<<<	articles
Trade and development: The case for unilateralism Samuel Brittan Contribution to Globalisation: a liberal response, CentreForum London September 2007 When I was asked to contribute this chapter I was initially reluctant. Not for any lack of sympathy for the objectives of the volume, but because trade negotiations and the associated institutional structures such as the World Trade Organisation and the various attempted regional common markets and free trade areas constitute a highly specialised subject on which I have little expertise and could easily commit many gaffes. But on second thoughts I concluded that this would be a cop-out. For my fundamental instinct is that the exponents of what Razeen Sally has called neoliberal institutionalism have got it wrong. The removal of barriers to imports and direct capital flows is a benefit to, and not a concession by, the country undertaking it. If others follow suit so much the better for all concerned. But that is not the heart of the matter. When the 19th Century Prime Minister Robert Peel repealed the Corn Laws in 1846 - only to be disowned by his own Tory Party - he did not wait for other European countries to dismantle protection. If he had, his successors would still be waiting today. In the post World War Two period, Ludwig Erhard, widely regarded as the father of the German economic miracle, followed his dismantling of internal price controls by making a start on removing or reducing import barriers without waiting for international negotiations to get going. A similar route has been taken more recently by some emerging economies in Asia and Latin America. It is true that the great Liberal figure Richard Cobden negotiated in the 1860s a trade liberalisation agreement with France at the request of the then Chancellor of the Exchequer, William Gladstone. Both of them believed that it was our business to look after our own tariffs; but they were assured by French sympathisers that there was no other way that the French tariff could be altered in the direction of Free Trade than through a commercial treaty with England.** His main motive however was to improve Anglo-French relations which were at times threatened by the bombastic attitudes of Lord Palmerston the British Prime Minister. Whenever I talk along these lines in front of Foreign Office or DTI officials a familiar look comes into their eyes. There he goes again, ascending into the stratosphere, miles removed from anything going on down below. But their dismissal should not be taken at face value. A whole industry of trade negotiation has developed whose interests would be threatened by a more unilateralist approach. Even Ministers and officials who claim to be free traders at heart feel uneasy at giving away something for nothing. Similar vested interests have developed among economists and commentators who regard themselves as trade experts. The case for free trade has suffered from becoming a specialist area divorced from the general case for competitive markets. The basic argument for free trade is that for free exchange. If one Robinson Crusoe discovers another and can increase his living standard by exchanging wool for wheat, he should do so rather than attempt self sufficiency. The subtlety is that he still gains even if he can grow both commodities at less cost than his neighbour on the other island. The exchange is worthwhile so long as there is a difference in the ratio of costs for the two commodities. The above is sometimes known as the static case for free trade, remembering that static is a descriptive word and not a term of abuse. In today's world, however, the dynamic case is probably more important. This is that the competitive blast provided by the availability of cheaper or better supplies from abroad can be a big stimulus to the improvement of domestic industry. So can the inflow and outfow of capital across the exchanges. The associated transfer of technology and management skills may be even more important than the financial flows themselves. Some businesses will also benefit from the economies of scale that international exchange makes possible, although this last point is often exaggerated, especially by businessmen. In any case it is the hard evidence from many on the ground studies showing that developing countries open to trade and direct foreign investment did much better those that went in for import substitution that persuaded many economists in the World Bank and elsewhere, who were by no means instinctive free marketeers, of the benefits of a liberal approach. Of course these competitive aspects can bring hardship to the losing companies and their workers. But this is no different to the hardships experienced from purely domestic change, for instance when the handloom weavers lost out to the power looms or when old fashioned journalists are threatened by online technology. The same remarks about the need for retraining and social security floors apply whether the threat comes from internally or externally generated changes. Migration is fortunately the subject of a separate chapter, but it cannot be ignored altogether here as imports from new producers, investment in such countries and inflows of labour from them are partial substitutes. Free immigration almost certainly increases the joint welfare of the labour exporting and the host country. But how about the host country on its own? An inflow of workers increases both productive capacity (as the Bank of England has taken to reminding us) and the number of bodies to be fed, clothed and housed. So at a first approximation, the effects are neutral. But at a second approximation they are positive. For the free movement of labour promotes international specialisation in a way similar to the free movement of goods and services. Unfortunately there is a third level to consider. Hard experience shows that there is a limit, which varies with time and place, to the the speed with which a country can an absorb a rise in a culturally alien population without a social upheaval. Allied to this is the pressure that any population increase imposes on an already crowded small or modest sized industrial country. Until recently I would have been prepared to take these anti-liberal force head-on. But events in the formerly highly liberal Netherlands, which has experienced assassinations, a ferocious anti-immigrant backlash and the forced departure to the USA of a distinguished African opponent of Moslem fundamentalism, have made me draw in my horns and argue merely for the freest immigration policy with which the political authorities of the host country can get away. What are the semi-respectable arguments against Free Trade? The most fashionable is the so-called new trade theory based on dynamic economies of scale. The basic idea is that the products in which a country has a comparative advantage are not just a reflection of natural resources but of past history. The Finnish electronics firm Nokia became a world leader because it got there first and can now produce on a scale which competitors in other small countries would find difficult to emulate. On reflection, this is only a slightly more sophisticated version of the infant industry argument in favour of temporary protection for an industry which will be able eventually to stand on its own feet. This argument has been so overused that its author, John Stuart Mill, the 19th Century Liberal political economist, came to regret that he had ever published it. Even some of the new trade economists are against such protection on the grounds that governments are bad at picking winners and in practice use such arguments as an excuse for protecting politically influential lobbies, usually of old established declining industries. Another fairly old argument against free trade is based on the potentially beneficial effects on the terms of trade if a country can exploit any monopoly power it may have in certain products. The first thing to note is that this is an argument for reducing the size of the trading sector below what it would be under free market conditions. The result could be achieved just as effectively, and a good deal more honestly, by a tax on exports as by a levy on imports. Such policies are of course open to retaliation and could leave many or all of those who engage in them worse off as as a result. Until recently it was difficult to find examples of terms of trade effects other than the hoary pre-World War Two case of Brazil dumping its coffee into the sea. But an up to date and illuminating example now exists in the form of OPEC, the Organisation of Oil Producing Countries. If members could really get their act together they could restrict production and raise oil prices to the discomfiture of the West. But they have rarely been able to do so. Would-be cartels have always suffered from the in-built incentives to members to break ranks to increase market share. In addition of course the wiser OPEC members are well aware that attempts to force up the oil price are certain to add to the many other influences tempting consumers to economise on oil and search for substitutes. The recent flurries in the oil market have reflected the impact of rising demand on supply constraints which have little to do with OPEC. The immediate response in the 1950s, 60s and 70s to an advocate of unilateral tariff cuts or other reductions in trade barriers would have centred on the effects on the balance of payments. Anyone wise enough no longer to be worried about this aspect can (as Miss Prism would have said in The Importance of Being Ernest) leave out this and the following two paragraphs. The fact is that the balance of payments automatically balances under a floating exchange rate. If the demand for foreign currency increases due to increased imports or for any other reason, the sterling exchange rate moves to a level at which the demand and supply for it come into equilibrium. This can involve devaluation - which is by no means certain, as the financial markets might interpret the liberalisation as a sign of confidence encouraging them to move into sterling. A devaluation might in turn lead to worsened terms of trade if the unfavourable effect on import prices exceeds the boost to export ones. In other words the balance of payments and foreign exchange arguments are the same as the terms of trade ones, with all their weaknesses, and not an additional argument against unilateral liberalisation. I remember Milton Friedman pointing this out to me very forcibly when he was teaching me on a sabbatical at Cambridge and I was vainly trying to defend the balance of payments preoccupations of British Governments. There is a slightly more sophisticated consideration sometimes advanced by business lobbyists along the following lines. Nowadays direct trade payments across the exchanges are dwarfed by vastly greater capital flows. So we cannot rely on the exchange rate moving to offset the cost of extra imports. As a matter of fact the disproportion is frequently exaggerated. For a large part of the movements across the exchanges are extremely short terms ones reversed within days or even hours and therefore not on all fours with trade or long term capital movements. But I do not need to rely on this contingent aspect. Suppose that sterling does not dip in the way required to balance trade flows, possibly because of the positive confidence effects already mentioned. So much the better. For then we come near to enjoying the proverbial free lunch: increased absorption of foreign goods and services without having to sacrifice more British products to pay for them. Of course this bonus may not last. But at least time will have been gained for British producers to adjust to the competitive challenge from abroad. When setting out my stall at the beginning I was careful to speak of the benefits of the unilateral dismantling of barriers to trade and direct capital flows. How about the short term financial flows which used to be known as hot money? They also supply extra resources while they last; and, unpopular though it may be to say so, provide valuable health warnings when they depart and put downward pressure on the exchange rate. The large current payments deficits which have been incurred by the USA, and to a lesser extent other English-speaking countries, were initially financed by direct investment in business enterprises. But later the emphasis shifted into financial movements, including the purchase of dollar assets by the central banks of China and OPEC countries. For all the huffing and puffing they provoked among the righteous, they proved highly useful, in conjunction with the entirely non-mysterious drop in international real long term interest rates, in warding off the otherwise very real threat of a world-wide Keynesian slump earlier in this decade . I have little idea what proportion of these inflows will prove permanent and what proportion will go into reverse. But neither have the world’s so-called monetary authorities. I would rather rely on the financial markets, with all their imperfections and subservience to fashion, than on the ponderous attempts of governments to reach a consensus and the increased politicisation of international economic relations thereby involved. At the expense of a little untidiness I would make a partial exception in the case of some developing and former Communist countries. Knowledge of their affairs can be very skimpy in the financial centres of the West and bubbles in their currencies and securities easily develop and burst. The obvious example was the crisis of the late 1990s in Russia and parts of East Asia where a lot of fashionable short term investment was then followed by a stampede to get out. The worst aspect was the indiscriminate nature of the outflows, which affected innocent countries which were merely neighbours of those that triggered the panic. The moral is not that these countries should attempt to fine tune capital movements by controls on inflows. It is rather that they need to give thought to the sequence of economic liberalisation, with capital movements coming nearer the end than the beginning of the process. A more fundamental approach to the problems of emerging and developing economies is to suggest that there are far too many separate currencies in the world and that many of these countries would do well to adopt one of the existing international monies. This point is made by Ben Steil in the June 2007 issue of Foreign Affairs (One World, Too Many Monies). It is important that they should actually use such international currencies and not just establish a currency board theoretically based on them. If they do the latter, they risk repeating the experience of the Argentine whose experiment crashed. Steil suggests that the lesser world economies should adopt the dollar or the euro. He does not mention the yen or sterling. My own view is that, whatever a very small country like Ecuador (which has adopted the dollar) may do, bigger economic players are most unlikely to officially adopt other currencies. A more likely development is for the dollar and the euro to become increasingly used in international trade and capital movements, leaving domestic currencies for lesser internal purposes. This would be a partial return to the pattern of the Middle Ages when the Ducat and the Florin were dominant international monies existing side by side with a multitude of local currencies, all theoretically based on precious metals. The most serious adverse aspect of free trade and payments is its potentially adverse distributional one in the industrial West. The world is not yet one single economy, but it is moving in that direction. The integration of nations such as China and India into it is the equivalent of multiplying severalfold the amount of unskilled labour relative to the supply of skilled labour and capital. Western economies as a whole benefit, but downward pressure is exerted on wages of the less skilled. The words less skilled are moreover a term of art as in this context they can apply for instance to many types of computer work about which many Indian operatives in call centres can teach their Western counterparts a thing or two. Some orthodox economists seek to minimise these effects and assert that the downward pressure on Western unskilled wages is due to technology. Their main evidence is that imports from low wage emerging countries are still a small proportion of Western consumption. This is to overlook the effects of potential competition on prices and wages - what competition economists now often refer to as contestability. An alert British textile manufacturer is not going to wait until he is forced into bankruptcy before adjusting his prices and wages, as well as products, to competitive threats. It is ironical that anti-globalisation agitators claim to speak on behalf of poor countries, whereas any adverse effects are likely to be felt inside the rich ones. The tendency to equality in worldwide wages, at least among those with comparable skills, has always been more welcome on the Left as an aspiration than its potential realisation in practice. But enough of these debating points. The conventional response is to say that US and European industry needs to move continually upmarket, developing new products and processes, to maintain its position. There are limits to how far this can go. Not everyone can be retrained to undertake high technology jobs. Moreover, is it really desirable that everyone all the time should be engaged in non-stop reskilling (misleadingly called lifelong education). What is this world if full of care, we have no time to stand and stare? In fact many of the future jobs are likely to be low tech in areas such as gardening, child minding or home helps; but pay in these areas will also be subject to downward pressure from those displaced from traditional activities. The Western response should surely be to keep its own frontiers open to gain the benefits of trade but redistribute income to those who would otherwise lose out. My longtime slogan, coined before the word globalisation was invented, has been Redistribution yes, equality no. Surely Scandinavian experience, which combines very internationally open economies with Welfare States shows that such a response is in principle possible. The Opposition parties in Britain are wrong to sneer at Gordon Brown’s tax credits which, whatever the errors of implementation, point at least in the right direction. There is one further point to be made about the orthodox policy framework. Institutions such as the WTO will accept full-blown free trade agreements such as the European Union or the North Atlantic Free Trade Area. But they frown upon more limited regional agreements that do not establish complete tariff free zones. Many international trade theorists share the bias against limited agreements, pointing out that they may simply divert imports from one source to another without necessarily favouring the least cost supplier. Such arguments however equally apply to free trade areas and common markets which fall far short of global coverage and it seems odd to direct so much indignation at halfway houses. Limited free trade agreements may be better than none at all and they could be especially valuable if the world moves in to a protectionist direction, which unfortunately cannot be ruled out. There is a more parochial aspect. The UK Government no longer has autonomy over trade policy and only a very limited say over policy towards capital movements. Its role has been taken over by the EU which requires a consensus among members. The arguments of this chapter can therefore be regarded as directly towards the EU as a whole rather than any single member. There is certainly room for improvement. EU agricultural protection has been estimated by Dr. Sally at a tariff equivalent of 55 pc.; and services of 15-25 pc. There is high protection in clothing-related products. Backdoor protection flourishes in the form of suspiciously high technical and food safety standards. A forthright free trading approach by the UK and a few of the EU newcomers could help swing the balance against the more protectionist impulses of what Rumsfeld called Old Europe and thus lead to a somewhat more liberal stance in trade negotiations such as the Doha round. Development I have not left much space to discuss the development side of my brief. In a sense I do not need to. For there is not one set economic principles for the developed industrial world and another for emerging countries. We still need the old cliché that trade is more important than aid. But good government, the rule of law and established property rights are more important than either. The exact nature of the property rights required is a topic that needs more attention than it often receives. Some developing countries’ wealth is more concentrated than in the West, despite all the billionaires in the latter. It is unreasonable to expect these countries to eschew all redistributive taxation. What is important is that whatever the property rights are, they will be enforced by the courts and the government. In addition, any redistributive policies should be broadly predictable in the long term. Nothing is more inimical to investment than doubts about whether it will be subject to confiscation or whether the owners will be able to repatriate the profits. Of course Western policies such as the Common Agricultural Policy, which hit the Third World particularly badly, are morally indefensible, apart from hurting Western consumers as well. But Third World producing countries can do a lot on their own. Some 40 pc of their trade is with each other and everything said about the benefits of unilateral liberalisation applies to them. It is particularly important to keep a clear head on aid and avoid being swayed by guilt feelings over past imperialism (easier in my case because my ancestors in eastern Europe did not oppress any natives). One thing never explained by the aid campaigners is how England managed its Industrial Revolution without any aid whatever and how the East Asian tigers and more recently China have forged ahead with very little. Africa, which has received far more aid in relation to population than any other area, contains the greatest proportion of basket cases. The case for aid is that it is an addition to the resources available for development. On the most favourable assumptions it is only a modest addition to what a developing country must provide from its own resources. As against this government to government aid can help keep in power incompetent or thuggish regimes. One problem is that money is fungible and funds can be diverted from projects which indigenous governments were originally going to finance themselves to arms purchases or prestige undertakings such as over elaborate airports. Individuals wanting to help the world’s poor should seek out charities that concentrate on doing things which would otherwise not be done at all. The same applies to governments and aid agencies, more difficult though it is to apply in their case. The fundamental thesis of this chapter is that globalisation is equivalent to a large part of the world becoming a single market economy. The main difference is that in a domestic market economy there is a national government that can cushion the impact of economic change or redistribute income towards the losers - admittedly an idealistic account of what they in fact do. There is no such international government. Nor is there likely to be and it is wishful thinking to suppose that either international aid or institutions such as the World Bank can supply the deficiency. My contention is that a tit-for-tat negotiating attitude to trade liberalisation will not in practice be any kind of substitute for these cushioning forces. The use of such arguments mainly gives a veneer of respectability to policies designed to protect the vocal local interest groups and have nothing to do with rational policies of either cushioning or adaptation. * Classical Liberalism and International Economic Order, Routledge 1998. ** John Morley, The Life of Cobden, p.703
<<<	articles
Published on www.samuelbrittan.co.uk Contact - samuel dot brittan at ft dot com