Free trade paradox

The latest such issue has arisen with Chinese-made garments which have been stuck in European ports for several months now.

While countries such as the Netherlands, Sweden and Finland want the goods released, countries like France, Italy and Spain — all of which have big textile industries — have been pressuring the European Union Trade Commission (EUTC) to curb imports of Chinese clothing. EUTC commissioner Peter Mandelson, however, has been trying to persuade the EU members to lift the ban.

The issue here is not economics, but politics. The political economist Adam Smith, founder of modern economics, made an unassailable argument for free trade in his 1776 book The Wealth of Nations. Smith’s case rested on one fundamental proposition — "In every country it always is and must be the interest of the great body of people to buy whatever they want of those who sell it cheapest." In 1817, another political economist, David Ricardo, formulated the theory of comparative advantage, in which he proved that every country can benefit from trade by specialising in those economic activities it does best.

History since then has demonstrated the truth of these economic principles. Protectionism has usually resulted in weakened economies, with the ordinary consumer suffering the most, while free trade has bolstered the economies of countries with open borders. Indeed, while tariffs do help keep protected industries alive, they also reduce real wages in other sectors of the economy. So the populace as a whole is worse off.

The leaders of the developed nations know all this.

Their own economists can tell them that dropping tariffs and subsidies will, despite short-term displacements, help their already-robust economies in the long run. Moreover, the removal of trade barriers, especially on textiles and agricultural products, will do far more to help the economies of the poorer countries than any amount of aid. Indeed, a recent World Bank survey found that global trade liberalisation would increase developing-country agricultural exports by US $200 billion and textiles and clothing by US $180 billion. However, such arguments do not impress the special interests the developed countries’ leaders need — or think they need — to keep them in office. This is why the issue is political, not economic.

But this present matter is not merely one of local politics. The fact that it is China which is at the heart of this controversy is also a major factor.

The Chinese economy has had the fastest growth rate in the world over the past two decades. This partly because that country started from a slump brought about by decades of Communist rule, with the standard socialist policies only being relaxed in the 1980s.

China’s growth has begun to slow down, but predictions are that by 2050 the Chinese economy will equal or surpass that of the United States. This will surely bring about a world power shift that the US and the EU may be reluctant to see.

This issue will therefore not end with textiles. In the coming years, the world shall surely experience more and more such clashes between the world’s largest nation and the world’s most powerful ones. We may then well see the truth of the old Chinese curse — "May you live in interesting times."