Free V Fair

Listener: 29 April, 2000

Keywords: Globalisation & Trade;

The free trade versus fair trade dispute is an example of the way policy debates can be  dominated by extremism. Economists often pontificate on the topic with an authority that their theories do not justify. Non-economists take up ideological positions, relying on the economists’ claims.

What economic theory says rigorously about free trade is fairly limited. The well-established theory of comparative advantage argues that a country without tariffs, import controls, and so on is better off than one with them. The theory’s assumptions do not always apply. The market may not work – say, there are goods or bad. that are produced but not paid for. (Environmentalists are particularly sceptical of free trade.) Another (related) example is that sometimes the production process is different from that assumed in the theory. For instance, strong economies of scale (falling average costs with increased output) may justify protection. A third key assumption is that the resources, such as labour, capital and land, which become redundant from the abolition of protection, have to be redeployed in other industries, rather than remain unemployed.

The popular debate is more usually about the impact on the particular workers who suffer from globalisation. For, although the comparative advantage theory says the country is better off because income as a whole increases, it does not follow that every single person’s income is Workers from the closed-down industry are worse off Even if they get another job, their pay rate is likely to be lower, It is even possible that ell workers will be worse off, if the remove! of border protection lowers reel wages and raises profit and rents, (If a large share of the profits is owned by foreigners as a result of their investment, the country’s inhabitants may be actually worse Public trade policy disputes often amount to one side saying that free trade is a good thing, whereas the other says that canoot be true because some people are worse off, Neither side acknowledges the caveats to their arguments, (The inside government debate is sometimes no better in recent years, some government departments have supported free trade with all the subtlety of a struggling first-year economics student.)

Even so, I do not see that New Zealand has any real alterative to a relatively open international trading stance, that is, free trade in a moderated form, There are two positive reasons. First, we have a huge appetite for products we canoot possibly make in New Zealand. Those who protested at the World Trade Organisation in Seattle probably flew there in a Boeing (headquarters, Seattle), keep in contact with fellow protestors using Microsoft software (ditto), and buy books on globalisation from (ditto).

Second, the evidence is that countries that run relatively open international trading stances bave grown faster than those that have discouraged importing and exporting, and foreign investment. We do not fully understand why. My guess is that those very production processes that invalidate the comparative advantage theory of the benefits of free trade are precisely the ones that give the economy’s growth sectors their dynamic thrust. Full benefit requires larger markets than are possible in the domestic economy, so key sectors have to export. But trade is both ways, so the country must open itself up to importing. Trade is a bit like marriage. You bave to give up some autonomy to get the benefits.

So, my conclusion is for cautious liberalisation. I do not support what has been called the ‘trading naked’ strategy. It is like taking all your clothes off at a picnic, in the belief that the beautiful people will follow. The good news is that, although trading naked seems to have been the strategy of the last 15 years, my impression is that the current government is much more divided. It has extremists of both varieties, moderates between, and some who are genuinely puzzled. With luck, the public will bave a richer, meaningful debate, too.