The free trade sickness

From a new NBER working paper we learn that free trade agreements are like a virus. Yes indeed, FTAs are "contagious" in that countries are more likely to "catch" the free trade bug if a nearby country is already ill. True story... sorta.

Abusing an already over-abused metaphor, the paper mentioned above seeks to explain why new waves of trade liberalization are usually clustered in particular geographic regions.

And you know what? No developing region of the world caught the bug quite as bad as Latin America.

[Developing regions: number of free trade agreements]

One thing to notice: the bug doesn't seem to have been very contagious before 1976. Why?

Well... you see, when the famous British virologist, Dr. Adam Smith, discovered the free-trade virus towards the end of the 18th century it simply wasn't very contagious. Yes indeed, discovered during a brief visit to a pin factory, the virus was seemingly benign and exhibited the potential to improve welfare around the world by causing the infected to divide their labor--but it was very difficult to become infected. Upon further experimentation by Smith's colleague, Dr. David Ricardo, it was discovered that the virus, if capable of infecting entire nations, would cause those infected to specialize in that which they had a comparative advantage in.

Unfortunately, after years of experimental trials, it was concluded that intense and prolonged ideological exposure was necessary for the virus to spread, relegating its existence to the deepest and darkest backwaters of the world economy.

But all of this began to change in the late 20th century when, due to an unknown event, the virus mutated into a highly contagious and extremely dangerous version. During this time countless developing countries fell ill, lowering their tariffs at alarming rates exhibiting a reckless disregard for their national health... and stuff.

Anyway, the moral of the story is that I read dumb academic shit so that you don't have to! Oh, and even frivolous scholarly articles that revolve around silly metaphors sometimes have a grain of interesting information.

The End.

Contagion Time

Ah, remember the good old days, back in the early 2000s, when the certain and ever lasting benefits of "free trade" with the U.S., extolled as a sure route to development-freedom-democracy-and-awesomeness, offered us comfort from the anguish of our fleeting, uncertain and all around unknowable world? Well that was then and this is now.

According to a new study by the IMF, Central American contagion from the global financial crisis is largely due to increased trade integration with the U.S., which was caused primarily by, you guessed it, the Dominican Republic and Central American Free Trade Agreement (DR-CAFTA). In other words, DR-CAFTA countries have become more dependent on U.S. markets and thus more vulnerable to recessions from up north. According to the study:

"A one percent shock to U.S. growth shifts economic activity in Central America by 0.7 to 1 percent... Shocks to advanced economies associated with the 2008-09 financial crisis are found to have lowered economic activity in the region by about 4 to 5 percent, on average, accounting for a majority of the observed slowdown."

Well, there you have it: "freer trade" with the U.S. has amplified the transmission of recessions to Central America. Hey at least free trade agreements still have all those other wonderful provisions on intellectual property, industrial policy, environmental and labor standards and... oh wait, never mind.