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August 12th 2018 print

Peter Smith

The Vexations of Free Trade

International trade isn't bad, having contributed mightily and indisputably to the prosperity of most nations. But free trade is not good , often leading to what might be called ‘overspecialisation' that undermines the integrity of the nation state on which our culture and security rest

tradeI meet two groups for coffee each week. One predominantly left in its political orientation, the other conservative. I have almost continual disagreements in person and online with those in the first group (it gets wearing) and am in complete agreement most of the time with those in the second. You will notice I said ‘most’ of the time. It was evident at a recent meeting that free trade divides us. I find this is the case generally when I talk with conservatives, particularly with those of a classical-liberal bent.

I used to be a free trader. David Ricardo set out the script in 1817. Adam Smith had already demonstrated that specialisation and trade was beneficial. Ricardo went further by showing that trade was (almost certainly) beneficial even between two countries where one could produce all tradeable products more cheaply. Economist Robert Findlay described Ricardo’s theory of comparative advantage as the “most beautiful result in all of economics.” It has had a powerful influence on free-market economists ever since. And, by extension, on the views of conservatives/classical liberals more generally. It has become totemic. Free trade is good. Protectionism is bad.

I explained my revisionist views in two Quadrant articles (The Debate That Never Dies and  The Deplorable Victims of Free Trade). Why go over it again? I would like to make it simpler in order to bolster my case; and, as a longshot, to persuade free traders to think again.

Take two primitive Island communities separated by a body of water. Each grows sweet potatoes and catches fish. Sweet potatoes and fish make up their staple diet. One community is relatively better at growing sweet potatoes and the other at catching fish. The communities decide to trade freely. The more the communities specialise and trade the more they produce. Perforce, free trade inexorably leads one community into producing only sweet potatoes and the other only fish; which they share between them.

The communities become richer (in sweet potatoes and fish). However, they notice other disquieting differences. Each community becomes more uniform. Sweet potato growers can no longer share stories with fishermen and vice versa. They don’t have the same enriching cultural cross currents. Also, some sweet potato growers are not adept at fishing and languish out of work. The same thing happens in the other island to fishermen not adept at growing sweet potatoes. There are plenty enough sweet potatoes and fish to provide for those out of work but it is observed that they grow surly and are often depressed. Drinking of the local brew increases.

One day a giant storm strikes, destroying all fishing boats. Those on the island specialising in fishing all die of hunger for there is no means of getting sweet potatoes to them. They had put all their eggs, so to speak, in the one fishing basket. It would have been better if the communities had compromised. Some trade. Some specialisation. But not free trade and complete specialisation.

To the lesson of the tale. Trade deals should not be struck solely on narrow economic grounds. Industrial diversity is important for a nation’s cultural life and can be vital for national security. Specialisation can leave you vulnerable when trade is interrupted. Think of war. Trade can be disruptive and put people on the scrap heap. The human cost of displacing people from their jobs should not be summarily dismissed as a cost of doing international business. It must be taken into account.

None of this is to say that international trade is bad. It is unmistakably good and has undoubtedly contributed mightily to the prosperity of most nations of the world. But free trade is not good. It is bad. It leads to what might be called ‘overspecialisation’; particularly now that international transport costs are relatively small in the scheme of things.

Overspecialisation undermines the integrity of the nation state on which our culture and security rest. Fortunately, there is still no such thing as free trade in practice. All countries retain some level of tariffs and other trade barriers. Take the North American Free Trade Agreement (NAFTA). It runs to about 1000 pages. It is a contradiction in terms; free trade with many caveats. It follows that a renegotiated NAFTA with different caveats, tilting the way Donald Trump would like, could be as equally misnamed free trade as the current version.

Trump has been roundly criticised for going against the free trade totem. This is nonsense on stilts. America imposes lesser trade barriers than those of its trading partners. They are the ones offending against freer trade. Or, to turn it around, they are the ones being more sensibly alert to the need to protect their own industries. It depends on how you look at it to determine who the bad guys are.

To sum up. All of the costs, as well as the material benefits, of freeing trade should be brought to account. Only when there is overall net benefit for its own citizens should a country strike a deal and lower its trade barriers. I find it hard to understand why conservatives would disagree with this. But if they do I will continue to disagree with them.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [7]

  1. Macspee says:

    H’m much to think about. Level playing fields maybe? And other reciprocal rights: why can some people own property here but we are forbidden to own in their country, e.g China, Philippines; why can mosques open here but churches cannot in many Muslim countries. Why is Trump criticised for imposing tariffs on European cars when the European tariff on American cars is much higher, etc, etc.

  2. Eeyore says:

    Protecting industry leads to lower quality production.

    • LBLoveday says:

      I’d rather eat expensive, poor quality sweet potatoes, or even broccoli, than starve.

      • Eeyore says:

        Why the Hobson’s choice? We grow food and dig stuff up, Japan makes cars. Under protection we got the P76, without it I am tooling around in a marvel of modern technology for less than the P76 sold for in adjusted terms.

        • LBLoveday says:

          The Leyland P76 won Australia’s most prestigious automobile award, Wheels Magazine’s Car of the Year, in 1973.

          In the 1974 World Cup Rally the P76 won the Targa Florio section and placed 13th overall.

          Its brakes were so good that a good number of rally drivers fitted them to their other-make cars for many years to come.

          Just at the very time the Australian automobile industry needed a boost, that self-proclaimed great expert on cars and everything else, PM Edward Whitlam decided that Wheels’ experts knew far less than The Great Man, stuck his big ego in, and declared it a dud, despite his main knowledge of cars being the back seat of a chauffeured limo.

          Not to be outdone, Bill Hayden joined in and called it a lemon. Neither man had driven one, let alone owned one.

          Duds and lemons don’t win the Sicily leg of the World Rally or Wheels Car of the Year.

  3. Geoffrey Luck says:

    There’s a real-life example close to hand that illustrates the free trade fallacy even better than Peter’s 2-island hypothetical. For centuries on the Papuan coast, there was a regular flourishing trade between two tribal groups, hundreds of miles apart. Every year the Motu of Hanuabada village (still there on stilts above the waters of Pt Moresby harbour) set sail in their giant double-hulled canoes with crab-claw sails (lakatoi), running before the south-east trade winds (Lahara winds). Their canoes were loaded with the clay pots they had been making for the last twelve months, to trade with the Erema people in the Gulf of Papua, 400 kms to the west. This great annual expedition was called the Hiri. There they exchanged the pots for sago grown in the coastal swamps, and for huge logs for their canoes. When the winds changed to the west (the Laurabada winds) they sailed home. All so good until the years that the trade was interrupted by violent storms, or drought in the Gulf caused the sago harvest to fail. The Motu had no arable lands (the Pt Moresby area is arid and the soil unproductive) so their main food supply was lost. They had the harbour however, small agile canoes, fish nets and lines, so even in hard times they didn’t starve. But the Erema people lost their principal foodstuff, and their cooking pots, which, being poorly fired without glaze broke easily and had to be replaced each year. Only the arrival of the Europeans with tinned food and motorised ships brought regularity to both communities – even though it ended the Hiri trade.

  4. whitelaughter says:

    And if the two tribes are one political body – what then? Do the problems you describe magically go away?

    International trade is between *political* organisations, not between geographical regions. Are you worried that Broken Hill and Kalgoorlie do not produce their own food? You should be, they are far more dependent on the rest of OZ than OZ is on any other country.

    Visiting Darwin to avoid southern winter a couple of years back, I loved the place – but could not afford to live there, as the cost of basic essentials was far too high. Everything was imported, from either overseas or the rest of the country. Unemployment is also through the roof. If ever there was a location that should be considering the possibilities of self-sufficiency, it is Darwin. Is this pushed? No. Instead…

    What is the worst that can happen if the trade routes are cut? OZ is a major food supplier, *we* won’t starve. Invasion? Yes, serious threat, and an Indonesian war would cut our supply lines. But which would be better – sending our young troops to their deaths in the rubbish made in Adelaide, or flying them to a shipbuilding nation and having them sail cutting edge warships through the blockade?

    We don’t need a lot. Confucius summed it up: enough food, enough weapons, and good public spirit. We produce food. We cannot have good public spirit while we continue to force the military to buy substandard local rubbish – last figures I saw had the military spending $1.40 for every dollar of equipment they got due to local products being so overpriced.