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Ideas for a fairer world

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Free Trade versus "fair trade"

By Sir Samuel Brittan. Source: FPC event, 10 January 2005

Hilary Benn has described himself as a Benn rather than a Bennite. I thought of describing myself as a Brittan rather than a Brittanite; but I don't think this works quite as well with my own surname!

May I first say something on the Centre's publication "Free and Fair: making the progressive case for removing trade barriers"? I find myself agreeing with almost every word of, at least, Jack Thurston's introduction. What I am less enthusiastic about is the packaging. Words do matter. I dislike "the progressive case for free trade". Is this opposed to the reactionary case for free trade (history suggests that reactionaries usually are strong protectionists)? Does it suggest that there is a different kind of truth for different parts of the political spectrum?

But my objection to the term "fair trade" goes deeper. It is a weasel term that can be twisted to mean whatever we want it to mean. In the United States fair trade usually means resale price maintenance. I first came across the expression in the British context in relation to the late 19th century political leader, Joseph Chamberlain, who was a Conservative imperialist. He was a great exponent of "fair trade"' which he promoted in the form of an autarkic British Empire. William Gladstone, who was by far the greater statesmen, remarked in 1881: "Fair trade bears a suspicious likeness to our old friend protection. Protection was dead and buried 30 years ago, but he has come out of the grave and is walking around in the broad light of day. But after long experience underground, he endeavours to look more attractive than he used to appear… and in consequence he found it convenient to assume a new name."

Today when I see a supermarket product branded as "fair trade", I wonder whether it merely means that the company producing it is law abiding and observing general accepted conventions. Or whether it means it refuses to trade with businesses using cheap labour in emerging countries. Here is an all too frequent example of those who shout loudest about helping the poor actually harming them. No one likes cheap labour, least of all well fed journalists or policy analysts. But it is nevertheless the main advantage that some poor countries have to offer on the world market and is a stepping stone to better living standards.

A question asked by many contributors to this volume is why it is so difficult to mobilise mass support for free trade. Hilary Benn notes the effects of the Corn Laws on the price of bread, which helped to sweep away Protection in the 1840s. The threat of a dearer breakfast basket saw the defeat of the Conservatives Party by the free trade Liberals in 1906. Yet just as outrageous is the effect on the cost of food (roughly £600 pa for a family of four) imposed by the Common Agricultural Policy. Why does this not lead to similar anger?

My own suggestion is that the reformers in the main British political parties and elsewhere, see the way forward, like Hilary Benn today, as a series of "further changes in the CAP." The same applies to trade policy in general. The detail of tit-for-tat WTO-and EU- type negotiations is mind numbingly boring even for economic journalists who specialise in other matters, let alone for the general public. If the British government had made a bold proposals for abolishing the whole CAP in the negotiations on the European Constitution, there would at least have been a lively debate. In return it might have had to offer more concessions on other items such as majority voting on a broader range of issues, which will in any case be necessary as the EU expands.

The free trade movement has lost a great deal by becoming too associated with trade negotiations best left to specialists and not brought in to the broader debate about the merits and defects of a free market economy.

Of course there are such things as market failures explained in every textbook. But these do not become better or worse because of the intervention of national frontiers. The protectionists have gained a lot of ground because they have becoming associated with hostility towards large international corporations. We do not have to pretend that these institutions are especially lovable. Personally I hate both government and corporate bureaucracy. Such corporations serve the public interest, national and international, mainly because they are forced to compete. The debate should centre on the extent of competition and the contestability of markets rather than the likability of the organisations

I am not going to argue against a gradual and sequenced approach by some of the poorest countries to reducing import barriers. But the more quickly and thoroughly they can open their economies the more rapidly they are likely to prosper; and in OECD countries the barriers and subsidies should come down tomorrow.

Postscript on Samuelson

When Milton Friedman was teaching me on a sabbatical in Cambridge he said that "that protection is better in theory, but free trade is better in practice." What he meant was that, although competent economists could find exceptions to the case for free trade, the kind of protection that was politically likely would do far more harm than good. More recently another Nobel prize-winning economist, Paul Samuelson, who comes from another part of the political spectrum and whose textbook will be familiar to many, has recently said something similar.

Samuelson's analysis which appeared in the in the summer 2004 issue of the American Journal of Economic Perspectives caused something of a stir. Some America commentators have been delighted to talk of Samuelson as a free trade renegade. There was indeed something suspicious about the appearance and timing of the article. Samuelson insisted that it should appear in the issue of Economic Perspectives before the presidential election, instead of with the usual symposium of commentaries, which would have delayed it until nearer the end of 2004. Moreover, he chose as his example of possible losses arising from free trade the outsourcing of services, such as the now famous call centres manned from India. As some of the subsequent commentators pointed out, this is not a good example for the case Samuelson wanted to make. (A Panagariya. Why the Recent Samuelson Article is NOT about Offshore Outsourcing. forthcoming). But the outsourcing of services was however at the heart of John Kerry's complaints about the Bush domestic policy. It is difficult to escape the suspicion that Samuelson, who now rarely comments on current issues, was being used as a weapon in the presidential campaign - and extremely unsuccessfully at that.

Let us however forget call centres and look at the general case. Samuelson has examined the opening up of trade between two stylised areas, America and China. He has worked out that if China experiences a rapid increase in productivity in an area where America has previously had a large comparative advantage (say computers) then America could be an absolute loser because the gains from specialisation might be more than offset by the losses on the terms of trade. There is nothing new in the theoretical possibility, although it depends on the losing country having a de facto monopoly in the product in question.

In the case he analyses, China becomes better off, the world as a whole becomes better off, but America loses. Not just American unskilled workers, but US GDP per head could fall. I am not mathematically competent to check his assertion that the argument becomes stronger if you take into account more than two countries and more than two commodities. The loss to the US in Samuelson's example comes basically from the rapid increase in productivity in areas where the US was previously supreme. Productivity increases do not benefit all comers - eg the effect of powerlooms on handloom weavers in the English Industrial Revolution. But going back to autarky would not in this instance help the US.

Anti-globalisers, who claim to have the welfare of poor developing countries at heart, should note that the only point at issue is whether China's gain is PARTLY America's loss. If you look at Samuelson's own conclusions from his analysis, you will find that he is extremely reluctant to draw a protectionist moral. But this will not be noticed by those who regard words as so much guff and look only at algebra.

Samuelson writes "If the past and future bring both [Type A] inventions that hurt your country and [Type B] inventions that help - even when both add to world real net product welfare - then free trade may turn out to be still best pragmatically for each in comparison with lobbyist-induced tariffs and quotas, which involve both perversion of democracy and non-subtle dead weight distortion losses. In 1900 free traders proclaimed, "Tariffs are the mother of trusts". In this millennium a more pregnant truth may be: "tariffs are the breeder of economic arteriosclerosis."

These may not be the most elegant sentences that Samuelson has ever written; but they repay study. As my tiny efforts to make them better known, I will put them on my website (www.samuelbrittan.co.uk).

Sir Samuel Brittan is an author and economic advisor at the Financial Times