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Why free trade is a necessary evil in the world today

Economy Watch

By Esmond Birnie

Published 18/10/2016

Free trade and relatively high immigration are two important consequences of globalisation
Free trade and relatively high immigration are two important consequences of globalisation

To borrow from Jane Austen's Pride and Prejudice: "It is a truth universally acknowledged that most politicians dislike globalisation and most economists think it a good thing."

Globalisation is the process whereby national economies have become more open to each other so goods, services, labour and capital can move more freely. Free trade, or at least freer trade, and relatively high immigration are two important consequences of globalisation.

For the first 60 or so years after the Second World War, growth in world trade far outstripped the growth of world output - but that is no longer so. This year a global trade growth of less than 2% has been forecast. In some European countries - notably Ireland and Sweden - the percentage of the population who are foreign born exceeds that in the US (historically a migrant nation) but perhaps the shutters are being pulled down.

It is understandable that politicians should reflect any shift in public opinion. We have seen anti-trade rhetoric from both contenders in the US Presidential election. It is also very unclear if the Transatlantic Trade and Investment Partnership (TTIP) and the trade agreement with Canada are going to be ratified by European politicians.

It is often the case that those who lose out from freer trade (or immigration) have a more concentrated and vocal voice than those who gain. To the extent that free trade promotes new economic activities there is probably no constituency yet in existence to lobby or vote for such innovation.

The cry: "I am their leader and most follow them", often has currency. Examples of 'political courage' regarding free trade are not that common and sometimes not encouraging. In the 1840s the British Prime Minister reduced the protection of farming in the UK (the repeal of the Corn Laws). This was consistent with the development of Britain as an industrial economy but Peel's decision split the Conservative Party and consigned him to the political wilderness.

Nevertheless, it is not unreasonable to expect our leaders to recognise that not all of the problems blamed on globalisation such as increased inequality and a squeezed working and middle class are really caused by trade. The World Bank reckons that some of the 'blame' lies with technological change. Nevertheless, globalisation has depressed living standards for some.

The Conservative government seem to have set themselves a difficult combination of policies - less globalisation in the sense of cutting migration from the EU but also more globalisation in the sense of increased free trade with more distant parts of the world.

The May government has probably correctly assessed that public opinion is such that there is no appetite for a repeat of the large scale in-migration into the UK which occurred after 2005 when the Eastern European countries joined the EU.

When the Home Secretary Amber Rudd suggested that businesses publish an audit of numbers of 'foreign workers' she may have been flying a political kite and her suggestion would have constituted a very blunt instrument.

However, there could be a sense in which a turning off of the tap of low cost labour from the EU will force UK business and society to do what we should have been doing anyway - much stronger efforts to bring back into the labour force the long-term unemployed, economically inactive and socially excluded.

What about my profession? How are economists challenged by globalisation and its discontents? The common criticism of economists is that we cannot agree on anything.

That is a little bit unfair and the defence of free trade is probably one of the areas where there is some consensus (though not 100%). As far back as the 19th century economists (David Ricardo) identified reasons why international trade was likely to benefit all countries. Admittedly, there is nothing in the theory of comparative advantage to tell us that all countries will benefit equally.

I think that what we economists need to do is exercise a bit more realism and a bit more imagination about what really motivates our fellow human beings.

Realism in the sense that it has to be recognised that often those who lose from trade or immigration are not compensated (the World Bank recently recognised this point). Imagination in the sense that economic theory has, traditionally, had a fairly narrow view of what motivates human beings - we consume goods and services and we want to consume more. If human beings were only a collection of such economic interests then at least in principle we could design economic policies to try to make some better off without making anyone worse off.

In reality, over and above such economic interests most people have senses of identity - things like religion, nationalism and ideology. These are the things about which wars are fought. So, when we find that people don't necessarily follow their apparent economic interests this does not necessarily imply they are too stupid to follow the economic theory or that they do not believe economic forecasts, something deeper is going on.

PS: What do the economists of the future think? I asked my second year undergraduate lecture class in International Economics whether they believed free trade and globalisation were, on balance, beneficial. The percentage saying 'yes' was 100%.

Belfast Telegraph

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