Thursday, May 10, 2007

Free trade, not always the panacea it is painted

I know that our International Development spokeperson reads this blog feed, so if you have a moment, Lynne…

The European Union is currently negotiating a trade agreement with twelve Pacific Island nations, one of which is Vanuatu, and whilst there, I became aware of local concerns in terms of the proposals. Reading the arguments, I began to realise that nations like Vanuatu enter into these negotiations at a huge disadvantage.

Vanuatu has no real industry, and is, for the most part, a subsistence economy, with 70% unemployment. With a population of less than 250,000, spread over more than eighty islands, and with most of the citizens dependant on what they can grow or catch to sustain themselves, I find myself wondering who will benefit from such a deal.

Indeed, it was originally expected that such an agreement could only follow on from a successful conclusion to the Doha Round of trade negotiations. In fact, the intention was that the deal would follow three years afterwards, and yet the Doha Round is still ongoing, which makes you wonder whether or not the European Union negotiators are acting in good faith.

At the moment, Vanuatu’s economy is dominated by Australian companies, with banks like ANZ, clothing firms such as Billabong and various food brands dominating the marketplace. Whilst the tourism industry still has a significant element of indigenous providers, this is likely to change as international hotel chains move in. Tourism requires initial investment, which is hard to come by in a subsistence economy.

So perhaps the solution is to start the move towards meaningful free and fair trade by allowing such small nations free access to our markets, without reciprocity. For the most part, they produce nothing that we can produce here, and as long as we ensure that other developed nations don’t cheat by using such nations as an alternative manufacturing base, like the Mexican production facilities for American companies, it would allow these comparative micro nations to support their inhabitants and reduce their dependence on overseas aid.

I have always believed that we should help poorer nations to help themselves and wonder why the link between trade and aid has been so undersold. A cynic would suggest that aid linked to the provision of services by British companies allows us to feel good about ourselves, whilst closing off our markets to these countries allows us to protect our indigenous industries and secure votes from those workers thus saved from potential unemployment.

We need to enhance our store of goodwill post-Iraq, and perhaps a trade concession to the small, mostly poor ACP (Africa, Caribbean and Pacific) nations would achieve that and help them build secure economies for the future. Then, and only then, should we seek to open up their currently fragile industrial bases to competition.


Anonymous said...

?? Why not reciprocity?

Surely allowing EU companies & individuals free access to the Vanutu market would also boost investment in their economy (eg the tourist industry you refer to) + will ensure their residents get a better deal through enhanced competition.

Surely Liberals won the argument on free trade 100+ years ago?

Tristan said...

You seem to be missing the point of free trade.
It is of most benefit to those who open their market - not to those who have access to another's market.

And why is it cheating for a company from another country to use the country as a manufacturing base. That benefits all involved. Jobs, higher wages and better conditions for the inhabitants of the host country, cheaper products for those in other countries leaving more money to be spent on other things.

Protecting industry stifles the economy, it distorts market signals which point towards the best use of resources.

Why is it good to protect an industry which would not be successful on the global market? It harms the citizens of the country through higher prices and less choice and poorer quality goods and prevents investment where the comparative advantage can be exploited to develop industry.

Britain should be calling for unilateral free trade for Europe for Europe's benefit, but we should also encourage developing countries to open their markets.
The 20th Century is littered with the disasters caused by protecting infant industries - India is probably the best example, we should offer advice to open markets for the benefit of those countries.

Tristan said...

(this is of course, aside from the ethical consideration that the only fair and ethical trade is one done voluntarily between individuals without government intervention)

Tom Papworth said...

If the Liberal Democrat overseas development team do read this blog, Mark, I pray to God they have not read it yet!

Your post demonstrates a two fundamental misunderstanding of the value of trade.

The first is the assumption that the benefits of trade derive primarily from exports. This is a fantasy common among Mercantilists and protectionists. In fact, the greatest benefit from trade comes from imports, which both reduce the cost of goods and inject greater efficiency into domestic firms.

As such, the real winners in non-reciprocal trade agreements accrue to the importers. When Britain began unilaterally to trade freely in the C19th, we left our protectionist competitors behind.

The second error comes from a failure to understand the principle of comparative advantage. As Ricardo clearly demonstrated, it does not matter whether a country has an absolute disadvantage in every form of production. If it concentrates on what it is best at, and relies on imports to substitute for what it is less efficient at producing, both it and its trading partners will benefit.

Vanuatu’s poverty, size and remoteness are irrelevant. South Korea was poorer than Senegal half a century ago, but as it opened up its markets it grew to be the world’s twelfth largest economy. Hong Kong was a tiny and poverty stricken rock after the war, but free trade made it an economic giant. Vanuatu may not be able to overcome the tyranny of distance to sell Steel, but in an increasingly digital age there are plenty of services that it could offer. The first step would be to reduce business taxes and regulation so as to attract financial investment companies that wish to benefit from a light regulatory regime and a less rapacious government.

As for the dominance of foreign firms, I would point out that Britain’s economy has boomed in the past decades as we have allowed foreign firms to buy up or invest in Britain. By comparison, the economic nationalists in France have seen their economy stagnate even as they suffered high unemployment. If, as you suggest, Vanuatu’s citizens are too poor to set up businesses on their own, they desperately need foreign capital.

No amount of foreign competition can undermine the ability of subsistence farmers and fishermen to maintain their standard of living. But if they wish to improve their lot, their best hope is to remove the misguided restrictions their government imposes on citizens, taking away their freedom to trade freely with whomever they wish, no matter where they live. If they do it alone they will benefit. If they do it in conjunction with the EU they will boom.

Mark Valladares said...

Tom, Tristan and Anonymous,

I accept the points made about free trade, especially as someone who leans towards being a Gladstonian free trader by instinct.

However, the concept is a mostly abstract one in the case of a small multi-island nation with a predominantly subsistance economy, poor internal communications and far from potential export markets. And that is the key problem with the 'free trade is a wholly good thing' argument.

South Korea and Hong Kong are rather poor examples to use, given their proximity to huge potential markets, significant populations and excellent trading links.

And the idea that Vanuatu should cut taxes overlooks the absence of income and corporate tax there altogether.

The small island economies rely almost entirely on niche agricultural markets, where they cannot compete effectively on price and must therefore compete on quality. At the same time, we in the west debate issues such as 'food miles' which can only discriminate against countries like Vanuatu.

The difficulties of internal communications, non-existent infrastructure (eighty-three islands, three airports with tarmac runways, only two meaningful ports, very little in the way of an effective road network) mean that much needs to be done to bring Vanuatu up to a point where free trade actually has meaning to anyone other than a rich elite.

And that's the problem with the purist argument, in that it assumes a basic economic model conducive to an import/export driven economy.

Academia often lacks the benefits of practical knowledge. Normally, I would be loathe to point this out but, in this instance, I have little choice...

Tom Papworth said...

(One "comment" you don't need to post, though of course you are free to do so if you want)

I'm sorry if I appeared to be unfairly acerbic in my blog.

I was genuinely concerned that the debate was not being progressed, but in retrospect I can see that it came across as rather rude.

I guess I need to learn that the speed of electronic communication does not always mean that communication is instant. I also need to recognise the difficulty of conveying tone in writing.

The last thing you need when trying to enjoy a holiday is a spat.


Duncan Borrowman said...

Mark is back now Tom, I saw him today at Lynne Featherstone's, he may well have buttonholed her on this issue in person.

Funny when I read the title of this posting I just knew which two bloggers I would see commenting.