Free trade is never more necessary—or vulnerable—than in times of economic distress. The current global downturn is no exception. Protectionist barriers have shot up all over the world, including the United States. Earlier this year, Congress killed a pilot program allowing Mexican trucks to transport goods across America and included “Buy America” provisions in the stimulus bill banning foreign steel and iron from infrastructure projects funded by the legislation. More disturbingly, President Barack Obama, after chiding Congress for flirting with protectionism, initiated his own ill-advised affair by imposing a 35 percent tariff on cheap Chinese tires.
If the world manages to avoid an all-out trade war of the kind that helped trigger the Great Depression after the U.S. imposed the Smoot-Hawley tariffs in 1930, it will be in no small part due to the efforts of one man: Jagdish N. Bhagwati, an ebullient and irreverent 76-year-old professor of economics at Columbia University. Bhagwati has done more than perhaps any other person alive to advance the cause of unfettered global trade.
A native of India, Bhagwati immigrated to the United States in the late ’60s after a brief stint on the Indian Planning Commission, where he learned first-hand the insanity of an economic approach that tried to modernize a country by cutting it off from world trade. Since then, he has devoted his efforts, both in academia and in the popular press, to showing that there is no better way of improving the lot of both advanced countries and the developing world than through free trade. His path-breaking contributions to trade theory have put him on the short list for a Nobel Prize in economics.
Though a dogged trade advocate, Bhagwati is anything but dogmatic. He is a free spirit who draws intellectual inspiration from many disparate ideological camps. A self-avowed liberal, he is also something of a Gandhian social progressive, though Gandhi himself supported economic autarky. Bhagwati works with numerous Third World NGOs on a host of human rights issues. Yet he has no problem taking on these groups—or his famous student, Nobel laureate Paul Krugman—when they question the benefits of trade. In fact, he devoted his 2004 magnum opus, In Defense of Globalization, to a point-by-point rebuttal of these critics. Although he doesn’t vote Republican because he dislikes the party’s nationalistic jingoism, he readily declares that Democrats pose a far bigger threat to international exchange than Republicans.
This summer Shikha Dalmia, a senior analyst at the Reason Foundation, interviewed Bhagwati in his New York office.
reason: You have been on the short list for a Nobel Prize in economics for your contribution to trade theory. Could you explain what your main contribution is?
Jagdish Bhagwati: My breakthrough in trade theory was very simple, as all breakthroughs are. Back in the 1950s, when the case for free trade was widely regarded as less compelling analytically than today, protectionists had one very powerful argument on their side. They noted that a country necessarily benefits from free trade only when markets are perfect—that is to say, only when market prices reflect true social costs can we expect these prices to guide allocation correctly. Take pollution. Say your production process makes you spew things into the air and water but you do not have to pay for this pollution. Then the social cost of harming others is not being taken into account by you and hence your production costs are less than the “correct” social costs.
So you could take two points of view. The time-honored view was that when there is such “market failure,” or what might be better called a “missing market,” the case for free trade was compromised and any form of protectionism was justified. I argued that if you had a market failure, fix that, and you are back to perfect markets and the legitimacy of free trade. So, for example, you can have a polluter-pay principle on the environment. If you do that, then there’s no damaging spillover which has not been taken into account.
The proper policy response then is not to abandon free trade but rather to fix the market failure and then to embrace free trade. This was a revolutionary thought. For 200 years, serious economists had abandoned free trade in the presence of market failures of one kind or another.
reason: In Defense of Globalization was addressed to non-academic critics of free trade and globalization who claim that globalization does not have a human face. What was your argument?
Bhagwati: When I was in Seattle in 1999, when everything went haywire as far as trying to get a new round of trade negotiations, I realized that the young people who were agitating, and some of the older folks also, were not interested in whether trade was good for national income and prosperity. They were claiming that globalization has an adverse impact on a whole lot of social issues—gender equity issues, environmental issues, the effects of globalization on the polity and democratic rights. In short, to use the fetching phrase, they were concerned that economic globalization lacked a human face.
My book addressed precisely such issues. I found that, contrary to the fears of the critics, most social agendas were advanced rather than handicapped by globalization. Globalization, I concluded, had a human face.
Take women’s issues, for example: If you look at what happens to the gender gap on pay inequality, it turns out that you can make a perfectly solid argument that in fact it’s narrowed rather than widened as a result of international trade. The reason is very simple: If a man is paid twice as much as a woman, when they are both equally competent, that is inefficient. So when you are engaged in international competition, you’re really not going to be able to indulge your prejudice in this way. This will lead to more demand for women and less for men, bringing pressure to bear on their relative wages in the direction of greater pay equality.
Two brilliant young women, Sandra Black and Elizabeth Brainerd, did their dissertation at Harvard on this hypothesis. They found that in two decades in internationally traded industries in the United States, the gender wage gap narrowed faster than in non-traded industries. Trade had thus been good for an important social objective, not a drag on it.
reason: You still hear the argument—President Obama made it during his campaign—that we want fair trade, not free trade.