Critics of free trade have got it wrong

Until 2016 I thought that we had debated free trade vs protectionism enough over the past couple of hundred years and reached a broad consensus that free trade created value. That is, international trade is not a zero sum game. It increases both the production and consumption possibilities of the countries trading.

It has been a while since I studied economics but, if I remember correctly, the principle of Comparative Advantage has been around since the early 19th century. One of my economics lecturers loved to quantify everything and scribble lots of equations on the board to show what the net benefits of free trade were. When I found this confusing I fell back on common sense which told me the same thing.

So, I have always thought that the benefits of free trade were both obvious and mathematically provable. Certainly the economic models used today are overly simple and incomplete but they are better than the models of the past. Given further developments in economic modelling and increasing computing power we can look toward a future where our economies are understood and can be predicted. In short, economics is a science.

My favourite newspaper, The Economist, has made a point of defending free trade for the last 100 years or so. Certainly there can be dislocation, particularly among the workforce, when production of goods or services moves from Country A to Country B driven by comparative advantage. Certainly there are issues to be managed such as multinational corporations shifting profits to low tax jurisdictions. But, because free trade is a value adding process, Country A will benefit as well Country B as its workforce migrates to tasks in which it has a comparative advantage. Given a reasonably flexible workforce and some sensible government involvement in distribution of the wealth created everybody is better off.

Some friends of mine in academia recently told me that I was wrong and that there is nowadays a strong rational basis to be anti free trade – particularly for developing nations. They encouraged me to read Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang. I have just finished it and, while it is the first intellectually serious attempt I have read by an academic to attack free trade, it falls way short of convincing me.

Chang is a South Korean “institutional economist”, and a specialist in development economics currently at Cambridge University. His book starts with a story. It is the year 2061 and a team in Mozambique has just created a breakthrough in hydrogen cell technology. This will revolutionise the world’s car industry! I guess I am meant to be swayed by this but seriously, give me a break: if making up fantasies about 45 years in the future is a proper argument then all my favourite science fiction authors should go into academia. Chang goes on to compare his Mozambique “fantasy” (his word) to the development of Korea over the last 40 years but the comparison is lost on me.

Chang’s first substantive point is that the major economies such as the US and the UK are preaching global free trade but that they themselves did not practice it when they were developing. OK, probably true (I haven’t checked in any detail although I thought Britain was a big free trader even then) but that was the 18th and 19th century. We would not propose that in any other field what was done in the 18th and 19th centuries is today’s best practice. Why should it be true in economics or international trade? Surely, the question to be addressed here is “does free trade maximise economic development opportunities in today’s world?”

Chang argues for developed countries to accept one-way tariffs by developing countries (imports to the developing countries being taxed by tariffs but the developed countries not charging import duties on the developing countries’ exports). Seriously? How would that be received in today’s America where rabid anti-free trade sentiment is rising? A blanket and reciprocal free trade framework is surely the only system that has any chance of being maintained in a world where everyone wants one-way protection.

And so we go on. Foreign Direct Investment (FDI) is bad because local workers might not be trained and local taxes might be avoided. No statistics, just critical points many of which do not even have anecdotal backup. There is no real attempt to answer the question of where the money will come from for economic development if FDI is banned. Is Chang proposing that every country should “do a Cuba?”

The whole question of what is a “foreigner” is skimmed over. Chang praises Finland’s isolationism in the early 20th century (where any enterprise with more than 20% foreign ownership was deemed to be “dangerous”) but why should “foreigners” be more dangerous than countrymen or neighbours? This proposition may have more credence in an ethnically homogeneous society such as Finland (or Korea) but in multi ethnic countries such as Australia, the USA and Britain it is a stretch. Perhaps that is why Chang simply skims over it.

The book is full of anecdotal arguments rather than evidence sifting or statistical analysis. That is OK and it is an interesting read but I am not going to regard it as an academic treatise. In my ignorance I had assumed that a “development economist” was a regular economist focused on developing economies but further research shows that it is quite a different beast.

Chang is a development economist, which may not mean anything to those who are not well versed in economic lingo and the academic study of economics. This particular field is one of the very few where central planning is hailed as not only possible – but preferable to market. Development economists overall look at how underdeveloped or developing nations can or should bring about economic growth, but they are as much proponents of schemes to raise health, education levels, and other “welfare” measures as they are in markets and economic growth. Perhaps for this reason, development economists commonly are very strongly pro-government (since government is the ultimate central planner and therefore, according to this logic, the most powerful actor, it can bring about great good – if only good people with access to the “right” information and tools run the government).1

In summary it seems to me that Chang has firstly decided that free trade is unfair and that encouraging it is a way for rich countries to keep developing countries poor. Then he has looked for any arguments to boost his premise. That process offends my scientific training, but let’s just fall back on common sense here… The famous economist L.W. McKenzie, himself an arch quant, was fond of relating the following explanation of the benefits of free trade when someone couldn’t understand his mathematical explanations-

“A moment’s consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England.” take care,