Trade is about politics, not just economics
A great post by Unlearning Economics on the site Pieria argues that ‘free trade’ is a myth. Both proponents and opponents miss the point that markets are built rather than natural, and that they depend on politics, not some sort of standalone economic process.
As is common in economics, I can’t help but feel this debate is being conducted on a phoney dichotomy: between the state and the market; managed or non-managed trade; politics or economics. All too often there is the idea of an implicit ‘free trade’ baseline, and one side argues for it while the other suggests strategic interventions to steer trade in the right direction.
As I pointed out in a post a couple of years ago, some of the Wikileaks revelations showed that trade is political, and has nothing do with comparative advantage.
My work on trade policy in developing countries strongly confirms this view. For instance in the tiny, isolated island nations of the Pacific, trade is built on ancient colonial relationships, modified in recent years by the influence of more powerful political interests such as those of big neighbours Australia and New Zealand.
The Pacific island nations mostly specialise in a few agricultural commodities, fish and coconuts, as well as tourism. To an extent you can argue that these are the countries’ comparative advantages — what they’re domestically better at producing relative to production of other things.
But that statement doesn’t really mean much. Britain and France, which used to own most of the Pacific before independence in the 1960s-70s, used it as a resource base for export to their own countries. That’s partly why these countries have lingering, entrenched agricultural sectors with limited value-addition. It certainly isn’t in their development interests to continue specialising in copra, which is one of the lowest-value products, or to keep exporting fish from their seas without processing it onshore. Pacific island nations are mostly too small and inflexible to industrialise, and they lack the human resources or land area to be able to quickly move into conventional, more value-adding sectors.
Nowadays the European Union is washing its hands of its former colonies around the world by obliging them to take part in a series of trade deals known euphemistically as Economic Partnership Agreements, which redefine their trading relationships as being reciprocal, meaning that any concession the EU makes, like a preferential low tariff rate, must now be given back to the EU in return. Brussels is no longer prepared to defend a special waiver for African Caribbean and Pacific countries at the World Trade Organisation which allowed the EU to violate the Most Favoured Nation rule, which is supposed to accord one country or region treatment no less favourable than another.
For similar reasons Australia and New Zealand are also prodding the islands in the direction of new trade deals — the Pacific Agreement on Closer Economic Relations (PACER) and PACER Plus. It’s nothing to do with direct commercial interest, just the new realities of the global economy and the need to set a precedent for other, more lucrative trade deals, such as those with Asian countries. There’s an element of ideology at work too. ANZ trade officials think that all countries should do ‘free trade’ because it works for them. They forget that their own countries developed under strong protectionism.
Neither of these deals make much development sense. The Pacific islands have already long had duty and quota-free access to Europe and ANZ. Why shouldn’t they be allowed to keep it? And it’s up to the islands to decide what tariff they impose on the goods of foreign countries.
In fact if trade agreements were really anything to do with the simple ideal of ‘free trade’ or direct economic interest, the Pacific islands wouldn’t be engaging in time-consuming, technical and troublesome deals with the EU, Australia or New Zealand at all, since the islands are increasingly trading with Asia. The following graphs show the historical direction of exports and imports in the Solomon islands since 1980.
Source: IMF direction of Trade Statistics
China has become by far the biggest export partner, although its share is now dwindling. Exports to the EU have steadily dwindled since the 1980s. On the import side, developing Asia is the big story, and Singaporean imports have similarly risen strongly, while Australia is currently the second-biggest import partner by country, although with a volatile history. Measured by both exports and imports, the EU is the country’s smallest trading partner.
So why aren’t the Pacific islands striking deals with Asia? If trade policy were about some sort of neutral pursuit of economic interest, the islands wouldn’t be wasting their time with the EU and ANZ; they’d be looking north and nearer east, and they’d be thinking about new opportunities in technology and services. But as it happens the current big powers with lots of political clout have decided that they want to do trade deals with the islands, and what they say, goes. China and Asia have very little trade interest in a region as tiny as the Pacific — its collective GDP is about the size of a mid-sized European town.
If I had a slight criticism of the Unlearningeconomics article, i’d say that she or he neglects the vast lobbying power of corporations and the extent to which trade deals are a product of the shoutiest multinationals. It’s a mistake to think of countries as necessarily acting in the interests of their citizens. The Wikileaks cables show that the United States acted quite clearly in the interests of McDonalds in El Salvador, partly due to powerful lobbying. The US also intervened behind the scenes in the interests of Monsanto and genetically-modified foods in Europe over many years. This had nothing to do with the comparative advantage of the United States or what was good for Americans.
But overall Unlearningeconomics is right:
The reality of trade is that it is always, necessarily, regulated. There is no ‘free’ baseline, untouched by politics, history and culture, to which we can aspire.
Trade is always managed, implicitly or explicitly. We can pretend that this isn’t the case and pursue an ill-defined ‘free trade’ ideal, allowing powerful interests and luck to shape the nature of the global economy, perhaps to the detriment of many. Alternatively, we can bring the management of trade into the open, making trade decisions political choices subject to public and professional scrutiny, respecting each country’s unique needs, and making sure that countries cooperate instead of descending into economic – or worse, real – conflicts.