The recently completed World Economic Forum in Davos, Switzerland, ended in a sombre mood. The rich and the powerful (incl. those aspiring to these roles) had the party spoiled by the subprime crisis, a creeping American downturn and high oil prices. Still, a much overlooked outcome of the Forum was a renewed impetus in the trade negotiations taking place under the auspices of the World Trade Organisation (WTO). The Europe Union plays an important role in these negotiations and it is time for the EU to bring in new thinking and to show global leadership!
WTO has the same aim as its predecessor GATT, namely to work towards freer international trade as. WTO has continued GATT’s policy of “rounds” of negotiations, in which comprehensive trade liberalisation deals are agreed to by all member countries. The current round of negotiations is labelled the Doha round after the capital of Qatar, where the round was kicked off in 2001. Earlier trade rounds have been slow affairs, but the Doha round seems to beat all previous experiences in this regard.
The main contention point of the negotiations is the extent to which the US and the EU shall reduce their barriers to agricultural trade by removing tariffs and subsidies. The round also seeks further liberalisation of trade in manufactured products and services. The blame for the many breakdowns of the Doha negotiations has, at various times, been placed to the EU, the US and various developing countries.
I believe it is time for Europe to show global leadership. Instead of dragging its feet in the process towards freer world trade, the EU should unilaterally remove all tariffs and quantitative restrictions on import into the Union, and at the same time abolish the current subsidy schemes for agriculture and industry. The arguments in favour of such a step are numerous, while the counterarguments are mainly political.
Economic theory generally suggests that countries should not restrict international trade as such a move limits consumer choice and leads resources to be employed productively. This result, which is essentially an application of the first theorem of welfare economics, may not hold in specific circumstances, but these are often mostly of theoretical interest. (The prime exceptions concern countries or trading blocs that are sufficiently large to affect world prices, protection of infant industries and distributional objectives.) Although not uncontested, empirical analyses have generally shown that countries with more liberal trading regimes grow faster than countries with many trade restrictions.
My (adopted) home country, Estonia, is living proof that indeed totally free trade does not hamper economic performance. Estonia regained its independence from the Soviet Union in August 1991, but faced numerous economic problems including a severing of its trade links. Nevertheless, international trade was liberalised and almost all tariffs were abolished during the first years of transition, and in 1997-99 Estonia did not have any restrictions or duties on international trade (with natural exceptions for weapons and nuclear material). Starting in 2000 Estonia reintroduced some tariffs as part of trade agreements with the EU. The lack of trade protection for the larger part of a decade evidently affected the economy as e.g. the agricultural sector contracted markedly and many manufacturing enterprises were exposed to strong competitive pressure. The broad picture is, however, that the open economy helped direct resources to productive uses and benefitted consumers by making import products available at international prices. The Estonian economy grew on average by 7.5 percent per year from 1996 to 2006.
It is time that the EU sheds its protective measures in agricultural commodities, manufactured products and services. World prices on agricultural products are high so the adjustment in the farming sector will be relatively painless at this time. The current systems regulating agricultural production are bureaucratic and prone to fraud and corruption. The competitive shielding leads to overproduction of agricultural products and puts a great strain on the environment. Europe generally needs increased competitive pressure to lower prices and increase the welfare of people living in the region. Perhaps free trade is an illusive goal, but one small country proved in the 1990s that such a policy is possible and that the benefits outweigh the disadvantages.
(For more on the Estonian reforms and their results, see my article in “Contemporary Change in Estonia”, www.diva-portal.org/diva/getDocument?urn_nbn_se_sh_diva-106-2__fulltext.pdf.)