Free Trade is for Social Liberals Too

A few days ago, Gordo argued that first-world agricultural subsidies are good because the alternative is importing food from the third world, which will increase the incidence of hunger there. I promised him a reply; since yesterday was International Day for the Eradication of Poverty, as Lindsay points out, now is a good time to explain just how destructive these subsidies are.

The UN’s own Human Development Report talks in length about the damage unfree trade does. It’s true that NAFTA caused Mexico’s poverty rate to spike. But it wasn’t due to some magical negative effect of free trade; it was due to American corporations’ dumping of government-subsidized goods in Mexico.

NAFTA officially condones free trade. But in practice, it really means free trade in goods that receive export subsidies. Mexico has lower labor costs than the US; the reason American corporations can dump corn in Mexico is that the government pays them to and pretends there’s free trade.

Free trade that doesn’t involve unequal subsidies tends to be good for everyone. What distinguishes European free trade from NAFTA is that in Europe, there were a variety of mechanisms to ensure that countries didn’t dump goods in one another. The Common Agricultural Policy imposed exorbitant farm aid on the entire Community, which together with the customs union ensured that the EEC countries would be dumping primary goods on the rest of the world instead of on one another.

This is what distinguishes the European experience with free trade, which has promoted convergence, with the American experience, which has promoted poverty. Unequal trade agreements like NAFTA allow the US to sell corn that receives export subsidies to Mexico but does not allow Mexico to even levy tariffs that undercut these subsidies.

Although Mexico is substantially poorer than the US, many new EU countries are poorer than the older ones, too. In 1995, Mexico’s GDP per capita was a quarter of the USA’s. When Portugal was admitted to the EC, its GDP per capita was barely half the average for the entire EU-12. Poland’s GDP per capita is 43% of Germany’s and 48% of the EU-15’s, while Romania’s is 35% of the EU-25’s.

The free trade that the United Nations Development Program encourages is not about first-world countries dumping goods in the third world, but about the first world eliminating tariffs that discourage growth in the third world. The 2005 HDR talks about case studies like Mozambique, whose sugar industry was crippled by EU quotas; Ghana and Haiti, where rice farmers lose their jobs because US-subsidized rice is cheaper; Burkina Faso and Mali, which lost 1-3% of their GDPs in 2001-2 just because of American cotton subsidies; and Lesotho, where 10,000 jobs were created in an 838,000-person labor force after the US slashed tariffs on Sub-Saharan African goods.

The serious social liberal scholarship does not challenge that view of trade. Paul Krugman has blasted American farm subsidies for wasting money. Amartya Sen basically embraces globalization, but points out to several problems with how it’s implemented, such as first-world domination of the IMF and World Bank, and first-world protectionism. Joseph Stiglitz similarly considers the combination of first-world farm aid with the prohibition on third-world protectionism disastrous.

The people who do challenge that view tend to come from a more fringe viewpoint. Food First, the think tank Gordo linked to in support of his view, seems at first glance more like the left-wing equivalent of the American Enterprise Institute or Austrian economics than the radical equivalent of mainstream economics.

For example, one of the pieces of evidence it cites that free trade is harmful even in its fair form is Brazil’s export-oriented growth, which has increased the incidence of hunger in the country. But exports don’t generally stem development; imports do. The driving force behind development economics has been the importance of import replacement, not export replacement.

Export-caused hunger simply means that the local elites have found a new way to concentrate wealth. The impoverishment of countries that are forced to abandon export-oriented policies suggests that slashing first-world farm aid will at worst infuse money into the third world, which the local power structure will divide as it divides all funds.

This alone gives some credence to Sen’s observation that democracy is the best safeguard against extreme poverty. A decentralized power structure that gives the people a voice will necessarily allocate funds more equally than a centralized elite. But it appears that even in most non-democratic countries, not having to face steep tariffs on exports tends to help the rural poor the most.

Obviously, all of this doesn’t matter to subsistence farmers. But most third-world poor aren’t subsistence farmers; people who grow sugar or cotton don’t eat what they grow, but sell their produce and then buy food at local markets. The people who do engage in subsistence farming tend to enjoy a far lower quality of life, contrary to Food First’s insinuation that subsistence is a solution to hunger.