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1 June 2017

Free trade: Have we lost the argument?

by Daniel Hannan

Originally published by The Conservative.

“Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular”. So wrote Lord Macaulay, the poet, historian and politician, in 1824. His words were true then and are, if anything, even more true today. Which is bizarre when we consider the improvement that free trade has brought to the human condition during the intervening two centuries.

As Deirdre McCloskey, who writes in this issue, has chronicled at length, the last two centuries have seen a rise in living standards on a different scale from anything homo sapiens had experienced up to that point. In Macaulay’s time, almost everyone subsisted on around $3 a day. The life of a peasant farmer in Poland or Ethiopia or India or Japan would have been recognisable to his Iron Age ancestors. Since then, our species has increased its wealth by, at a conservative estimate, 3000 per cent.

True, there are still a few unfortunate souls living on $3 a day. These wretches are overwhelmingly concentrated in countries that have refused to join global markets. North Korea, for example, regards self-sufficiency (“Juche”) as the supreme goal of public policy.

Yet clever people continue to campaign against an economic system that eradicates poverty wherever it is practised. In industrialised countries, the fear is that freetrade will shift jobs to places with lower wage levels; in developing countries, that wealthy corporations will take over. As Matt Ridley writes, both fears were logically disproved 200 years ago by David Ricardo; and yet, they linger.

Why? Why do rich countries elect protectionists like Emmanuel Macron and Donald Trump? Why do poor countries cling to the policies that are demonstrably arresting their development? There are three explanations, one psychological, one aesthetic and one political.

First, free trade is counter-intuitive. Our hunter-gatherer instinct is to provide against famine, to hoard. The idea of depending on others for basic necessities feels wrong. Never mind that Singapore, which imports even its drinking water, transformed itself from a mosquito swamp into a gleaming city state simply by dropping barriers to trade. Such facts are up against millions of years of evolution.

Which brings us to the aesthetic objection. My children’s homework is full of stories about nasty corporations exploiting textile workers in Bangladesh and Vietnam. Sure, you and Iwouldn’t want to work in a Vietnamese sweatshop. But we have not spent our lives bending our backs in rice paddies. We have not fled villages that lacked electricity, clean water and schools. Employees of foreign companies in Vietnam earn 210 per cent of the national average income, and their wages are rising.

It’s the political objection, though, that motivates the Trumps and the Macrons. Free trade brings dispersed gains but concentrated losses. Importing, say, cheap Chinese steel will make almost everyone a bit better off, as prices fall, productivity rises, new jobs are created and money is freed up for other things. But voters, being human, will attribute that rise in living standards to themselves, not to free trade. The losers, by contrast – the small number of workers in industries that are undercut – will blame the government and vote accordingly.

Can free traders win? Yes. It’s precisely the counter-intuitive ideas that can be proved with logic. Aesthetic objections to the industrialisation of the Third World (“poverty, to be scenic, should be rural”, as the Victorian novelist Anthony Trollope put it) are not shared by the workers in those industries, who compare their lives to their parents’. And the political objections crumble in the face of success. No one in Hong Kong or New Zealand seriously wants to go back to tariffs.

In short, we have the better songs, some of them in the pages that follow. So, take a deep breath, and start singing.

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