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Peterloo massacre 1819: mounted soldiers charge unarmed demonstrators
seeking political and economic reform in the United Kingdom.
Trade liberalisation is one of the few aspects of economic analysis and policy about which there is agreement across the political spectrum. Almost all conservative commentators endorse it with gusto, for centrists it is an article of faith, and many progressives accept it at least implicitly by their criticism of industrial country protection. And if one is an economist, to endorse trade restrictions one day of the year requires spending the other 364 (365 for leap years) apologising for it. This is despite the views of the greatest economist of the twentieth century, J M Keynes, who recanted from his support for free trade. In a rarely quoted (suppressed?) passage in The General Theory, he wrote,
So lately as 1923, as a faithful pupil of the classical school who did not at that time doubt what he had been taught and entertained on this matter no reserves at all, I wrote: “If there is one thing that Protection can not do, it is to cure Unemployment. ..." As for…mercantilist theory…we were brought up to believe that it was little better than nonsense. So absolutely overwhelming and complete has been the domination of the classical [free trade] school. (The General Theory of Employment, Interest and Money, 1936, Chapter 23, end of Section 1)
The claimed advantages of liberalising trade are well-known: it will increase welfare though a better allocation of production and consumption; it will increase domestic competition and lower prices for consumers; and it will stimulate exports and employment as the mirror of the cheaper imports. Better use of resources, cheaper goods and more employment: what possibility to be against?
The simple answer is, Everything. First, as demonstrated over forty years ago by the world's leading advocate of "free trade", Jagdish Bhagwati, the assumptions required to reach the conclusion that free trade improves human welfare are so restrictive as to be absurd: continuous full employment of all resources, all countries could produce all traded commodities, the consumption preferences of all countries are the same, and (my favourite) in every country the same technology is used to produce each commodity. [The true believer in free trade might wish to read: Jagdish Bhagwati (1964), "The Pure Theory of International Trade", Economic Journal, 74, 1-78]. If you accept all these absurdities the most that can be demonstrated is that some trade is better than no trade (autarky). It cannot be demonstrated that more liberalisation is an improvement on less. [The famous principle of the Second Best.]
Second, protection rarely acts to prevent competition from foreign suppliers. If effective, tariffs and non-tariff measures increase the prices at which imports sell. This does not prevent competition from being intense in the protected domestic market. As part of an industrial policy trade protection can be designed to foster competition. And, of course, it is quite common in small countries for the allegedly competing imports to be marketed by the domestic producers of the same product (who have production facilities abroad).
Third, there is no theoretical basis for the argument that freer trade stimulates domestic production and employment. It is quite impossible to produce such a theoretical conclusion, since trade models assume full employment. Adam Smith made the argument that trade provided a demand outlet for a country's surplus production ("vent for surplus"), which subsequent economists rejected as naïve and simplistic. As well they would, since if domestic demand were insufficient for full employment, increased public expenditure (or domestic investment) would resolve the problem as well as export demand would. The exception would be if a country requires a demand stimulus when it simultaneously suffers from an unsustainable import level. However, via more imports trade liberalisation would be likely to make that problem worse, not better.
Lurking in the wings is the argument that developing countries would benefit from the elimination of industrial country protection, especially on agricultural products. Since the latter countries cannot expect the former to liberalise unless they do, a general liberalisation would be good for all. Perhaps the most surprising thing about this argument is that anyone other than a true believer in free trade would take it seriously. First, most of the agricultural products protected by developed countries are not grown in the low income countries, so the benefiting countries could be middle income (e.g., Argentina) where the agricultural population (and, therefore, beneficiaries) is small. Second, for those few products which are produced by low income countries (cotton in Mauritania is invariably cited), the most likely beneficiary of a decline in production in the United States and the European Union would be China, not any country in Africa. In any case, the domestic consumption of these products while diversifying exports might be a considerably better outcome than mutual trade liberalisation.
This possibility suggests a more important objection to this attempt at a pro-developing country trade position. Imagine if governments throughout the world were offered the following choice: 1) the industrial countries will liberalise their trade when you liberalise yours; Or, 2) there will be no industrial country liberalisation and you are free to pursue whatever industrial policy you wish in order to diversify your economy. In the days before the WTO, most countries that enjoyed successful development, employment growth, and diversification chose the latter. [Very relevant to this choice is the excellent book, Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, 2002]. They are stuck with the former through no choice they have made.
Finally, consider a counterfactual world in which in 2008, in response to the global financial collapse, all the major countries of the world had combined strong fiscal stimulus packages with temporary import and capital controls to prevent economic growth from generating unsustainable trade deficits and/or currency depreciation. As these countries approached full potential on the basis of expanding domestic demand and steady exchange rates, it is quite possible, even with the import restrictions, that world trade would have grown faster than was actually the case: an anaemic 3.3 percent in 2008, a disastrous minus ten percent in 2009, and a barely-breathing one percent during the first half of 2010.
Perhaps there is a lesson here: a world with free trade should come after not before full employment.
Free Trade Hall, Manchester, built in 1850s on the site of the Peterloo
massacre of 1819.
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