Thursday, December 08, 2005

Good Sense on Free Trade

Another brilliant piece by Razeen Salley, London School of Economics, on free trade and development, Business Day, Johannesburg, South Africa: “Fear the New Protectionism” (

FREE trade is under threat in the early 21st century. Protectionism lurks everywhere. The US, European Union (EU) and Japan are loath to open their agricultural markets. China-bashing has replaced Japan-bashing in the US and EU. Their governments do their best to keep out cheap Chinese-made garments retailers want to sell and consumers want to buy.”


Absolutely right. Lower priced imports than can be produced domestically raises the real wages of workers and release capital for those projects that the country has an advantage in. Smith saw this as a theory of absolute advantage in the last quarter of the 18th century; Ricardo developed it as a theory of comparative advantage in the first quarter of the 19th century.

So where does free trade stand today? What are its prospects? The core arguments for free trade are as compelling today as they were when the philosopher Adam Smith set them out more than two centuries ago. These I call the free-trade trinity -- prosperity, freedom and security. The economic case for free trade revolves around a specialised international division of labour, unencumbered by artificial restrictions, that allocates resources more efficiently and leads to long-term productivity gains. All-round growth and prosperity are its results.

The moral case for free trade centres on individual freedom. It is individual choice and entrepreneurship that drive international commerce, and the resulting prosperity creates better life-chances for those previously deprived of them. And free trade contributes to a more secure international political environment. By forging commercial bonds among nations, it fosters better understanding among the diverse peoples of the planet.


Spot on again.

“Second, pervasive restrictions on the cross-border movement of labour must be loosened. That also promises huge gains for developed and developing countries. Given its political sensitivity, it can only be achieved gradually and piecemeal. But it should be at the heart of a 21st-century free-trade agenda.”


Very Smithian: gradualism, measured steps taken with humanity, not all at once in one giant revolutionary step that creates disorder.

This throws up two points. First, the modern conventional wisdom has it that free trade abroad can be combined with "big government" at home. This view forgets that free trade is part and parcel of free markets -- part of a constitutional whole that includes limited government and laissez-faire policy at home.

Second, 21st-century free trade should rely less on bureaucratic international trade negotiations and more on the 19th-century method of unilateral liberalisation. This is done by governments acting autonomously, and spreads internationally by emulation. The World Trade Organisation and other international trade agreements can be helpful auxiliaries, but their importance should not be exaggerated


Ignoring the remark about laissez-faire, by taking it in its minimal meaning, and not as a free for-all for anything goes, because businesses, as well as government agencies and labour organisations, must be watched closely for signs of monopolistic urges, we can appreciate the suggestion of unilateral action, rather than trying to proceed through decision systems enshrined in a 143 nation unanimity where any single country has an almost irresistible incentive to exercise a ‘blackmailing’ veto for its own gain (egged on by NGOs who oppose free trade, markets, smaller governments and capitalism).


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