THE EXTENSION OF FREE TRADE TO EVERY CORNER OF EARTH REMAINS THE LAST BEST HOPE: POVERTY CAN ONLY BE HISTORY WHEN PROTECTIONISM IS HISTORY
When the likes of Blair, Clinton and Schroeder dominated global politics from the late 1990s and until the economic crash of 2007/2008 the G8 summits tended to focus on the Left's top priorities, including combating climate change and increasing overseas aid budgets. The mood of the era was captured by Richard Curtis’ Emmy Award-winning drama, The Girl in the Café...
This TV film was produced by the BBC and HBO to coincide with the Gleneagles summit of 2005. It was proof – if proof is needed – that it is in drama where the BBC’s political agenda is strongest. At the time Tony Blair and Gordon Brown were seeking legacy-defining commitments from other world leaders to increase aid spending to tackle poverty in the developing world. Their ambitions were supported by that year’s powerful "Make Poverty History" campaign. Commitments to double aid to the poorest parts of the world were made and by 2010 some $30 billion of the extra $50 billion had been given (although countries like Britain rather than backsliding Italy were largely responsible). Although Oxfam was disappointed at the failure to fully meet pledges the UK-headquartered development charity was relieved that substantial progress had nonetheless occurred – and during a horrendously difficult period for the world economy. Much less impressive was the failure on climate change from the summits of the period. That failure culminated in the disastrous UN gathering in Copenhagen, in December 2009.
Since the global crash the centre right has been in the political ascendancy but it is not evident that global summitry has changed to match this political change – perhaps because Barack Obama remains the most powerful politician in the world and he largely shares the Blair-Clinton-Schroeder worldview. No great effort has been made to restart global free trade talks. The bilateral and regional agreements that have become the norm in the gap left by the absence of global talks have been a mixed blessing – reducing some protectionism but increasing the hotchpotch of market access standards. If centre right governments were interested in producing a global agenda as well-intentioned as that of their left-wing predecessors but with the potential to do much more good they wouldn’t look to that 2009 Copenhagen summit or the Geleneagles summit but to Bjorn Lomborg’s Post-2015 Consensus, a successor to his Copenhagen Consensus framework for choosing policy priorities.
Conscious that many summits are hijacked by special interest groups or by ideas that sound good in final communiqués Mr Lomborg put together 62 teams of economists, including a number of Nobel Laureate economists, to identify the smartest ways of spending limited resources. The Lomborg project found that lowering barriers to trade was by far the most useful project that world leaders interested in global justice could pursue.
A free trade deal across Asia and the Pacific would generate $3,438 of benefits for every $1 spent. That compares to providing contraception which would produce estimated benefits per dollar spent of $120; reducing tax evasion which would have a 49:1 pay off; doubling HIV medication which would be beneficial by 10:1; and vaccination against cervical cancer would have a 3:1 strike rate.
Mr Lomborg also uses his analysis to argue that many of the climate change lobby’s preferred policy actions – embodied in the Kyoto Treaty – are expensive and ineffective. He recommends, instead, that reductions in fossil-fuel subsidies and the investments in green technology of the kind associated with Bill Gates are much more likely to producer a cleaner environment. But let us return to his number one recommendation: and the power of freer trade.
ECONOMISTS DON’T AGREE ON MUCH BUT THEY AGREE ABOUT FREE TRADE
Was Keynes or Friedman right about the causes of inflation? Was Keynes or Hayek right about the merits of government intervention during recessions? Should exchange rates float or be fixed? Should we tax consumption or income? If you get three economists in a room you are supposed to get at least six opinions. So goes the joke at the capacity of practitioners of the dismal science to disagree with one another. But on free trade there is rare and wide agreement – partly because of the difference between free markets at home and free trade overseas. The governments of China and France, for example, like their large state-owned enterprises to be able to compete freely in global markets.
Earlier this year fourteen previous chairs of the US President’s Council of Economic Advisers – including Martin Feldstein, R Glenn Hubbard, Ben Bernanke and Austan D Goolsbee - wrote a letter to the leaders of Congress supporting the extension of free trade agreements. Economists who had worked for the Ford, Carter, Reagan, Clinton, Obama and both Bush administrations were united in writing that “expanded trade through [free trade] agreements will contribute to higher incomes and stronger productivity growth over time in both the United States and other countries.” An October 2014 analysis by Matt Slaughter of the Tuck School of Business at Dartmouth College would appear to confirm this. Commissioned by HSBC, the report found that US exports more than doubled from $1.04 billion in 2003 to $2.26 trillion in 2013; that international trade has boosted the income of average American households by $13,600 per year; and that the pay of employees of exporting and importing firms is 15% to 20% higher than firms focused on the domestic US market.
Explaining why he was one of the letter’s signatories Gregory Mankiw, Professor of Economics at Harvard University, referenced Adam Smith: “Just as no sensible person tries to make all his own clothes and grow all his own food, he said, no sensible nation will aim to achieve prosperity by isolating itself from other nations around the world.” Ever since Smith and his observation that “consumption is the sole end and purpose of all production”, free traders have been allies of consumer rather than producer interest groups.
One very real event in the last century reinforced the free trade consensus amongst economists – just as the 18th century wisdom of Smith inspired it. Eighty-five years ago America indulged in one of the greatest acts of economic self-harm in its history. The Smoot-Hawley tariff bill of 1930 – the unhappy legislative offspring of two Republicans: Senator Reed Smoot and Congressman Willis Hawley – increased nearly one thousand duties on imports to America. Other factors were more important in creating the Great Depression but Smoot-Hawley exacerbated the economic hardship and introduced trade restrictions into the global trading system that took decades to fully unwind. According to the US Department of State, American imports from Europe declined from a 1929 high of $1,334 million to just under $490 million by 1932. US exports to Europe fell from $2,341 million over the same period to $784 million. Over the five years from 1929 to 1934 world trade shrank by a catastrophic 66% as nations engaged in round upon round of beggar-my-neighbour retaliations. Economists were united in opposing the bill at the time. Reflecting on the law in an article for the American Economic Review in June 1942 Princeton University’s Austrian school economist, Frank Fetter wrote:
“With the sharp division of economic opinion in recent years on so many issues of public policy, it is hard today to realise the almost unanimous opposition of economists, in the spring of 1930, to the tariff bill then pending in Congress. Economic faculties that within a few years were to be split wide open on monetary policy, deficit finance, and the problem of big business, were practically at one in their belief that the Hawley-Smoot bill was an iniquitous piece of legislation.”
Smoot-Hawley didn’t just hurt the world economy. It contributed to the geopolitical tensions of the 1930s. Japan, denied the ability to buy resources from once key trading partners, invaded those territories instead, for example. The politicians of the period ignored the insights of Richard Cobden, the so-called “apostle of free trade”. Cobden, a Manchester industrialist, joined with John Bright to repeal nineteenth century restrictions on imported grain – restrictions that were enshrined in the Corn Laws and which raised the price of basic foodstuffs for the working poor. For Cobden trade was about so much more than material enrichment. “I would not step across the street just now to increase our trade for the mere sake of commercial gain,” he wrote, “but to improve moral and political relations of France and England, by bringing them into greater intercourse and greater dependence, I would walk barefoot from Calais to Paris.”
On another occasion he said:
“The people of the two nations [France and England] must be brought into mutual dependence by the supply of each others' wants. There is no other way of counteracting the antagonism of language and race. It is God's own method of producing an entente cordiale, and no other plan is worth a farthing.”
Thomas E Donilon, President Obama’s former National Security Adviser, embraced the spirit of Cobden in 2001, claiming that there has been no time in human history that a nation of diminished economic vitality has also maintained global security.
BUT BEYOND ECONOMISTS THE FREE TRADE CONSENSUS IS UNDER ATTACK
But if the near consensus amongst public policy-making economists has endured over the decades it appears to be breaking down in the political and public sphere. While there has always been a populist, anti-trade streak in American politics (Barry Goldwater campaigned against John F Kennedy’s support for free trade) the consensus amongst most elite politicians was swallowed by a more sceptical, unpersuaded public. But, asks David Frum, what happens when the public’s respect for those elites has collapsed – as has now happened?
One manifestation is the unlikely and unofficial Sanders-Trump alliance against free trade. The two leading renegade candidates for the White House in the autumn of 2015 – for the Democrats and for the Republicans – may not agree on much but both take populist positions against current US trade arrangements. Democratic Senator Bernie Sanders has declared that “the results are in. Unfettered free trade has been a disaster for working Americans. It is high time we ended our disastrous trade policies.” Across the aisle we have the Republican Donald Trump. Fifteen years ago, in “The America We Deserve”, he wrote, he was worried but not defeatist:
“You only have to look at our trade deficit to see that we are being taken to the cleaners by our trading partners. We need tougher negotiations, not protectionist walls around America. We need to ensure that foreign markets are as open to our products as our country is to theirs. Our long-term interests require that we cut better deals with our world trading partners.”
More recently he seems to have lost faith in “tougher negotiations” - calling for a 20% tax on imported goods - to help eliminate various corporation taxes. He is an echo of Ross Perot who stood for the American presidency in 1996. Perot warned America to listen out for a “great sucking sound” if the North American Free Trade Association was passed – as capital and jobs moved south, out of America to “offshore” in cheaper Mexico. Bill Clinton, who inherited the draft NAFTA prospectus from his Republican predecessor, didn’t duck the challenge, however. Donning a baseball cap with “NAFTA we HAFTA” emblazoned upon it, he fought for the deal and got it passed. More recently his wife, Hillary, has been less than steadfast.
Although most Americans still think free trade benefits the US economy (by 58% to 33%) only a minority agree that it benefits their own finances (by 43% to 36%). A 44% to 38% plurality of Americans on lower annual incomes (of $30,000 or less) believe that free trade has hurt their own family’s fortunes. Another poll – conducted by for CBS and the New York Times – found that 58% of this lower income group preferred to limit imports to protect industries and jobs. Only 36% preferred the wider selection and lower prices of imported goods available under free trade. The YouGov polling at the beginning of this analysis found widespread openness to protectionism – not least in America. There is also some evidence that Republicans are now more anti free trade than Democrats. Fortunately there is also some polling which suggests support for free trade is growing as the post-crash recovery continues. People, perhaps unsurprisingly, are most open to protectionism when times are toughest and when its enactment would be most dangerous – as it was in 1929. Sentiment in Australia today, where growth is slowing because of the derailment of the Chinese resources boom, is turning against free trade. By 49% to 32%, Australians believe the China-Australia Free Trade Agreement negotiated by former prime minister Tony Abbott would be bad for workers. Tourism, big business, exporters and mining are perceived as likely to benefit but skilled workers, manufacturers, farmers, small businesses and middle income households are expected to lose out.
THE TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP
Some tout the Transatlantic Trade and Investment Partnership as the biggest trade deal ever for the European Union – boosting the whole continent-wide economy by $130 billion or about $650 per household. America would gain by almost as much. Others, in contrast, say it would be of limited benefit to both sides of the Atlantic. Theodore Bromund, a Senior Research Fellow at the Washington-based Heritage Foundation, said TTIP was the equivalent of offering someone earning £40,000 today a raise in 2029 to £40,200. “That,” he wrote, with some understatement, “is not a big effect.”
Many on the Right who are normally enthusiasts for free trade are getting cold feet about TTIP because trade agreements between advanced nations do not have the simplicity of yesteryear. The obviously dangerous protectionism of the Smoot-Hawley variety is long gone. The next round of benefits come from eliminating the so-called non-tariff-based barriers to trade. These are the standards for goods and services that pile costs on producers – and therefore consumers – so long as they are substantially different in America and Europe.
There are fears that big businesses will use the complex TTIP negotiations to erect new forms of regulatory privilege. Unlike small enterprises big business has the time, resources and legal know how to dig deep into the minutiae of large and complex, multilateral trade deals and add all sorts of extra detail – on product specification, environmental standards and labour rules - that will help them to survive and prosper today but might make it harder for new businesses to get up and running in the future. The rules, in other words, inhibit innovation, insurgent companies and the “creative destruction” dynamic.
Theodore Bromund concludes that “TTIP promises a lot, but at bottom, it is about creating a process for the US and the EU to make rules together. That is not about freeing the market: it is about controlling it.” Bromund’s boss, Jim DeMint, President of the Heritage Foundation has likened the new Congressional process for authorising “free trade” deals to “a special interest boondoggle”. Instead of focusing on advancing free trade, TTIP-style deals are cut on human rights, worker safety, and environmental protection. Professor Larry Summers, the US Treasury Secretary at the tail-end of the Bill Clinton presidency, is explicit about this. “Being pressed down everywhere,” he writes, “are middle classes who lack the wherewithal to take advantage of new global markets and do not want to compete with low-cost foreign labour.” Global companies can no longer be the primary stakeholders in future trade agreements. Instead future agreements must explicitly concern themselves with “economic equity, protection of the environment, opportunities for workers to migrate and financial stability.”
American conservatives are particularly concerned at how President Obama might use the fast-track negotiating authority he has – a freedom to negotiate all of the details of a trade agreement and then present that deal to the House of Representatives and the Senate on a take-it-or-leave-it basis. Their anxieties have grown because of his vow to negotiate “the most progressive trade deal the world has ever seen”. Will he inject minimum wage rules, renewable energy targets and union empowerment provisions into trade agreements? This may be true but the deals will also protect intellectual property and limit government kickbacks to favoured companies. For free marketeeers like Charles Krauthammer and Senators Ted Cruz and Rand Paul this is enough for free trade agreements to still be worth supporting.
There are big national security issues at stake here too. Trade is not enough in itself to guarantee peace but beggar-my-neighbour protectionist battles can cause hardship and exacerbate global tensions – as they did in the 1930s. During the Cold War, America used trade deals to simultaneously promote prosperity and good relationships with strategic partners. Moreover, if the likes of Europe and America aren’t negotiating trade deals with Asian countries, China already is and Chinese deals enshrine crony capitalist ways of thinking – where government-owned firms are favoured. As Barack Obama has said:
“If we don’t write the rules for free trade around the world, guess what, China will. And they’ll write those rules in a way that gives Chinese workers and Chinese businesses the upper hand.”
This is a case of free marketeers not letting the perfect be the enemy of the good. They should certainly fight to limit the amount of social and environmental content in trade agreements – content that should ideally be settled democratically at the level of the nation state. Overall, however, the economic and geopolitical advantages of freer if not perfectly free trade are still worth having.
“THE SOUTHERN SILK ROAD”: AFRICA AND SOUTH AMERICA REPRESENT THE NEXT BIG FRONTIERS FOR FREE TRADE
If trade agreements between mature economies like the United States and those of the European Union are unlikely to deliver big gains that is not true of Africa and South America. Trade between African countries currently accounts for just 13% of total African trade. That compares with intra-regional trade of 70% in Europe, more than 50% in Asia and 21% in Latin America – according to data from the United Nations Conference on Trade and Development. Huge gains for these two regions and the wider world are possible if the next decade or two sees much freer trade across the southern hemisphere.
A free trade area from the “Cape to Cairo” was an ambition of Cecil Rhodes at the end of the 19th century – underpinned by a transcontinental railway. More than a century later that vision is still to be realised but the next frontier for free trade is in the developing world and in Africa, in particular, amongst its population of 626 million people (8% of the world’s population). It remains much easier for many African states to trade with faraway developed nations than with their neighbours. For most African nations China – with its huge appetite for commodity trade – is the dominant trading partner. Chinese-African trade volumes reached $222bn in 2014, for example. That is more than five times larger than trade between South Africa and the rest of the continent ($41 billion).
June 2015’s Tripartite Free Trade Area (TFTA) agreement between 26 of Africa’s 54 states – an accord between the Southern African Development Community (SADC), the East African Community (EAC), and the Common Market for Eastern and Southern Africa (COMESA) - suggests that there is some willingness amongst many of Africa’s political leaders to move towards free trade but the reality is that it will be some time before the will matches the rhetoric. A patchwork of preferential trade arrangements currently govern trade relations between African states – some of those agreements are poorly-drafted and unevenly enforced and they make it hard for private businesses to predict the true cost of exporting goods and services. Tariffs, complex visa protocols, poorly-protected property rights, inadequate transport connections and unreliable energy supplies continue to place low ceilings on African prosperity. Only when they are overturned will the continent become the economic superpower that many think is possible within the next few decades and we will see Africa’s lowly share of total world trade - currently just 3% - start to rise.
There are similar opportunities in Latin America. The continent is currently a story of two groupings and has been since Brazil, Argentina and what was then Hugo Chávez’s Venezuela grouped together to kill the “Alaska to Patagonia” Free Trade Area of the Americas as proposed by George W Bush. The Wall Street Journal reports that the Pacific Alliance trade bloc (of Mexico, Colombia, Peru and Chile) is growing much faster than the Atlantic-facing trio. The Pacific Alliance has chosen to eliminate tariffs, trim government intervention in their economies and open themselves up to foreign investment. One Brazilian quoted by the Journal summed up the Atlantic bloc harshly: "Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Zimbabwe." As the Atlantic bloc model continues to deteriorate and gets over its anti-US obsessions the hope must be that the whole of South America emulates the Pacific quartet (now joined by Costa Rica) and a new era of prosperity dawns across the whole region. The Pacific Alliance is projected to grow three or four times faster than Brazil over the next few years.
THE MANDELSON EXCEPTION
A final plea. I began this chapter by hoping that centre right governments would prioritise free trade at global summits. At the same time could centre right governments put their best people in charge of trade negotiations? It’s rare that a politician of the calibre of Lord Mandelson, a British Labour politician, leads the brief. Trade negotiations are less sexy than cutting taxes or increasing spending, for example, and the benefits of successful free trade agreements rarely accrue within a normal electoral cycle. Opposition to free trade does, of course, have time to make itself known before elections. Despite politicians always moaning about the short-term nature of business their failure to champion free trade with appropriate levels of commitment reveals their own very regrettable short-termism.
As David Cameron seeks to renegotiate Britain’s relationship with the European Union the completion of the single market in services should be a higher priority. It was one of his priorities when he first launched his renegotiation bid in January 2013. “When the Single Market remains incomplete in services, energy and digital,” he told his Bloomberg audience, “the very sectors that are the engines of a modern economy - it is only half the success it could be.” He continued: “It is nonsense that people shopping online in some parts of Europe are unable to access the best deals because of where they live. I want completing the single market to be our driving mission.” There has not been much evidence that it has been Mr Cameron’s “driving mission” even though service sector growth has been greater than manufacturing growth in 13 of the last 16 years within the EU and has potential to grow even faster. Working with the All Party Group on European Reform, the Open Europe think tank has proposed a range of reforms to “complete” the single market. David Cameron should make progress on single market issues a “red line” issue. Jonathan Lindsell’s report for Civitas – explaining how independent, non-EU nations have been able to negotiate faster, more bespoke trade agreements than Brussels – offers an alternative if EU reform fails.
At this point I could launch into extended thoughts on what Britain’s exit from the European Union might mean for Britain, Europe and regional trade blocs. On this occasion I’m going to resist the temptation but will return to it in the pieces that I intend to write over the next year – following up on reactions to this report.
POSTSCRIPT: EDUCATIONAL VIDEO ON COMPARATIVE ADVANTAGE
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