Trump, twitter, trade, and tariffs are the flavours of the day. In an era when these four Ts influence global policy – what are the nuances, costs, and benefits of international trade? Is trade a killer of jobs or an agent of prosperity? Let's examine. The whole idea of international trade pivots on the theory of comparative advantage postulated by the famous British economist David Ricardo. This theory suggests that countries are better off when they specialise in certain goods and services and trade them with each other. Thus, if a country has cheap labour and expensive capital, it should specialise in labour-intensive industries and trade it for goods with countries that have cheap capital and expensive labour. This trade will benefit both countries much more than if they were to produce all goods they need on their own.
Balancing international trade
Despite the prospects of peace and prosperity, international trade has failed to create an equal world
MPost | 2018-03-14 16:27:10.0
The case for international trade
The world did embrace Ricardo's theory. Here's the evidence – as per the World Bank, in 30 years (1986 to 2015), merchandise trade as a percentage of world GDP increased from 27 per cent to 44 per cent. It was at an all-time high of 51 per cent in 2008. Certain countries benefitted much more than the others due to trade. Between 1998 and 2007, China's merchandise trade as a percentage of its GDP doubled and its GDP became 4.5 times. India also benefitted. Its trade became 1.7x and its GDP tripled, in this period. Ricardo's theory in action – countries are better off when they trade.
Economic gain is not the only rationale for trade. There is a moral case as well. Why should a person born in a country pay extra (in the form of tariffs and duties) for the goods and services that can be found in other countries? After all, people don't choose the country of their birth. So, why should an Indian born in Raipur pay extra for petrol than a Saudi born in Riyadh? Ideally, she should pay the same price as the Saudi pays, plus the additional cost of transportation. However, thanks to the 2.5 per cent customs duty on petrol, she ends up paying much more. The Indian didn't choose to be born in India, nor did she choose the government that levied this duty. Mind you, a duty is much better than sanctions that prohibit countries from trading with each other (think, Cuba and USA). The simple conclusion is that the place of one's birth determines the access an individual has to products that may be essential to living a normal life. Now, that's discriminatory and morally unjustifiable.
Trading for peace and prosperity
Thus, international trade is backed by a moral and an economic argument. And, these arguments prompted the world to engage with China and many other countries that, mildly put, weren't respectful of basic virtues such as democracy, freedom of expression and human rights. Henry Kissinger's secret trip to China in 1971 laid the foundation of a resurrection of US-China relations. The US objective to engage with China, in those days, was to create a counter-balance to the Soviet Union. And trade emerged as a great tool for engagement. The argument was that both countries would be better off, and the world would be more peaceful and prosperous. The US also thought that China would be an ideal market for its mega companies that could invest and earn profits from the Chinese demand for goods and services.
And the US followed suit, it lifted the trade embargo against China in 1971. An act by the US to strengthen its relations with China in those times meant that the entire western world was ready to engage with China. In 1978, Deng Xiaoping launched the 'Open Door' policy and announced his intention to trade with the entire world. Special economic zones opened in China that offered preferential treatment to US companies and China joined the World Bank and IMF. Chinese exports to the US account for 25 per cent of its total exports worth $40 billion in 1988 and in 2001, China joined the WTO. The essence of these events is to showcase how China benefited through trade and globalisation. Between 1990 and 2004, China's economy grew at an average rate of 10 per cent per annum, which was the highest growth rate in the world and a substantial part of this growth was international trade, as 45 per cent of the growth came from exports. The total foreign trade in China in the year 2017 was estimated to be $4.28 trillion which was an enormous increase from 1978 when the total international trade was estimated at $21 billion. Through China's rise, the world also gained. Cheaper goods, job creation, less poverty were clear benefits.
So, Henry Kissinger was partially right. The world did become more prosperous due to China's rise. Now let's analyse the second part of his claim.
Did the world become more peaceful? Did China become all righteous and pious? Here are five hard facts that prove otherwise: i) China has expressed its dominance in the South China Sea without paying any heed to the due process of international law; ii) China continues to protect undemocratic, evil-minded nations such as North Korea and Pakistan; iii) China's Belt and Road Initiative has enhanced financial vulnerabilities in countries that were its proud partners. Sri Lanka is a clear example; iv) Chinese companies are aggressively acquiring mineral resources in Africa to the tune of $80 billion per year and finally; v) Democracy and freedom of expression still remain pipe dreams. 10,000 people died in the Tiananmen Square demonstrations in 1989 and there is still no free press in China. Heck, you can't even use Google in the country!
Look, what we did
The challenge is not just what China is doing to its people but what it wants to do outside its country. My one sentence argument is that a country that does not believe in democracy, human rights and disrespects the sovereignty of other countries has a defense budget of $150 billion, the world's largest army, a foreign military base in Africa and a President who just ended term limits and is no less than an Emperor for life. Yes, various other countries with similar philosophies such as North Korea and Pakistan also have advanced military capabilities, but none of them come close to China. It's the scale and size of China along with its persistence to influence world order that poses an acute danger to the globe.
So here's the larger question, if in the 1970s, someone would have looked through a crystal ball and gazed ahead towards 2018 and predicted the exact sequence of events as they occurred, would trade still have warranted as a mechanism that made the world a better place? China's growth has been export driven. Without exports, China's economy would not have been where it is today. Without a growing economy, China's military power would not have been where it is today. Its defence budget would not have quadrupled from $30 billion in 2000 to $120 billion in 2010. Without trade, China's hegemonic intentions would not have been as strong as they are today. And President Xi, turning into Emperor Xi would not have sent tremors across the world.
So next time we argue that trade will lower the cost of iPhones or toys or steel, we must remember to weigh the short-term benefits against the long-term costs. And, the next time textbook economists oppose tariffs by governments, they need to analyse their long-term impact and not just short-term economic gains. But, this is not to say that trade is bad. David Ricardo's theory makes complete sense and globalisation must be strengthened. However, if I may take the undeserved liberty to add to his theory, then trade, not just between any two countries but between like-minded and morally upright countries makes the world better off in the long run.
(The author is Young Professional with the Economic Advisory Council to the Prime Minister (EAC-PM), New Delhi. The views expressed are strictly personal)