Will Fair Trade Diminish Free Trade?

By Gould, David M.; Gruben, William C. | Business Economics, April 1997 | Go to article overview

Will Fair Trade Diminish Free Trade?


Gould, David M., Gruben, William C., Business Economics


The successful completion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) that created of the World Trade Organization (WTO) in January 1995 has generated much optimism about the future of world trade, and with good reason. The trade accord not only eliminated tariffs on many goods, but it was also the first GATT-round accord to address intellectual property rights, trade in services, and agricultural subsidies. The WTO estimates that the volume of world trade in goods grew by 8 percent in 1995, four times the growth of world GDP. In fact, during the 1990s, international trade has routinely grown far faster than world output, an indication that national economies are becoming ever more closely linked. The WTO now includes 127 members; another thirty countries, including China and Russia, want to join.

In such an environment, it may seem strange to question the global commitment to free trade. But postwar history shows that, while trade agreements have reduced some forms of protectionism, new forms have been invented that at least partially replace them. At the same time that GATT reduced tariffs on manufactured goods from an average rate of about 40 percent in 1947 to about 3.8 percent now [ILLUSTRATION FOR FIGURE 1 OMITTED], the United States and other countries were refining disguised forms of protectionism. Increasingly complicated nontariff administrative procedures and laws began to regulate the flow of trade.

More specifically, policymakers have developed contingent trade protection to "correct" for "unfair" trade by other countries. The most often alleged unfair trading practice is dumping - the act of selling goods for a lower price abroad than in the home or other markets or selling at below average total costs. During the 1960s, GATT member countries initiated fewer than twelve antidumping actions per year. By the late 1970s, the United States alone averaged more than thirty-five cases per year. As Figure 2 shows, in the first half of the 1990s, the number of cases outstanding across the four most frequent users of antidumping laws (the European Union, the United States, Canada, and Australia) has been increasing, particularly in the United States. Many developing countries (e.g., Argentina, Brazil, India, Mexico, and South Africa) have joined the escalating use of antidumping laws. The four major users represented 82 percent of the antidumping measures enforced in July 1995, but only 51 percent of the cases initiated between 1994-95 (Messerlin 1996).

Past GATT agreements have included rough guidelines for using antidumping duties, but the WTO has codified these guidelines more fully than any previous GATT accord. Moreover, these codifications greatly resemble those of U.S. law.

The central question addressed in this article is whether the WTO will stem the rising tide of administered trade regulations that has weakened the trend toward liberalized trade around the world. Because the WTO adopted many aspects of U.S. fair trade laws, we use the U.S. experience as a benchmark to glimpse what the future may hold for world trading.

WHEN IS TRADE UNFAIR?

The express intention of fair trade laws is to prevent foreign sellers from pricing and selling anticompetitively or predatorialy in your country. For example, if foreign exporters sell for less in the United States than at home, U.S. laws and rules accommodate U.S. efforts at retaliation. But is this notion of unfair trade really unfair?

Economists often deny that below-cost prices or foreign export subsidies mean unfair trade. After all, if foreign firms want to sell cheaply in the United States, why should U.S. consumers not be allowed the obvious benefit? This argument recognizes the benefits to consumers, but dismisses the effects of unfair trading on some domestic producers and ignores other arguments against unfair trading practices. Moreover, as Bhagwati (1988) notes, "A free trade regime that does not rein in or seek to regulate artificial subventions will likely help trigger its own demise. …

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