Many people ask me what will happen at this week’s meeting of the World Trade Organisation at Cancun. Well, don’t pay much attention: any changes will probably be marginal.
More important, media reports on the WTO are typically in the language of economic diplomacy. And this happens to be quite contrary to the language of ordinary economics. So, lay readers may be misled more than enlightened by media coverage of WTO coverage.
In the language of economic diplomacy, anything that improves a country’s exports is called a gain, and anything that increases its imports is called a sacrifice. People reading about diplomatic negotiations may conclude, unsurprisingly, that exports are a good thing and imports are a bad thing.
Yet, economic theory, and even common sense, will tell you it is the other way round. You typically export what you already have a surplus of, and import what you do not have. Which of these is more valuable: what you already have in excess, or what you lack? Obviously the latter. If you have a surplus of food but no clothes, you cannot dress yourself in your food surplus. You are better off buying clothes from somebody else. But in order to buy the clothes you have to sell some surplus food. That is why you trade your food for clothes.
The logic of international trade is identical. What is really of value to a nation is what it does not have, and so has to import. Exports are not an end in themselves, they are valuable mainly because they provide the purchasing power to finance imports.
Seen in this light, the language of economic diplomacy at WTO is highly misleading. When a country lifts a ban on imports, its negotiators at WTO claim it is a sacrifice. In fact the supposed sacrifice is a huge gain to consumers, who can now buy something that was not available earlier (save through smugglers).
Similarly, when a country agrees to lower its import duties at WTO, negotiators claim they have made a sacrifice. Yet, this enables consumers to buy the same item at a lower price. What diplomats call a sacrifice is actually a gain for ordinary citizens.
Why do economic negotiators of all countries use such crazy language? Are they ignorant of economics, or devoid of common sense? No, not at all. But at international negotiations they act on the unstated but dubious assumption that public interest lies in increasing the profits of their producers rather than in reducing prices for consumers. You might think that country negotiators would speak for the masses rather than corporates, especially socialist ones. Yet socialist countries (like India during the licence-permit raj) have always been at the helm of sacrificing consumers at the altar of producer interests. And all in the name of the poor!
Now, critics will object that I have oversimplified the issue. If a country cuts its import duties, that will benefit consumers, but may also bankrupt producers, and render their employees jobless. Very true. But the beneficiaries will vastly exceed the losers, and the gains will exceed the losses. Besides, the only way to keep improving productivity and living standards is to keep shifting investment and labour from less productive to more productive activities. This can be done partly by improving productivity in existing companies, partly by shutting down the most inefficient companies and redeploying their land, labour and capital in more productive enterprises. In the process, countries should provide safety nets to those who suffer the most pain. This is not difficult. Since the gains of an import duty cut to consumers are so large, a small part of that benefit will suffice to finance a safety net for the displaced.
That is what successful eco-nomies like the East Asian tigers did. They started by specialising in garments and footwear, then shifted to light engineering and simple electronics, and have now shifted to microchips, computers and research-intensive products. Every change has meant bankruptcies and job losses. Nevertheless, the overall gains have been so huge that Korea, once as poor as India, is now 20 times richer. In their high-growth era, all the tigers ran high trade deficits: imports rose faster than exports. Do not measure their success just in terms of export growth. Rising imports did even more to improve their living standards.
Back to WTO. It is too early to predict the outcome of Cancun, or negotiations beyond. In this column, I will simply warn readers to examine carefully the language in which economic diplomats will present the outcomes. Look out for supposed sacrifices that are actually gains, and vice versa. Eight rounds of global tariff cuts under WTO and GATT — supposedly mass sacrifices — have ended up creating the fastest economic growth in world history..