European Affairs

Summer 2001

 

Letters to the Editor
We Need to Push Both Pedals of the Trade Bicycle
Carol Crawford

 

In his article "The Goal of Trade Must Be To Create Jobs" in the Spring 2001 issue of European Affairs, Supachai Panitchpakdi makes the worthy point that trade is not an end in itself, but rather a means to increase living standards around the globe. And while trade is likely to be a necessary ingredient in the mix that produces rising incomes, it is certainly not the only requirement. Similarly, while jobs are an important benefit of trade, they are not the only one.

Efforts are now underway to initiate a new round of trade negotiations. A new round has great potential to benefit the developed and developing world in ways big and small, but constituents on all sides need a better understanding of the economics of trade before we can move forward.

Dr. Supachai writes of the developing world's wariness over expanded trade, but a similar ambivalence regarding the value of trade - or more precisely imports - exists in many areas of the developed world as well. Many Americans also fear trade as the villain luring factories offshore, stealing jobs from old line manufacturing industries.

Yet imports bring great value to the everyday lives of all Americans, in the form of a greater variety of goods and services and of more competitive prices. Imported inputs allow U.S. intermediate producers to be more competitive at home and in foreign markets. Reducing the remaining trade barriers in sectors that are still protected would bring additional benefits to Americans and others in the developed world by allowing more choices at better prices.

The less developed world would benefit even more from further progress in reduction of remaining trade barriers. Those living in the developing world currently pay a very high price for trade barriers. Trade barriers imposed by their own governments keep prices high and restrict consumer choices.

They reduce the competitiveness of their own producers by limiting their access to goods and services produced elsewhere. Dropping those barriers would both reduce the cost of living and improve the competitiveness of domestic producers.

Developing countries face a different kind of injury from the high tariffs and other protectionist devices erected by the developed world. Developing countries are often thwarted from selling their primary exports - such as agricultural products, textiles and apparel - in developed world markets. The ability to market these goods - where they have a comparative advantage - would in fact bring the jobs much needed by the developing world.

A new round could and should shine a spotlight on these costly barriers and their adverse effects on the developing world. In addition, a new round could also facilitate agreement on other ways to reduce transaction costs, allow each country to realize its comparative advantage, and thereby permit productivity increases. These are the real precursors of job creation and rising incomes.

But it is not clear that economic progress and job creation in the developing world need be held hostage to a new Round. Developing countries can take steps unilaterally to maximize their opportunities to promote job and income growth. Since capital creates jobs, governments can seek to attract foreign direct investment. FDI not only provides infusions of capital and jobs; it also brings new technology and managerial expertise, important ingredients in productivity growth and job creation.

Developing country governments that have offered an environment that attracts FDI - an environment that provides transparency, political and economic stability, freedom from corruption and intellectual property protection - have been rewarded with new jobs, productivity gains, and higher incomes.

Common wisdom has it that the trade bicycle must keep moving forward or it will fall to the ground. Dr. Supachai asks whether it should keep moving forward if we don't know its destination. The destination should be an open international system that allows countries to produce and sell goods and services according to their comparative advantage, benefiting buyers and sellers alike in the form of higher standards of living.

Unfortunately, numerous trade barriers still exist in both the developed and developing worlds that prevent countries from maximizing their competitive advantage, with costly results, particularly in the developing world.

But even if we know its destination, the bicycle cannot get there if only one pedal is pushed. The developed and developing world's only control one pedal each. Perhaps Dr. Supachai's real message is that the pedals on both sides of the bicycle must be pushed for the bicycle to progress toward expanded trade and its promise for new jobs and improved standards of living.