Trade liberalization: the way forward

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Trade liberalization the way forward

• Boris Begovic
• Center for Liberal-Democratic Studies
• (CLDS)
• Freedom, Commerce and Piece
• A Regional Agenda
• Tbilisi, Georgia
• October 25th, 2006

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The case for free trade

• Comparative advantages
• International specialization
• Increased economic efficiency
• Increased social welfare
• Free trade is not a zero sum game every nation
  wins
• Abolishment of Corn Laws 1846 unilateral trade
  liberalization

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Reasons for protectionism

• Every nation wins but...
• ...not everyone in the nation wins
• Special interest politics
• Public choice theory
• Tullock (1967) tariffs, monopoly and theft
• Inefficient domestic producers against free trade
  as competition increases
• Tariff barriers

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Figure 1 Tariff protection
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Non-tariff barriers

• Quantitative barriers
• Quotas et al.
• Vested interest of the privileged importers
• Alliance of domestic producers and importers
• Protection without domestic producers
• Rent dissipation
• Hidden quantitative barriers (quality standards,
  sanitary control, etc.)

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Figure 2 Non-tariff barriers
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Increasing costs of competitors

• No possibility for formal barriers (free trade
  environment)
• Introduction of British labor legislation to
  India 1881
• Banning child labor in developing countries
• Noble and innocent aims of the campaign
• ...usually set or abused by the private interest
  of domestic producers

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Figure 3 Increased costs
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Customs corruption

• Customs administration enforces any trade policy
• Extortion, i.e. corruption without theft
• Increased costs that are transferred to the
  corrupt customs officials
• Increased rent to the domestic producers
• Endogenous corruption

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Figure 4 Corruption without theft
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Customs corruption effective liberalization?

• Corruption with theft breaching the rules
• Effective liberalization with decreased tariff
  burden
• Grease/sand in the wheels of business?
• Transaction (transfer) costs
• Exogenous corruption

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Figure 5 Corruption with theft
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Trade liberalization who gains and who looses?

• Heksher-Ohlin model of specialization
• Stolper-Samuleson model of redistribution
  (factor-endowment model)
• Costless inter-industry mobility of factors
• Specific-factor model
• Factors capital and high/low skilled labor
• Consumers
• Rent-seekers

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Who gains and who wins?

• Labor attitude and level of education
• Factor-endowment vs. factor-specific model
• The logic of collective action (Olson)
• Free riders problem and collective action of
  consumers
• Nationalism and protectionism the stronger
  nationalism, more animosity against free trade
• Protectionism hurts the nation who cares?

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Trade liberalization some realistic option?

• Mercantilism and trade wars zero sum game
  considerations
• WTO and further liberalization
• US no tariffs on industrial products in 2015
• PTAs and FTAs
• Trade creation or trade diversion
• Accession to the customs unions
• Unilateral trade liberalization not an option?

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Trade liberalization some realistic policies?

• Big Bang the end of communism and planned
  economy
• One off event short window of opportunity
• Supporting the winners advocacy means overcoming
  the problem of collective action
• Political integration EU accession as the
  vehicle
• Informing the public about the consequences

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Trade liberalization a few more realistic
policies?

• Foreign investors and attracting them two types
  of the investors
• Economies of scale in small economies
• Export led growth as the only option fro small
  countries
• Changing the character of nationalism/patriotism
• Hurting the national social welfare is not
  serving national interest

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The way forward how to promote trade
liberalization?

• By fighting the opponents
• By supporting the allies
• By setting agenda of the public debate
• By taking the active part in public debate and
  consultations
• By providing the information
• By fighting the ignorance

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The Contest
was first published in September 1843 to take
part in a severe contest between intelligence,
which presses forward, and an unworthy, timid
ignorance obstructing our progress. The
contest is still on.