Blake Borgeson, in blog form

It started popping up in the news throughout Tuesday, and got the front-page writeup Wednesday: after 7 years of trying, the Doha round of free trade talks have been declared over with zero agreed on.

The NYTimes and others write in detail about what the US says on one side, and what India and China say on the other, about what went wrong, and who’s the stubborn one that cares more about guarding against risks to their own pocketbook than moving forward the world economy.  But, like a lot of news, there’s very little discussion of why anyone should really care much about all this.

I believe the standard position I hear from economists: that the principle of free trade is good, just like free markets in general, but that it causes problems for the people on the losing side of the equation when wealth and jobs are redistributed within a country and throughout the world.  Still, it’s not second nature for me to think of what some real ramifications could be of free trade stopping its recent forward march, or of turning around and retreating.  But I happen to be reading a book that does a fine job of discussing that.  Saving Capitalism from the Capitalists, which generally is about the benefits, causes and curses of free markets, spends some time on free trade, and its importance to free markets and competition within a country, so I thought I’d share a few lines.

First, a huge problem free markets generally run up against is the whims of democracy.  To illustrate this, the authors discuss what happens once a country has had a free market for a time–long enough to have some very successful large companies that now dominate their industries.

Those in power–the incumbents–prefer to stay in power.  They feel threatened by free markets.

So you’ve got big, successful companies that now dominate their industries and have tons of cash, and these guys are looking to put a bit of a damper on the “free” aspect of markets and competition to maintain their position.  The winning firms want to hold onto their power.  They’ve got cash.  The distressed (to a large extent, the ones who lost their jobs) are numerous, loud, and rally in the name of reversing the damage.   In their words,

…incumbent groups ride the coattails of the distressed back into power.

The two groups combine their political influence to enforce regulations on the market.  For the dominant companies, the goal is to restrict competition.  For the distressed workers, it’s to bring about a system more like the old days, with less risk and less change foreseen.  The main defense against regulating away competition, which eventually makes the industry stagnate and under-perform compared to the industry in other more competitive countries,  is opening the country’s borders to allow trade with other countries.  Competition from the outside prevents our government from regulating markets out of existence in the name of smoothing risks and preventing further damage to the distressed.

Open borders limit the ability of domestic politics to close down competition and retard financial and economic growth.

Why don’t we hear about the effects of closed borders on developed countries more these days?  Mainly, the authors believe, because these days it’s quite hard for developed countries to successfully keep out foreign competition, given how open the world as a whole has become.

A country’s borders are porous.  When the rest of the world is open, it is difficult for any single country to put up barriers to the flow of goods, capital, and people.  … So when the world is open, its borders will perforce be open unless it is a police state.  Incumbent interests will be subdued.

But if we allow the world as a whole to drift backwards, we risk those rules of the game changing significantly. Countries have the ability to close their borders en masse and keep out competition to protect incumbents and ailing industries.  The Doha Round of talks, at the beginning, was supposed to outline a set of commitments among most of the largest economies in the world to continued opening-up of borders and freeing-up of markets that are currently not very free.  In the end, the hope was to at least get everyone to commit to at least keep trade about as open as it currently is.  Unfortunately even that failed.

So let’s do what we can to keep from rolling backwards on free trade.

[Update: As I should have expected, the Economist put out a piece in their latest issue, online just a day after my post, with a lot better treatment of specifically what the eventual goal of the Doha talks at the end were, and what that failure specifically means: The Doha round…and round…and round]