Editor’s Note: J. Lloyd Blackwell III is professor of economics at The University of North Dakota College of Business and Public Administration and director of the Bureau of Business and Economic Research. Blackwell can be reached by phone at (701) 777-3357 or by e-mail at lloyd.blackwell@mail.business.und.nodak.edu.

Q. The World Trade Organization (WTO) recently resolved to eliminate all farm subsidies by 2013. The WTO also is pressing for similar reforms in other sectors but is especially targeting high-profile farm support programs such as the U.S. sugar import quota system and European dairy price supports.

What does this mean for the United States?

A. Let's look at the U.S. sugar industry as an example, since beet sugar production is important to the Red River Valley. The December 2005 WTO agreement bans export subsidies for sugar, but since the present tariff-quota remains in place, there is likely to be little or no effect on regional sugar producers, at least not in the short term.

If the tariff-quotas had been removed for sugar as they were for several other products by the latest WTO agreement, the situation would have been much more serious for the Red River Valley. In that case, sugar producers could have expected to have seen prices of sugar decline to approximately the world price, which is much less than the U.S. price. Then it would be expected that American Crystal stock and also the price of beet land would have dropped precipitously. That would have dramatically reduced incomes of beet farmers, and would very likely have put some of them out of business. Beyond that, owners of beet land and American Crystal stock would have suffered major financial losses. All this would have had a rather large negative economic impact in the Valley, but fortunately for this region, it didn't happen this time around.

Q. What is the WTO trying to accomplish and why?

A. I see a call by many poorer countries to be allowed to participate more fully in world markets. When countries protect industries with quotas and/or tariffs, this restricts the supply of product from other countries and keeps domestic prices higher. So other countries can't sell as much as they would like.

Quotas, tariffs, and subsidies all influence who can produce what and how much is traded globally. The smaller countries in the WTO now seem to be more forceful in seeking removal of tariffs, quotas and even subsidies.

Subsidies to domestic producers of exports make it possible to sell more at the world price. If a large sugar-producing country has substantial export subsidies, the world price would fall noticeably. This could push some countries, probably small ones, out of world markets.

Subsidies to domestic production can also be a problem because they increase domestic supply, which means that less would be imported from foreign countries. The WTO so far does not appear to be interested in acting on domestic subsidies, perhaps because this would be seen as interference in internal political affairs of member nations.

Q. We're talking about facilitating freer trade. What does that mean in practical terms?

A. I wish I could say that the world has discovered a principal that has been known since early in the 19th century - the law of comparative advantage.

Comparative advantage was first described by David Ricardo in 1817. Ricardo argued that more goods were available when everybody produced the things they could produce cheapest in terms of alternative goods, regardless of where they lived. The result was that more goods were available in both countries when they had unrestricted trade.

The problem with comparative advantage is the transition from protectionism to free trade. Some previously protected groups of producers may have to produce something that makes them worse off, although the country as a whole is better off. Unfortunately, that's cold comfort to those who don't benefit, and they often bring political power to bear to resist free trade. The relative political power of interest groups has lots to do with how much free trade exists.

The flip side of trade determined by the distribution of political/economic power is when no interest group has power to influence economic affairs on its own behalf. In that case, all trade is unrestricted. This in turn leads to Pareto Optimality, where nobody can be made better off without making somebody else worse off. Without free trade, Pareto Optimality is impossible.

Q. Will we see the WTO negotiations liberate the world from protectionism?

A. I don't even think that the current movement in the WTO is necessarily about comparative advantage. It simply may be that a group of countries sees that they'd be better off if trade barriers didn't preclude their selling more of their products.

But any action that removes trade barriers is at least consistent with comparative advantage. Bottom line? It’s going to be a long time, if ever, before we see total free trade.