Monday, 31 July 2017

In all this trade talk let's not forget that we're rich because we're free

It starts like this:
At the end of last year, a news story was published with huge implications for ‘international development’: a drop-off in commodity prices through 2016 dashed hopes that the world’s poorest countries could escape extreme poverty by the end of the decade.

The story raises a critical question directly linked to what Brexit will mean for countries of the global South and the reality of what ‘free trade’ and protectionism mean in the context of economic development – a reality brought into sharper relief in recent weeks by a long-running spat over trade at the G20 and Liam Fox’s focus on signing tariff-free trade agreements around the world.
And then goes rapidly down hill. The thing that beats me is why people who tell me that they 'care' about the world's poorest are so trapped in the belief that more open trade is making the 'world's poorest countries' less well off. Let's start with the facts:
The world’s achievement in the field of poverty reduction is, by almost any measure, impressive. Although many of the original MDGs—such as cutting maternal mortality by three-quarters and child mortality by two-thirds—will not be met, the aim of halving global poverty between 1990 and 2015 was achieved five years early.
The main reason for this wonderful decline in world poverty is the recognition that open markets, more free trade, property rights and good economic governance are the necessary prerequisites for reducing poverty. Bear in mind that the natural state of humankind is grinding poverty. Up to around 1700 - a little earlier in Holland - nearly everyone lived and had always lived in what we'd describe today as absolute, abject poverty. Since that time, courtesy of us recognising that if you allow people to prosper by innovation the whole of society benefits, average incomes in the UK and other developed nations have risen - in cash terms - by a factor of at least sixteen. If we take account of what that innovation means - the thousands of things that make our everyday lives better ("dentistry" as P J O'Rourke put it) - then that factor of sixteen is truly much higher.

Now free trade isn't the reason for that growth in our living standards (nor, for that matter, is the shocking colonial exploitation of the 100 years from roughly 1850 to1950) but it is one of the things that contributes to the, sadly belated, opportunity for those countries that missed out on the first economic revolution to secure the sort of living standards even the poorest in Britain enjoy. And much of it will be about those institutional reforms, the list of things governments shouldn't do, enabling people to do business (again - property rights, good economic governance, free markets). But trade matters and the more free that trade the better.

So we don't want this sort of nonsense:
But the UK must go further. Brexit trade policies will do little for longer term economic change in the South unless poor countries can export processed or manufactured goods with similar preferential schemes, or, conversely, use tariffs to shield emerging industries from international competition. On top of this, the Northern-led agenda of using trade deals to privatise public services and grant corporations legal powers to sue states outside national jurisdictions offers little in the fight against poverty.
I agree the UK must go further and absolutely agree that the sort of protectionism that forces developing countries into exporting raw produce rather than processed goods (as I once asked, 'why aren't we eating Ghanaian chocolate bars?') is a bad idea all round. But the next part - tariffs and import substitution - is a return to the days before 1980, before the dramatic drop in the world's poverty, before the triumph of what's now called neoliberalism. And being able to go to an independent court for arbitration is a protection not an affront to liberty - without giving people and businesses the power to challenge government there is no check on arbitrary decisions by that government.

I also agree that 'trade deals' and especially bilateral trade deals are not free trade. Indeed the fact of the 'trade deal' between two governments (or groups of governments) is a reminder of the degree to which trade is not free. For sure a lot of so-called trade deals are really about regulatory harmonisation (sweetened by public procurement bungs in both directions) but they do not represent the ideal of allowing, in a well-governed economy, people to trade freely. This means, since trade is about consumption rather than production - imports not exports, allowing people to purchase the things they want with their own resources from whoever, wherever they wish.

Over the past 40 or so we've not talked much about trade. There has been occasional bits of political posturing about the 'balance of trade' and a great deal of macho talk about 'the global race' and 'competition' between nations but not much about actual trade. Or indeed the fact that it is nonsense to, for example, argue for a ban on live animal exports without realising that there's no difference between taking a truck load of sheep from Canterbury to Cannes or from Basingstoke to Aberdeen (at least not for the sheep). And a thousand other examples of how doing business - buying and selling, securing mutual benefit, adding value - shouldn't be different if the supplier is in Ulan Bator or Uttoxeter.

The result of us not talking about trade is that people begin to believe this sort of nonsense (completely unsupported by economic history):
...this obscures the fact that rich countries only pursued free trade after they ascended to the peak of the global economy; they used protectionism to ensure that domestic industries grew ahead of being exposed to competition, before “kicking away the ladder” they used to get to their dominant positions.
Not only does this line not make sense (if protectionism worked then there was no ladder to kick away) but it really isn't true. In the UK you only have to look at the 30 year long row over fixing grain prices with Corn Laws or the rows about 'Empire Preference' to see that there's nothing new at all about political arguments between mercantilists and free traders. And most of the time - witness steel, food, cars, even second-hand washing machines and old clothes - the protectionists, the mercantilists, win the argument.

Brexit really does mean a chance to do it differently. I appreciate that the absolutist position (remove all the tariffs on stuff we buy) may be correct in theory but we should remember it also removes the opportunity for reciprocity by governments - takes away a little of their power. Meaning it won't happen. But, since most of the barriers to trade are regulatory (or outright bans as is the case with much of European trade policy), the presence or otherwise of tariffs is pretty marginal - we lose a little by scrapping them but it allows us to get focused on improving economic governance in developing countries by helping them improve their standards of regulatory enforcement and compliance.

Free trade is a very good idea but the regime we have in world trade today is not free trade. We're a lot better than we used to be - the GATT Agreements and their child, the World Trade Organisation, helped make this the case as did the growth in international regulatory co-operation spawned by GATT - but the focus remains on the inter-governmental fix, on grand folk meeting in summits to decide whether or not some women somewhere will be allowed to sell you cocoa powder, knitted comfort blankets or large amounts of steel. If we can change this then we'll have a more free, more happy and above all richer world - all of it.


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