Free Trade makes sense

Jane Kelsey, Professor in the Faculty of Law at Auckland University and as ardent opponent of free trade as one might hope to come across has an article in the NZ Herald today entitled ‘Free trade deal may not make sense in these hard times‘, after 4 largely irrelevant scene setting paragraphs, the ground could have been traversed in one paragraph, but there were some inferences to be made, she writes:

The careful stage management of announcements on free trade agreements is not new. But the US decision should encourage us to look beyond the simplistic assumptions that the more free trade agreements we sign, the better off we will be, based mainly on some fanciful modelling of the gains to agricultural exporters.

We in New Zealand stand to learn a lot from the debate that is unfolding in the US under the new administration.

The inference being that by looking to the USA we will learn the error of our ways. There is a delicious irony in this comment from a left wing academic that we in NZ can learn from the US. When normally there is a visceral anti-American stance from the NZ left.

Kelsey writes:-

There is a second, ideological impetus for the deferral, which reflects the tide turning against the neoliberal model of globalisation. Fifty-four members of the House of Representatives, including many senior politicians, sent a letter to the new President dated February 26, 2009.

They voiced their opposition to “more of the same” agreements promoted by earlier administrations. In calling for a halt to numerous free trade negotiations they singled out the Trans-Pacific Partnership.

It would be foolish to dismiss their opposition simply as resurgent protectionism for US agriculture and industry. Their list of concerns about the broad compass of these agreements echoed those expressed by Obama during the election campaign.

They include over-reaching privileges for foreign investors and their right to take governments to international arbitration; service sector privatisation and deregulation; limits on government procurement; and inadequate labour and environmental protections

On a slightly cynical note, has Kelsey ever come across a tariff or trade barrier she dislikes?

So let us consider some counter arguments. Nigel Lawson writing in the FT commented:-

there is another lesson of the 1930s. It is that although capitalism survives it is capable of retreating behind a protectionist shell, at great cost to global prosperity. This is a real danger today. The “Buy American” provisions in President Barack Obama’s fiscal boost are an ominous sign. The impulse to resort to protection when economic hardship suddenly strikes is, of course, always present. But there is today a dangerous new factor which magnifies the threat. The leaders of some of America’s largest corporations have already joined up with organised labour (the AFL-CIO) to urge Congress to impose tariffs against imports from countries (such as China, for example) which are understandably unwilling to bear the heavy costs of an obligation to curb their carbon dioxide emissions. There is considerable support in Europe, notably within the European Commission and in France, for a similar approach.

It is essential, both in the US and in Europe, that this is resolutely rejected. The first and most important requirement for the future of capitalism is the preservation of globalisation, and the massive benefits it confers on mankind, in particular in the developing world. There are, inevitably, costs of globalisation; but they are hugely outweighed by the benefits. So resistance to protection, whatever arguments may be used in its favour, must be rigorously maintained. Nor is this an exclusively economic argument. It is a moral imperative, as well. Moreover, a trade war with China could well have unpredictable, and potentially highly damaging, political consequences.

Indeed one of the arguments for globalisation is that the linkages and inter dependence created tend to mitigate against armed conflicts. Mitigate, not eliminate.

Peter Mandelson writing in The Times:-

A crisis invites us to think the unthinkable. As the Prime Minister rightly argued before the US Congress two weeks ago, there is no conventional thinking that should be so ingrained that we are not willing to test its assumptions in the search for solutions to the credit crunch and the rebuilding of global growth.

Hence the siren song of the protectionists from both the left and the right, often cloaked in the rhetoric of nationalism. Often giving shelter to some very nasty racial and religious under-currents. Witness today’s news from Australia about jobs for non residents and some statements here about jobs for New Zealanders.

Mandelson continued:-

So what about free trade? Running through the preparatory discussions for the London Summit in April is the explicit assumption that ensuring the global trading system remains open through the downturn is an imperative and a priority. Free trade sceptics will argue that this is an ideological blindspot. But the basic case for open trade has not been damaged by the credit crunch, and it remains central to any chance of a sustained global recovery.

Lawson and Mandelson both make the above point.

Kelsey, from the other end of the spectrum writes:-

The indefinite postponement of these negotiations reflects a move within the US to rebalance trade and globalisation policies. The rejection of the free market model recognises the urgent need for governments to address a tidal wave of financial and industrial collapses and skyrocketing unemployment, social distress and deepening poverty.

That action cannot be dismissed as “protectionism”; it constitutes responsible government at a time of crisis, irrespective of what free trade rules say.

This is drawing a very longbow and is not supported in reality.

In fact as Mandelson went on to write, in defence of free trade:-

The evidence is sitting around the G20 table. There is no G20 country that has not benefited from the expansion of trade and the creation of a global economy in the 20th century. Open trade has driven the rising levels of global prosperity that have defined the two decades leading up to the credit crunch. The growth of trade allowed countries and their companies to specialise and compete for sales globally rather than just in their home market.

NZ has for example benefited massively from this.

Then Mandelson makes two critical points:-

By allowing developing countries to become part of global production lines supplying developed world markets, it drove the growth that has lifted more people out of poverty more quickly than ever in human history. As they grew, these economies created demand for imports from the developed world in turn.

It is this massive demand engine that is the basis of global prosperity and that has been stalled by the credit crisis, not least because the crunch has dried up a lot of the temporary credit that finances 90 per cent of international trade. The fundamental challenge facing G20 governments is getting that global demand engine turning over again. Rebuilding demand, and transmitting that demand throughout the global economy, will both require an open trading system.

Kelsey seems to ignore these factors completely.

Mandelson then noted, and Adam agrees whole-heartedly,:-

It is the importance of trade in driving recovery that is the most important lesson of the 1930s. By creating a tit-for-tat spiral of closing markets, the retreat into protectionism in the decade after the crash of 1929 put a structural check on economies trying to return to growth. It dismantled the engine, notionally in the attempt to fix it.

Has Kelsey not learned from history. The deleterious impact of Smoot-Hawley for example on which Adam has posted previously. It is quite clear that a number of US politicians have not learned from their own past history. Apart from anything else it can be argued that the Great Depression was a major contributory factor, along with the provisions of the Versailles Treaty to the rise of Hitler and the start of WWII. For those who disagree note the rise in nationalist political parties in a number of countries.

Mandelson makes a call for completion of the Doha Round, whilst Kelsey wants to take time out for a cup of tea. Peter Mandelson writes:-

Representing 90 per cent of all global trade, the G20 should renew their Washington pledge of last November not to erect any new barriers to trade or investment.

G20 leaders should commit to completing a Doha world trade deal as a matter of urgency, which, by locking in tariffs in the global economy at today’s levels or lower, would strengthen world trade regulation to everyone’s benefit. They should commit to strengthening the capacity of the World Bank and other financial institutions to bridge the trade finance gap for developing countries. They will condemn protectionism as bad for their own economies and bad for the global economy. They have to mean it.

Keywords are that last sentence above.

Mandelson acknowledges that the free trade system as it stands is not perfect:-

Free trade has always had its critics, and they have often had an important case to make about fairness. Intelligent criticism over the past half century has pushed the defenders of free trade to acknowledge that it is not a development panacea. While it produces huge benefits for consumers and wider economies, it does not come without costs for industries exposed to greater competition. Open trade must be flanked by policies that help workers to adapt to change and that enable the poorest countries to compete fairly with their more advanced trading partners.

The growth that comes with rising trade, especially in the developing world, has to be sustainable and properly managed.

It should be noted that much of the US criticism which Kelsey seems to approve of, is in fact economic nationalism, cloaked in rhetoric about fairness and labour rights. When in fact the reality is that the US wants market entry on it’s terms and seeks to restrict everyone else in their ability to compete.

Mandelson concludes:-

But the principle of open trade itself was not the problem and it is a necessary part of the solution. Whatever orthodoxies might need rethinking after the credit crunch, the value of open trade is not one of them.

His argument is not perfect, but Adam confesses that he prefers the approach of Mandelson to that of  Kelsey.

To finish let us return to Nigel Lawson:-

That capitalism has been shown, in practice, to be endemically flawed should come as no surprise. That is the nature of mankind. What is more important is that history, notably the history of the world after the second world war, has demonstrated beyond dispute that every other system of economic organisation is far worse. So capitalism both deserves to survive, and will survive, just as it did after the even greater economic disaster of the 1930s.

Adam agrees and is firmly of  the opinion that free trade is an intrinsic and critical part of the mix.