11 May 2016

Why free trade works


Free trade and free markets have taken a drubbing in the last year or so. Trade has become a dirty word in the US election cycle with both candidates from the Republican and Democrat parties trying to run as far to the left of each other on trade as they can. Hilary Clinton, once an advocate of the Trans Pacific Partnership (TPP), has withdrawn her support for the agreement. Bill Clinton’s administration passed the NAFTA (commenced during the George HW Bush administration), and the WTO Uruguay Round (here negotiations began during the Reagan administration in 1986). In Europe, a significant group of BREXIT advocates want Britain to leave the European Union, including its core free trade agreement. Even the TPP countries will have difficulty passing any agreement through their local congresses. Throughout the world, a rising tide of nationalism and protectionism seems to have taken root.

The attack on free trade has been accompanied by an equivalent attack on free market capitalism. The financial crisis has led to enhanced doubts about the ability of capitalism to deliver sustainable economic growth without massive inequality. This has led to the rise of numerous parties on the left, such as Podemos in Spain, and fuelled leaders whose message is derived from an anti-capitalist world view, such as Jeremy Corbyn’s ascendancy to the Labour Party leadership in the UK. On the right, isolationist, nationalist parties have emerged whose economic thinking is drawn from socialism – a strong government with some sort of control over the means of production or at least a compliant private sector that does its bidding, such as Marine Le Pen’s Front National in France, or the leading parties in Poland and Hungary. In the stormy confusion that has taken hold, the still, small voice of classical liberalism can barely be heard.

Yet, the combination of free markets and free trade has actually delivered more for humanity than any other economic system. Since the launch of the GATT system in 1947, absolute poverty has been decimated. The trading system has held protectionist impulses at bay and prevented a slide into conflict that, throughout history, has accompanied these same protectionist/nationalist impulses. Global growth increased by 1,000% between the launch of the 1947 trade round and 2001. Between the first century AD and 1913, it grew by a factor of two. Billions of the world’s people have been lifted out poverty. In China alone, hundreds of millions have been added to the middle classes as China has embraced a market based economy.

But something is missing. There is a widespread perception that the economic game is rigged against the average person, and that the gains from trade have been pocketed by a small group who have gorged themselves while little of the benefits have flowed to consumers. And people have reacted to this by saying that the solution is to turn back the clock and stop the relentless drive towards freer trade and freer markets. A smaller group of people who promote government-led economies and heavy regulation have used this feeling to push their own agenda. While the diagnosis of the disease is accurate, the medicine proposed is killing the patient. Global growth has stalled; global trade negotiations have stalled (for the first time since 1947, we have had over twenty years since the conclusion of a global trade round). There is no engine of growth in the world as China slows and India fails to deliver on its enormous promise.

The better solution is to actually address the reasons for the problem. The reality is that we have had only partial reforms from the days of socialism, communism and import substitution. While trade has been opened up, competition inside the border has not kept pace. This has led to the continuing presence of a large number of economic distortions inside the border put there by elites, incumbents and oligarchs in order to protect them from competition from both outside and inside. It is here that progress to lower distortions could have tremendous gains – our data suggests that another 1000% gain in global GDP could be had if all distortions were eliminated – but equally importantly it would be an actual response to the feeling that the game is rigged and somehow unfair.

A world of open trade, where competition on the merits is the economy’s organizing principle (meaning you succeed or fail based on the quality of your ideas and hard work) is a world that delivers growth, hope and opportunity in a sustainable, fair and more equitable manner because it delivers equality of opportunity. In this world, nationalism and protectionism would be pushed back into the shadows as true capitalism — open trade and open and competitive markets –demonstrates its own success and shines out as a beacon of light. In the meantime, proponents of open and competitive markets must make the moral case for markets because of their poverty alleviating power, and must also make clear the immorality of policies that promote the corrosive power of monopoly, distortion and crony capitalism because of their capacity to destroy wealth out of the economy.

Shanker A. Singham is Director of Economic Policy and Prosperity Studies, Legatum Institute and CEO of Competere Group.