Wednesday, March 1, 2000

Is Free Trade Fair Trade?

My article titled "Is Free Trade Fair Trade?" was published in March 2000.

Free trade is fair trade, or so one thought until the recent protests in Seattle during the WTO meeting. The Seattle protesters contended that unrestricted trade harms developing countries. In contrast, India's experience provides clear evidence of the high costs of a restrictive trade policy. For almost fifty years, India, the world's largest democracy, lived under the premise that trade is a zero-sum game. Successive governments believed that free trade would only weaken the Indian economy further and open it up for even greater economic exploitation.

The result of this economic experiment has been tragic but clear. In 1947, at the time of Independence from British colonial rule, India's share of global trade was estimated to be about 1.8%. Today it is less than half that. Per capita income has stagnated at less than $500, and an estimated 20-30% of the population lives in abject poverty. The Indian experience is in sharp contrast with that of many countries in South-East Asia that had started out at around the same level or worse, but in the last thirty years have leapt far ahead.

The economic philosophy behind a restricted trade regime was national self-sufficiency, and import substitution. It was argued that protecting local industries would not only help protect jobs, but also allow the industries to mature and develop, and the domestic knowledge base and technology to grow.

The results of this policy, in India and elsewhere, have been the opposite of what had been intended. The experiment failed because of fatal misconceptions about the nature of the market and the role of trade. And the cost for this failure has been extremely high. Ordinary consumers lost out, because domestic producers faced little competition, and their products were characterised by high price and low quality. Foreign goods were either unavailable or made prohibitively expensive through sky-high tariffs. Not surprisingly, the contribution of the economy to the growth of knowledge and technology was marginal.

Trade restrictions have clearly failed the citizens of developing countries. It is time to try a new policy which will promote domestic economic growth, spur innovation, and benefit consumers. There are several critical components to such a policy. They include the lifting of trade restrictions, respect for private property rights and contracts, and the assurance of freedom of choice in the marketplace. Such policies will induce competition and force producers to find better and cheaper ways of satisfying consumer demands.

To enhance the domestic base of knowledge and promote technological innovation, another essential component of a pro-growth policy is protection of intellectual property rights (IPR). The approach to IPR is another clear distinguishing factor between developing and developed countries. The former generally considered knowledge to be free and IPR as an instrument for restricting access to knowledge. The unintended consequence of this approach has been that while knowledge may be free, it has also become scarce, dated and even unavailable, as there is no incentive to invest in the discovery process.

The experience of India in this regard is quite telling. It may be argued that a lot of the traditional knowledge systems in India have decayed or died because of lack of protection for IPR. This seems particularly ironic today when there is universal concern for protecting the local knowledge base. For instance, the failure of most local pharmaceutical companies to utilise the "free" knowledge to develop new and better drugs is an illustration of the significance of IPR. IPR may limit access, but in the process eliminates the "tragedy of the commons" in the knowledge domain. IPR, therefore, provides the incentive to discover and makes knowledge affordable and sustainable.

Another aspect of trade that needs more attention is its relationship with democracy. Traders in the marketplace are like voters in a democracy. If free flow of ideas is essential to sustain political freedom and a democratic polity, then free trade is critical to sustain economic freedom and an efficient marketplace. Liberty, after all, is indivisible.

Therefore, the best way to realise the competitive advantage that an opportunity to trade provides is through universal dismantling of barriers to trade and economic growth. The evidence of prosperity is clear from the diverse group of countries that instituted domestic reforms and adopted relatively open trading systems -- to the benefit of their citizens. Their experience is testimony to the fact that, where the interests of ordinary citizens are at stake, free trade is fair trade.

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