Reflections on recent events, plus the occasional fact
free rant unfiltered by rational argument.
Free-trade is good, right? You wouldn’t think so listening to Donald Trump. Depending on your viewpoint he’s affirmed himself as the anti-trade president. In a bizarre twist, China is now seeking to defend ‘free-trade’. If that assessment is true, it’s a remarkable reversal of roles.
The free-traders claim long-term positives outcomes across a whole host of social metrics. Less war, better life expectancy, greater wealth and even fairness. These are all cited as outcomes of free-trade. While we debate the merits of international trade deals, these folks see the benefits.
To them down the sweep of history, free-trade helped drive the great escape from poverty. This phenomenon defines the modern era. Along with the industrial revolution, trade drove that process. Granted, along the way there was a lot of nastiness, with disastrous outcomes for some.
At its fundamental, economic activity is a mutually beneficial process. It’s a positive sum game. I exchange my talents for money that allows me to buy food, a home and medical care. Someone provides those services to me, for which I pay. This allows specialisation and expertise to develop across human societies and borders. I don’t need to know how to grow rice because someone else does that. Likewise, the rice grower doesn’t need to know my job. He earns his money from providing to me.
At a local level, informal rules may be enough to guide this process. When you go international, it gets complex. That doesn’t distract from the fact that free-trade has the potential to make all humans richer in the end. Plus, and this is the crux, its claimed it makes us nicer people.
As economist Ludwig von Mises put it, “If the tailor goes to war against the baker, he must henceforth bake his own bread.”
Academic research is pointing to free-trade reducing the prospect of war between nations. The last 50 years has been a remarkable period of calm. At the same time trade has expanded exponentially. The cause and effect are disputed by some. Others feel that business is a significant factor in promoting world peace.
The great escape from poverty started in the 1800s with Britain's industrial revolution. Trade then gave the process a kick up the behind to spread out across the world.
In 1976 as one wag put it “Mao single-handedly and dramatically changed the direction of global poverty with one simple act: he died.” At that moment China shook off its inward-looking policies, opened up and started to trade. In the process, and in no time, it lifted hundreds of millions from poverty. Its a lesson in the power of market economics to generate wealth, food and a middle class. China in 2008, after 20 years of the open door policy, attained the same per capita income of Sweden in the 1960s. Breathtaking.
Planned economies without exposure to competition bring stagnation. Then in turn, if unchecked, famine. That’s the lesson from history.
Even so, free trade is not without a downside. Some workers toil in harsh conditions, while the environmental impact can be terrible. The anti-free trade lobby cites these adverse effects. In particular job loss, the economic impairment to countries, and the ecological damage. As underdeveloped countries cut costs to gain a price advantage, workers in these countries face low pay.
Unions have criticised free-trade agreements as harmful to workers. They also see such contracts as contributing to a loss of jobs. To them while workers suffer, the clout of multinational corporations increases.
Putting all these factors together, these critics of free trade fall on the negative side of the equation. To them, free-trade has terrible outcomes. That helps explain much of the resistance to free-trade. No doubt there is some truth in this negative view. But nobody can ignore the positives.
It seems clear that free-trade improves efficiency and innovation. Over time, free-trade works with market forces to shift workers and resources to more productive uses. This allows efficient industries to thrive. The results are higher wages and a dynamic economy that continues to create new jobs and opportunities. In the short term, some workers suffer, and industries disappear. That’s the painful part.
Most of all free trade drives competitiveness. It requires businesses and workers to adapt to the shifting demands of the broader marketplace. These adjustments are critical to remaining competitive. Hiding behind a protectionist barrier produces more expensive goods and services.
This brings us back to Trump and his spat with China and others. Some of what is vexing Trump is the perceived lack of fairness in the trading systems. As regards China, getting market access remains a challenge. Thus China’s proclamations on free-trade are disingenuous when protection of massive state-owned enterprises persists. These protected industries, cannot sustain themselves without reforms. Inefficiencies remain unchallenged when protected from competition.
On the flip side, what is the human cost of dismantling these entities by exposing them to market forces? These could be terrible, with the potential for social disorder. You can, thus, understand China’s concerns and its incremental approach.
I’m no trade expert, far from it. My knowledge of the intricacies of its mechanisms is sketchy at best. Yet, I know this much. I’d rather have the baker making bread to sell to his neighbour than bullets with which to kill. A simplistic view I know, but it covers a pivotal point. The record is clear. In the long-term, free-trade on a level playing field is mutually beneficial. Unfortunately, as always, the devil is in the detail, and much of the current shenanigans is all detail.
I'm sure we will come through to break bread together.
Walter De Havilland was one of the last of the colonial coppers. He served 35 years in the Royal Hong Kong Police and Hong Kong Police Force. He's long retired.