The Tricks of Trade Treaties

The recent trade agreement between Chile and the United States is being praised as the first significant agreement in the Western hemisphere since the North American Free Trade Agreement (NAFTA) was signed a decade ago. But while it is celebrated in certain American circles, it displays many of the problems that characterize past trade agreements, problems that generate much discontent about globalization. Indeed, in some ways it is a step backwards.

One source of discontent with globalization is that it deprives countries of their freedom to protect their economy and citizens. Special interests in industrial countries, it seems, take precedence over broader interests. Moreover, these trade agreements are often asymmetric--the North insists on the South opening markets and eliminating subsidies, while it maintains trade barriers and subsidizes its own farmers.

In some ways, the agreement with Chile broke new ground--in the wrong direction. It failed to take advantage of opportunities afforded by more open trade with an emerging market that has a sophisticated and highly qualified public service.

Particularly ironic was the provision designed to restrict Chile's use of capital controls for short-term speculative capital flows. Chile used these measures efficiently and effectively during the first part of the 1990s. Research suggests that these restrictions did not affect the flow of long-term capital. On the contrary, they probably encouraged inward flows, as funds that otherwise might have been provided on a short-term basis were induced to remain for longer.