In Arthur Conan Doyle’s “The Hound of the Baskervilles”, Sherlock Holmes lectures Watson on the unlikely subject of free trade.
Says Holmes: “Capital article this on free trade. Permit me to give you an extract from The Times. ‘You may be cajoled into imagining that your own special trade or your own industry will be encouraged by a protective tariff, but it stands to reason that such legislation must in the long run keep wealth away from the country and lower the general conditions of life in this island.’”
“What do you think of that, Watson?” cries Holmes in high glee, rubbing his hands together with satisfaction.
That was written in 1901. And in 2006 we are still arguing the toss. And at the heart of the argument is how to deal with the fast growth of imports from the low cost, developing world.
This week is showdown time over the latest of the world’s great trade negotiating efforts, the Doha Round. President George W. Bush in Vienna last week seemingly threw down the gauntlet to the European Union, hinting that the US is going to accept limits on its controversial agricultural subsidies and will moderate its demands for further access to foreign agricultural markets. If Europe matches this with an agreement to accept bigger cuts in farm tariffs than it has so far proposed a deal could be on its way.
Still, even if this central deal between the world’s top trading nations is done where does that leave the poorer nations? Long proponents of freer trade they are always in danger of being scissored by the world’s two leading trade blocs.
There is an important story of historical evolution. Many of the leaders of the newly independent countries of the 1950s and 60s came to political maturity during the 1930s when the Great Depression convinced them that there was no future for their countries as exporters of raw materials. That was a recipe for dependency and vulnerability. This early experience was compounded by dramatic fluctuations in raw material prices in the aftermath of the Korea War. Autarchy seemed a better option than the vagaries of trade.
But during the buoyant late 1960s these leaders began to change their minds. The sharp oil price rise of 1973 and the debt they incurred because of it convinced many of them that exports were a life-and-death issue. But although with agricultural products and labor intensive industries they have long had a comparative advantage, decades of pushing to reduce the protectionism of the developed countries with their high cost farmers, textile and shoe manufacturers sheltering behind tariffs and subsidies has produced only modest progress.
The evolution of thinking in the Western industrialized world has followed a different course. In the 1960s the West uniformly pushed for free trade. But by the 1970s and 80s it had produced strong business, agricultural and political lobbies that resisted progress on freer trade at every opportunity. They are able, as they do now with the Doha Round, to make it extremely difficult for freer trade to advance.
An interesting chapter of the annual report of President Reagan’s Council of Economic Advisors in 1982 observed with devastating honesty that the developing countries are “justified in claiming that world trade system discriminates against them.” Nothing since then has changed enough to alter that harsh judgement. Both Europe and America try to take the sting out of their protectionism by pointing out how generous they have been with trade preferences for the really poor nations. These give an advantage to the likes of Africa, Central America and Bangladesh, but usually at the expense of other more developed Third World nations.
A new study by the International Monetary Fund shows that for many of the poorest preferences are less generous that it appears because so few products are covered and there are overcomplex rules of origin. In truth, they will benefit from the general lowering of multilateral tariffs, as is being discussed in Doha. Only the African countries might lose out. But the answer for that is to abolish totally all rich world tariffs on African exports.
If the African countries want to be clever and at the same time shame the EU and the US they should announce that they will abolish their own import tariffs if the two blocs end theirs — another recent IMF study finds that developing countries could increase their export earnings by reducing their own tariffs. Sherlock Holmes would not be surprised. It has taken an inordinate amount of time for the penny to drop among those with a less inquiring mind than his.
