What free trade has achieved - Politicsweb, 28 May 2017

These giant vessels have played a major role in one of the great success stories of recent years, enabling production of various goods to be relocated from rich to poor countries. As a result, hundreds of millions of people in China and elsewhere in East Asia have been able to start working themselves out of poverty - so much so that rising wages in some of these countries have caused production to be shifted to even poorer places, such as Vietnam.

 

By John Kane-Berman 

Trade liberalisation is the great unsung hero of the global economy

Some months ago the Wall Street Journal reported that 862 container ships were being broken up in Pakistan, Bangladesh, and India. The good news is that this task was being carried out in three poor countries. The bad is that it was happening at all.

These giant vessels have played a major role in one of the great success stories of recent years, enabling the production of various goods to be relocated from rich to poor countries. As a result, hundreds of millions of people in China and elsewhere in East Asia have been able to start working themselves out of poverty - so much so that rising wages in some of these countries have caused production to be shifted to even poorer places, such as Vietnam.

Of course, millions in China and elsewhere are still very poor. But whereas more than 88% of Chinese lived below the lowest poverty line in 1981, the proportion today is in single digits. Economic liberalisation in China, combined with the lowering of trade barriers in the US and elsewhere, enabled China to export its way to greater prosperity. The same is true of other countries in Asia.   

The turning of the giant container ships into scrap metal symbolises the great risks that now face the global economy thanks to rising protectionist pressures, notably in the US, which has led the global movement towards trade liberalisation since shortly after the end of the Second World War. President Donald Trump's withdrawal from the Trans-Pacific Partnership with 11 other nations is a serious blow to their hopes of gaining easier access to the enormous American market. It will probably undermine their attractiveness as locations for companies building factories to export into that market.

Nor is Mr Trump the only protectionist now running a major country. His "buy American" attitude is echoed by the calls of the new French president, Emmanuel Macron, to "buy European".

More protection means less trade, which translates into lower economic growth. This, in turn, implies a slowdown in the rate at which the incidence of poverty around the world has been steadily reduced in the last half century.

Rising protectionism is not the only threat facing the poorest of the poor. Their plight is often overlooked in the new crusade against "inequality" unleashed a few years ago by Thomas Pikkety. If this causes governments to make economic interventions designed to reduce inequality, the poorest of the poor will be losers if the result of such interventions is lower rates of investment and therefore of growth.               

If cheap transport across the globe in container ships (or by air freight) has been one key driver of the globalisation of production, cheap labour has been another. This has prompted trade unionists and "fair trade" lobbyists to demand restrictions on imports of products produced by cheaper labour. Though their motives may be different, the result is the same: poor countries are deprived of their only comparative advantage in the global economy, which is abundant supplies of unskilled and very poor people.

For such people, the only alternative to being employed as cheap labour is not to be employed at all. Like proponents of statutory minimum wages, "fair trade" lobbyists usually overlook this simple fact.

What the world actually needs is not "fair trade" or protectionism but full-scale liberalisation. This would mean completely free trade based on the assumption that the whole world is a single market. In other words, no tariffs or duties or substitute barriers when goods and services cross borders. This will make for the most efficient division of labour across the globe. It will also stimulate competition, improve productivity, and reduce prices. In addition, it will speed up the process of finally eliminating the worst ravages of poverty. 

*John Kane-Berman is a policy fellow at the IRR, a think-tank that promotes political and economic freedom. His paper Free Trade: A Blessing Reviled is available on this website. His memoirs, Between Two Fires - Holding the Liberal Centre in South African Politics, were recently published by Jonathan Ball.   

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