I was recently a speaker at a debate at Southwark Cathedral that looked at the issues of free trade and trade justice. The other speakers were Chirstopher Stephens, Chairman of Traidcraft plc and a Civil Service Commissioner, and Hilary Parsons, Head of Corporate Social Responsibility at Nestle.
I got the distinct impression that many of the people in the audience - churchgoing supporters of fair trade - had never heard many of the arguments that I made in the speech and during the question and answer session.
I argued that far from being bad for developing countries, imports increase living standards, and that exports are not an end in and of themselves but merely a means to pay for imports. So the basic principles behind wealth creation, I said, were well known: free trade combined with reasonably free markets at home, the recognition of private property, the ability to enforce contracts, and of course peace.
Here’s my speech in full:
Speech given at a debate at Southwark Cathedral
The Archbishop of Canterbury, Dr Rowan Williams, once said the following:
“Every transaction in the developed economies of the West can be interpreted as an act of aggression against the economic losers in the worldwide game.”
Many people here tonight might sympathise with that point of view. European economies have been getting ever more affluent, but what if this is at the expense of the world’s poorest? What if the reason for wealth is because trade rules are rigged in our favour? What if our weekly shop at Tesco, as Rowan Williams believes, is an act of aggression on others?
The good news is that trade is not an act of aggression. Every act of trade is an act of peace. Some people believe that when two people trade, one person is a winner and the other is a loser. But if I buy a shirt, I do so because I value the shirt more than I value the money. The shop values the money more than they value the shirt. Trade happens because both sides believe they will benefit. Tonight, I’m going to make a case for free trade and I’m going to argue three main points.
Firstly, cheaper imports are good for an economy – including poor ones
Secondly, protectionism doesn’t work.
Thirdly, freer trade by rich countries isn’t as important as the policies that poor countries themselves implement.
Firstly: cheaper imports are good for an economy – including poor ones
One of the greatest misconceptions about trade is that countries get rich by exporting more and importing fewer goods. Sure, exporting more is good. But exporting is a means to an end, not an end in itself.
For those of you in paid employment, think for a moment about your salary. Is your salary an end in itself? Maybe you draw your salary as £20 notes and frame them and proudly display these framed £20 notes in your living room.
No of course you don’t. For most people, salaries are a means. They are a means to buy groceries and clothing, television sets and cars, and pay the mortgage or rent.
In the one person economy – that’s you – going to work and getting a salary is an export. Using that salary to buy something from a shop is an import. The purpose of our exports is so that we can afford to import. And the cheaper the imports – the cheaper the televisions and clothing we buy – the better off we are. A combination of specialisation and mechanisation has massively decreased the cost of things, and that’s why we’re better off today than at any point in the past.
Some people, however, think that developing countries should increase the cost of imports by increasing taxes on them. They think that developing countries would be better off if that did that. But this is like saying that you would be better off if when you next go into John Lewis and buy a television set, you find that the government has whacked a big tax on TVs.
Of course, there are those who say that while more trade is essential for developing countries, what they oppose is free trade.
But that doesn’t make sense. Making trade more free means more trade happens. Making trade less free means less trade happens. If you ask any small businessperson, they’ll tell you that one of the basic economic truths is that if you put the price up, the amount sold goes down. Not many people bought a computer for their home when computers cost £10,000. When they cost £500, lots of people bought them. When you increase the price of trade by imposing tariffs, less trade takes place.
Secondly, protectionism doesn’t work
In the thirty years after independence, India protected its economy. The result was that its economy stagnated. Poor people literally starved, while a small elite protected from foreign competition ripped off consumers, selling poor quality goods at massively inflated prices.
Now of course many campaigners say that they’re not against free trade in general, but they want “targeted protection” for infant industries. Confusingly, by infant industries they often mean plain old agriculture. But even when they mean new industries, it’s difficult to find examples where this kind of policy has worked.
Protection of infant industries largely failed in southeast Asia, just as it did in Latin America, Africa and south Asia. The Malaysian car industry is the most egregious recent example. Instead, these economies have latched on to fast catch-up growth through manufacturing exports driven by foreign direct investment. This is the path China has taken, purusing the most significant liberalisation programme the world has ever seen. Hong Kong and Singapore of course have pursued very radical free trade policies. Northeast Asia is more complicated. There are sectoral examples where infant industry protection has probably worked for the particular industries concerned, especially in South Korea, but at a cost to their host economies as a whole. And one can point to lots of other examples in Japan, Taiwan and South Korea where it very clearly hasn’t worked.
All this reinforces the overwhelming evidence from the postwar period that open economies with freer trade policies grow faster and have more success with poverty reduction than closed economies.
A study by Jeffrey Sachs and Andrew Warner of 117 countries in the between 1970 and 1989 showed that open developing countries had an annual growth rate of 4.5 percent, compared with 0.7 per cent in closed developing countries.
Thirdly, freer trade by rich countries isn’t as important as the policies poor countries themselves implement
While I would be the first to criticise European protection, it’s important to get some perspective. The good news is that the world is going in the right direction in terms of getting rid of protection. Average world tariffs have massively decreased over the past fifty years.
Many countries that 30 years ago were considered economic basket cases are now getting rich. China and India have been liberalising - in China’s case it’s been pursuing the largest liberalisation the world has ever seen. Four hundred million Chinese people have been lifted out of poverty. Its share of world trade rose from 1.9% in 1990 to 7.3% in 2005.
The tragic news is that Africa has remained deeply protectionist - in a world where virtually everyone else has been liberalising. African tariffs are some of the highest globally. While OECD countries cut tariffs from an average of 23.7 percent to just 3.9% in the 20 years from 1983, Sub-Saharan Africa merely cut its tariffs from 22.1% to 17.7%.
What’s happened to Africa’s share of world trade? It declined from 3.5% in 1970 to 1.5% in 1999.
Europe’s Common Agricultural Policy is often accused for being responsible for African poverty. Well, it’s certainly true that the CAP is damaging… to European consumers who haven to pay more. And it’s bad for the environment, encouraging the growth of crops using heated greenhouses which would be better off simply grown in hotter countries. It squanders European resources that would be better off invested in research and development for the sort of industries we’re going to be doing in the future, in helping adapt to the challenges of globalisation, including the rise of India and China.
But any people believe that the Common Agricultural Policy is having a major effect on the least developed countries. It has been claimed that the Common Agricultural Policy kills 1 person every thirteen seconds – and mainly in Africa. But is this true? People see the poverty of farmers in Ethiopia and Chad, look at European subsidies, and believe that there is a link.
For those of us who favour free-markets, it was very convenient to argue that not only agricultural subsidies harm us in Europe, but they also hurt the least developed countries.
However, the inconvenient truth is that this that the CAP is not overall damaging to the least developed countries.
Don’t get me wrong, I’m in favour of abolition of the Common Agricultural Policy. It’s absurd that we’re subsidising EU cows to the tune of more than two euros a day. But the beneficiaries of CAP abolition would not be the likes of Ethiopia and Chad. They would be the emerging economies like Brazil, Argentina and Vietnam. Put it this way, if we get rid of the subsidies for British beef, are we going to see more beef on the supermarket shelves from Chad – or from Argentina? The answer is Argentina.
It turns out that, as The Financial Times’ World Trade Editor Alan Beattie has pointed out, most of the least developed countries don’t compete much with the agricultural produce grown in the EU.
In fact, the economists Alberto Vales and Alex McCalla have shown that as many as 45 of the least developed countries, out of 49, are net food importers. As prices rise with the removal of subsidies, those countries will be harmed, not helped, except in the tiny minority of cases where the importers switch to becoming significant exporters.
Of course, helping the emerging economies become first world economies is good thing. But thinking that ending the Common Agricultural Policy is great saviour of the world’s poorest can be a distraction from looking at the real solutions.
And it’s worth noting that while the World Bank estimates that developing countries as a whole could gain $142-billion a year from major agricultural liberalisation, only $32-billion of that would result from rich country liberalisation. The rest - $110-billion - would come from developing countries’ liberalisation of their own highly protected agricultural markets.
Conclusion
The good news is that wealth creation is actually very simple. And most of the world’s poorest are not in Africa but in Asia. We don’t hear much about Asia’s poor – we don’t get politicians launching a Commission for Asia. And the reason for that, it seems to me, is that Asia has been lifting hundreds of millions out of poverty. Asia is pretty good at the creation of wealth.
Why do I say that wealth creation is simple? Because, difficult though they may be to implement, we actually know the basic principles needed to make countries rich. After all, three hundred years ago every country was by today’s standards in poverty. And in 1960 Taiwan was poorer than the Congo. Free trade is important but it’s not just free trade, but it’s the things that tend to go with it too – reasonably free markets at home, the recognition of private property, the ability to enforce contracts, and of course peace.
Or, as Adam Smith eloquently put it in his book The Wealth of Nations, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”
Tags: common agricultural policy, corporate social responsibility, Hilary Parsons, Nestle, rowan williams, speeches, Traidcraft