kind of FTAs on U.S. wages is less than minimal.

It also explains why ratifying this FTA is a good idea -- it locks in U.S. policy. As I've posted previously, the reason these agreements are a good idea is precisely because they prevent the drift towards protectionism that is otherwise inevitable in a pluralist political system. As for Kevin's desired "pause," let's face it, there is going to be zero momentum towards further liberalization beginning in 2009 regardless of whether this FTA is passed. Kevin's pause is happening whether anyone likes it or not.

After analyzing the content of the deal, Yglesias concludes the following:

All things considered, this seems to have almost no implications for American well-being, and if I were a member of congress I think I would consider this an excellent moment to let me vote be dictated by pure partisan politics or possibly corruption. If I were a blogger, I would say that lowering barriers to the importation of foreign goods on a unilateral basis would be good policy for the United States and that using bi- or multi-lateral trade negotiations to try to get other countries to adopt "pro-business" policies is a pretty dubious undertaking.
The first point is incomplete and the second point is factually incorrect.

The biggest benefit of the FTA with Colombia has little to do with economics and everything to do with our bilateral and regional relationships. Go back to NAFTA. Kevin is right to point out that the agreement's economic effects were not terribly large. On the other hand, even skeptics of trade liberalization -- Dani Rodrik, Paul Krugman, and Joseph Stiglitz -- supported NAFTA because it locked Mexican economic reforms, promoted political reforms, and cemented a stronger bilateral relaionship.

There's no reason to believe that the same effects would not take place with Colombia. Matt has been stressing the killings of labor activists in Colombia. However, the EPI graph he highlights shows a pretty dramatic reduction in these killings since 2003.

Question to Matt: what's the best way for the United States to help reduce those killings even further -- ratifying or rejecting the FTA? I'd argue the former. FTAs matter more than unilateral reductions of trade barriers because they decrease the likelihood of policy reversals (which, again, is why Hillary Clinton's proposals to renegotiate FTAs every five years or so is such a God-awful idea). Ratifying the FTA with Colombia increases the likelihood that labor killings will continue to decline.

A final point: for freer trade to be politically sustainable, there needs to be some kind of reciprocity, which can't happen via unilateral reductions in trade barriers. Historically, unilateral reductions have had a minimal impact on the openness of the global economy. In the 19th century, the repeal of the Corn Laws mattered a hell of a lot less than the Cobden-Chevalier treaty in opening up European economies to each other. In the 20th century, GATT mattered a hell of a lot more than any unilateral U.S. policy in leaving the misbegotten trade policies of the Depression behind.

UPDATE: On the other hand, I should point out that Drum is 100% correct on this point he makes in a follow-up post:

Question: which is more important to the cause of free trade: (a) passage of the Colombian trade pact or (b) reining in the monstrosity that is U.S. farm policy? The answer is (b) by several light years. So why do we hear so much about the dire consequences of failing to pass a piddling bilateral trade deal... but almost nothing about the dire consequences of the hideous $300 billion distortion caused by the latest round of farm subsidies most of which goes to big agribusiness, not struggling family farms? How about a little more noise on the farm front?
The problem is even bigger than Drum realizes, since cutting back agricultural subsidies are also the key to completing the Doha round.

ANOTHER UPDATE: I just want to point out that the initial version of this set a new personal record for number of typos in a single blog post.

posted by Dan on 04.10.08 at 08:52 AM




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