The Importance of Trade

Now that Mr. Trump has appeared on the World stage, we are being forced to reexamine our belief in free trade as a mantra for growth. His statement that the rise of China as a world power has been on the back of “the biggest theft of American jobs in history” will go down as one of his more memorable statements, even if it has no foundation.

Donald Trump

To some extent Brexit is another, with Britain trying to raise the drawbridge that is its Membership of the European Union. The irony of that is that Britain was the first of the great powers to benefit from open free trade with the world, because she was an island (and not a very big one) and had the largest fleet of ships in the world.

The industrial revolution started in Britain who had coal and technology. They had to import most of what they used as industrial raw materials and much of what they consumed. In fact, at one stage in the last Century, Britain was the largest import market in the world. At the same time, it dominated world trade.

What the industrial revolution and global trade did for the world goes often unacknowledged in that it made it possible for humanity to live at a standard that would have seemed impossible two or three centuries ago. Today, in vast swathes of the world, in the so called developed States, populations live on average incomes of more than US$35 000 a year, some States claim average incomes above US$50 000, including the United States.

When you think that China, Taiwan, South Korea and Singapore were all classified as developing States 50 years ago with average incomes at less than US$1000 a year and are now highly developed States with some of the highest incomes in the world, the transformation has been staggering in historical terms. It took Britain 6 centuries to do what China has done in less than 50 years. No wonder that the first world leader to stand up and contest the Trump world view, was the Secretary General of the Chinese Communist Party at the World Economic Forum in Switzerland.

First it must be acknowledged that one of the main drivers of global economic growth in the last two hundred years has been international trade. Overall it has expanded at three times the average growth of nation States and this has helped those States who embraced the system, create the capacity to raise living standards even though they do not have access to land and resources on any sort of scale. In fact, countries with no resources and very little land have done, on average, much better than countries with massive resources – oil and gas, minerals and agriculture. This has become known as the “resource curse”, but all it means is that if you have access to the veins of global trade on favorable terms, you can live very well. Singapore and Hong Kong are just two examples.

Second, it has given rise to specialization and the concentration of production in those countries who are best able to use the basic raw materials involved. This is the secret of German and Japanese productivity and growth since the World wars destroyed their productive capacity. Germany is the largest exporter of finished goods in the world, has an industrial base that comprises thousands of small to medium sized companies.

What has happened in the world in the last 50 years is that those countries, or even Cities that have been able to specialize and produce finished goods of a quality and price that allows them to dominate markets, have been able to grow their economies at an extraordinary rate. No one could have imagined in 1950, that a country – as large as China, could possibly grow at 12 per cent per annum or more for 40 years and lift a billion people out of poverty to middle income status.

It could never have happened without free trade in goods and services.

In many ways, the USA is in a unique position – it is dependent for only 5 per cent of its economic output on trade. It is one of the most independent countries in respect to access to resources of all kinds, in the world. It is for this reason that the USA will survive Trump and remain a global economic power. But so much of its leadership influence in the world in the past has been based on its commitment to moral principle and free markets. Free markets work best in a free trade environment that is managed with clear rules and guidelines – that is why we all belong to the World Trade Organization.

The rise of China in the world has been driven by pragmatic economic and political policies. The fact that this change came at a time of open markets and free trade made it possible for China to harness her massive human resources and to compete globally for economic space, with brilliant success. Today China dominates many markets and has been the main driver of global growth. Without the combination of open access and the Chinese rise, the world economy could never have grown in the way that it has in the past half century.

On the back of this growth and the rising tide of prosperity that has swept the world have come many other benefits – democratic values and practices have become entrenched in many societies that previously only knew tyrany and dictatorship or feudal systems of governance. In fact, closed societies – like Zimbabwe and North Korea have been brushed aside and left behind, their populations wallowing in poverty and despair.

The reality today is that we all live in a global world where communications have been completely transformed and trade across open borders has become the main path to prosperity. If you do not change, you get left behind in every way. Trump, even though he leads the most powerful nation on earth, will soon discover his limitations, the main sin of the Bush/Obama era was perhaps overreach and extending USA influence beyond its real boundaries. But the answer is not to go back, but to embrace the new world order, as the Chinese and many others have done and survive the race to the future.

Abandoning the  work of building an integrated and free, democratic world is hard work, but it is the only way forward, all other paths lead nowhere. The one interesting aspect of the just started Trump era, is the fact that rather than bowing to babel in Washington – American States and Cities are increasingly making their own way in the world and this may become the characteristic that will continue to ensure human progress as we make our way into the future. As the famous Chinese leader Deng Shao Ping said; “When you are crossing a river and cannot see the bottom, you must use your feet to feel your way across”.

The open world system has become firmly established in global money systems and as a result, the vast sums of surplus cash, someone estimated it at US$100 trillion, have become a means to capacitate economic growth wherever the right conditions exist. That is precisely how the Tiger economies of the Far East have fueled their new industries. This system automatically rewards common sense and good government and punishes everything else. If you do not believe that just come and visit Zimbabwe.

Post published in: Business

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