Pact can show way to real recovery

WITH the passage of the North American Free Trade Agreement by the US House of Representatives, most politicians and business leaders everywhere breathed a collective sigh of relief.

European concerns that Nafta may end up creating a trade 'fortress' in the Americas mirror US fears of a few years ago about the single European market. The White House has already warned that Nafta and Apec - the organisation for Asia Pacific Economic Co-operation - offer an alternative 'trade architecture' to the US if Europe fails to compromise on cutting subsidies for farm trade, the main obstacle to a Gatt accord. 'The US now has a natural escape route for a multilateral trade pact that can develop further into South America and spread west into Asia,' said Ian Harwood, chief economist of Warburg Securities.

Free-trade supporters have stressed the paramount importance of a successful conclusion to all these talks. A Gatt failure, they warn, could splinter the world economy into regional trading blocs ring- fenced with trade barriers. Whatever the outcome, the proliferation of trade negotiations and deals is bewildering to ordinary people and the impact on everyday life seems unclear.

The boom years of the 1980s coincided with a surge in the growth of world trade. More recently, the expansion of global trade slowed and industrial economies sank into recession. Many policy-makers have accordingly concluded that the success of these agreements would boost international trade, lift business and consumer confidence and clear the way for a sustainable recovery.

The classical theory of free trade holds that dismantling international barriers to trade encourages an international specialisation of production that maximises the economic welfare of the whole world. In other words, countries should make what they do best. Thus, for example, China is a leading manufacturer of soft toys, the US and Japan world leaders in computers, and Germany probably the largest manufacturer of hi-tech machine tools.

But there is almost as much concern that breaking down the barriers to trade will destroy huge numbers of jobs in the relatively high- wage industrial world as production is transferred to Asia, parts of Latin America and Eastern Europe where there are vast pools of cheap labour, and where employers' 'non-wage' costs such as social security payments are low.

In practice, even if all the present trade negotiations succeed they will not result in completely free trade. And during the long years of hard bargaining, the free-trade negotiations have been overtaken by the 'globalisation' of the world economy in which multinational companies, buttressed by the increasingly free movement of capital around the world, seek to be active in all markets, regardless of whether there are trade barriers or not. Thus Japanese car manufacturers have established plants in Britain to serve the EU.

Although barriers to trade have grown in recent years, they have been confined largely to declining industries such as steel and textiles, where production in industrial countries has been matched by soaring low-cost output in the developing world. For the same reasons, just as much protection is practised in agricultural trade.

At the same time, capital flows and services have become increasingly unregulated as governments dismantle controls that proved difficult to administer. Capital moves around the world electronically, and it seems unlikely that this trend could ever be arrested.

A key reason for the flood of capital and investment to China, South- east Asia and parts of Latin America is not so much the advent of a more liberal world trade environment as the prospects for growth. Many Asian countries enjoy annual growth rates in excess of 10 per cent. Attracted by the prospects of rapidly expanding markets and large profits, companies have understandably poured money into these regions to bring their production facilities closer to these markets.

If Europeans complain, they have only to look back to the late 1980s. American and Japanese investment poured into the European Community in anticipation of the 1992 single market. Until the recession knocked the European economy off course, the single market was expected to provide a fresh boost to growth. Even today, Britain is one of the biggest European beneficiaries of foreign investment. Relatively low wage and 'non-wage' costs and a nascent economic recovery make the UK an attractive location for serving the European market.