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July 13, 2006

Martin Jacques

We learn something amazing from Martin Jacques today:

The west, which has been the traditional defender of free trade - because free trade always favours the most powerful and advanced economies

Really? Does it? And there was silly old me thinking that free trade benefits consumers over producers.

July 13, 2006 in Trade | Permalink

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Aherm . . quote:

"John Stuart Mill proved that a country with monopoly pricing power on the international market could manipulate the terms of trade through maintaining tariffs, and that the response to this might be reciprocity in trade policy. Ricardo and others had suggested this earlier. This was taken as evidence against the universal doctrine of free trade, as it was believed that more of the economic surplus of trade would accrue to a country following reciprocal, rather than completely free, trade policies.

"This was followed within a few years by the infant industry scenario developed by Mill anticipated New Trade Theory by promoting the theory that government had the 'duty' to protect young industries, although only for a time necessary for them to develop full capacity. This became the policy in many countries attempting to industrialize and out-compete English exporters."
http://en.wikipedia.org/wiki/Trade

Posted by: Bob B | Jul 13, 2006 9:47:23 AM

Just out of interest, can you cite an example which contradicts the notion that "free trade always favours the most powerful and advanced economies", rather than sticking to the familiar theoretical dogma? There are, no doubt exceptions, but I think as a rule, Jacques has it exactly right.

Tim adds: Yes. Hong Kong. Shit poor in 1950, one of the richest places on the planet now. Sure, the most powerful and advanced economies have benefitted from importing things from Hong Kong but nowhere as near as much as Hong Kong has benefitted: as seen by the difference in growth rates over that period.

Posted by: TheIrie | Jul 13, 2006 10:18:31 AM

There is a substantial professional literature on whether openness to trade or protectionist policies are more likely to promote economic growth and poverty reduction in developing countries. Unfortunately many of the seminal papers are subject to conditional access but I think it fair to say that the consensus tends to the conclusion that on the balance of the evidence openness is observed to be more conducive to faster development as in this IMF assessment:

Andrew Berg and Anne Krueger on "Lifting All Boats - why openness helps curb poverty": Abstract:

"Although there is a near-consensus among economists that trade liberalization strongly promotes growth and poverty reduction, concern about its ill effects has not abated. Hence, it is important to assess the quality of the evidence regarding the links between openness, growth, and poverty reduction. This article provides a critical survey of recent studies."
http://www.imf.org/external/pubs/ft/fandd/2002/09/berg.htm

However, this World Bank paper considers some subtle issues such as whether the conclusions are dependant on the time periods and global regions selected for comparison:

Adrian Wood on "Openness and wage inequality in developing countries": Abstract:

"The experience of East Asia in the 1960s and 1970s supports the theory that greater openness to trade tends to narrow the wage gap between skilled and unskilled workers in developing countries. In Latin America since the mid-1980s, however, increased openness has widened wage differentials. This conflict of evidence is probably not the result of differences between East Asia and Latin America. Instead, the conflict is probably the result of differences between the 1960s and the 1980s, specifically, the entry of China into the world market and, perhaps, the advent of new technology biased against unskilled workers."
http://www.worldbank.org/research/journals/wber/revjan97/pdf/artcle~3.pdf

Posted by: Bob B | Jul 13, 2006 10:58:25 AM

The point of economic thinking above the level of the playground is to realise that trade is not a zero sum game and that both sides to a trade (freely made) gain benefits. Moreover, economic historians are prone to pointing out that "the west" is not traditionally the defender of free trade; that role classically fell to the British, not "the west".

Posted by: dearieme | Jul 13, 2006 11:07:44 AM

I would suggest that Hong Kong is a good example, though looking at its neighbours, it doesn't prove the rule. I found this

"Third, the growth experience of Hong Kong reveals a unique
government involvement in development which is different from other Asian newly industrialized economies. In South Korea, manufacturing industries were heavily promoted by the government, but in Hong Kong, only a very low degree of government intervention was observed. In between these two extremes, the Taiwanese government guided its industry, while the Singaporean government provided incentives for giant multinational companies to lead its industrialization. With different degrees of government involvement, all four Asian NIEs succeeded in catching up with economically advanced nations. Therefore, the role of government during the process of technological catching-up is not a matter of debate between government intervention and free market mechanism. Instead, it would be more fruitful to investigate the different ways in which states and markets are interrelated and how both government and private enterprises can consciously work together towards specific goals. A combination of competent government policies and dynamic private entrepreneurial firms is a good prescription for economic growth."

Source: "From a ‘Barren Rock’ to the Financial Hub of East Asia: Hong Kong’s Economic Transformation in the Coordinating Perspective" - Asia Pacific Business Review, Vol.10, No.3/4, Spring/Summer 2004.

Tim adds: "A combinati on of competent government policies and dynamic private entrepreneurial firms is a good prescription for economic growth."

Despite my sometimes bombastic rhetoric I don’t actually doubt that for a moment. My concern is rather that in those parts of the world which are currently poor I see no presence of competent government so really rather doubt the possibility of their being competent policies. I thus regard laissez faire trade policies as being the best on offer.

Posted by: TheIrie | Jul 13, 2006 11:39:57 AM

On that crucial insight that the benefits from trade are not a zero-sum game, the curious thing is that despite the time elapse since David Ricardo published the notion of comparative advantage in his book: Principles of Political Economy and Taxation (1817), the concept has been poorly understood - perhaps because of the presentation and the products chosen for the example he constructed. Possibly, a more modern idiom could help bring out the essential flavour:

Suppose two countries, A and B. In A, a car exchanges in the market for 20,000 TV sets whereas in country B, a car exchanges for 25,000 TV sets.

An exporter of a car from A to B can expect to sell it there for the equivalent of 25,000 TV sets which could be imported back to A making a net gain of the equivalent of 5,000 TV sets less the transport and transactions costs. This trade would continue to be profitable so long as the difference in relative prices remained.

Note: the trade benefits depend on the differences in the relative prices of the two products in the two countries - there is no mention of differences in absolute prices. The implied consequences are that car production would increase in A and decrease in B while TV set production would increase in B and decrease in A. Also, that consumers in A would gain from cheaper TV sets and consumers in B from cheaper cars.

The trade policy traditions of mainland Europe seem to owe more to Napoleon's Continetal System and List's National System of Political Economy:
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/list/national.html

But recall the consequences of President Jefferson's embargo on foreign trade 1807-09?
Try: http://www.dartmouth.edu/~dirwin/Embargo.pdf

Posted by: Bob B | Jul 13, 2006 12:05:42 PM

Tim, I am sympathetic to your point, however, I'm more concerned by government agendas than competance. In many cases I suspect the government is extremely competent at channeling money into it's own pockets.

So, I can accept your position, providing it is held universally - that is, I assume you are opposed to EU agricultural subsides, US steel tariffs, and so on? Do you support organisations that campaign against these things?

Tim adds: The latter questions? Yes, unequivocally. I write for several places that argue against such things. I’ve even had a piece in The Times arguing that Mandelson was a complete tit (not quite in those words mind) for imposing tariffs on shoes. TCSDaily, the Adam Smith Institute blog.....The Sprout where I do a monthly column (it’s a small circulation English language mag in Brussels, by and for eurocrats really) which is in essence a rage against the stupidity and iniquity of the EU’s external trade policies.

Support? As in donate money? No (too many debts already). Support, as in intellectually, most certainly.

Posted by: TheIrie | Jul 13, 2006 12:26:24 PM

The saga of Credit Lyonnais, a state owned bank in France, could provide exemplary insights into the good sense of presuming that governments and governmental interventions for industrial policy reasons are (usually) competent. This account in The Economist is illuminating:

"When France's economy slumped in the early 1990s, Crédit Lyonnais began bleeding red ink. Two bad investments proved particularly costly: in SASEA Holding, a Swiss company that went spectacularly bust, and in Metro-Goldwyn-Mayer, a Hollywood film studio which became embroiled in scandal. . . Three bail-outs (the last in 1998) raised the total cost of saving Crédit Lyonnais to FFr120 billion ($20 billion) of taxpayers' money."
http://www.economist.com/research/backgrounders/displaybackgrounder.cfm?bg=1325321

Curious that the bank's worst financial losses were incurred through investments made in a Swiss company and an iconic American movie studio which had somehow become embroiled in France's national industrial policy for reasons that were never entirely transparent to outside observers. However, tracking what precisely went wrong became inordinately difficult after this calamity:

"Much of Crédit Lyonnais' Paris headquarters was destroyed in a major fire on May 5, 1996. The fire began in the main trading room of the bank and was one of the worst fires to damage a Paris building in 25 years. The fire burned for over 12 hours and two-thirds of the building was destroyed, along with crucial bank archives and computer data."
http://www.answers.com/topic/cr-dit-lyonnais

Posted by: Bob B | Jul 13, 2006 1:50:10 PM

Jacques piece sounds alot like Wallerstein's theory:

Those countries who are at a given moment particularly efficient at productive activities are normally the ones who proclaim the virtues of free trade. Free trade obviously serves their national interests. It means they can sell their products in foreign markets without the penalty of tariffs or other barriers. It means they can invest surplus capital in other countries. Those countries who are moderately strong but still weaker than the strongest are normally the ones who try to be protectionist. They feel that, if they can protect their internal markets for a while from the competition of producers in the strongest countries, they can improve their own efficiencies and develop a sufficient internal market to withstand open competition. For them, it is a matter of time. The protection is temporary. Truly economically weak countries are usually too weak politically to get away with protectionism.
http://www.binghamton.edu/fbc/127en.htm

Posted by: Tom Griffin | Jul 13, 2006 3:05:14 PM

"Free trade obviously serves their national interests. It means they can sell their products in foreign markets without the penalty of tariffs or other barriers." No, Tom; as I understand it, in the classical British free trade period, Britain reduced or eliminated import tariffs without demanding reciprocity. It's an American habit to demand reciprocity.

Posted by: dearieme | Jul 13, 2006 5:45:53 PM

"in the classical British free trade period, Britain reduced or eliminated import tariffs without demanding reciprocity."

Before that, of course, it had forcibly opened other markets without offering reciprocity. So at best it eventually evened out.

Posted by: Jim | Jul 13, 2006 6:04:52 PM

What I think is interesting about Wallerstein's schem is what it implies about the US loss of position.
Is the US resort to trade bilateralism and military interventionism, the equivalent of Empire Free Trade and the scramble for Africa.

Posted by: Tom Griffin | Jul 13, 2006 6:20:10 PM

Oh, except of course the market in slaves: the Royal Navy was used to suppress that market.

Posted by: dearieme | Jul 13, 2006 8:57:39 PM