WHY FREE TRADE?
Paul Samuelson, the Nobel Prizewinning economist, was once challenged by a mathematician to name a single idea, in the whole of the social sciences, that was both true and nontrivial. It took him years to come up with an answer, but eventually he settled on David Ricardo’s theory of comparative advantage.
Ricardo’s startling theory is 200 years old. It explains why, against all apparent reason, a country could find it advantageous to import some goods even if it could produce them more efficiently than other countries. Conversely, a country is able to export some goods even if other countries can produce them more efficiently.
International trade is not driven by the absolute costs of production, but by the opportunity costs of production. The country most efficient at producing textiles, for instance, might be even more efficient than other countries at producing, say, shoes. The country would be best served, then, by directing its labour to producing shoes, in which its margin of productive advantage is even greater than in textiles. The country would be an exporter of shoes and an importer of textiles.
Churchill the bricklayer
Few people know that Winston Churchill was a fantastic bricklayer - he built a fine wall around his country home of Chartwell. But would it have made sense for Churchill to carry out all the brickwork needed on his house himself? Most people would agree that his time was better spent as a politician, speechwriter and commander-in-chief - this is where his comparative advantage lay. So it made sense for Churchill to employ a bricklayer to do the work on his house, even though he might have been able to do a better job himself.
This is good news for developing countries, which might lack absolute productive advantages, but will always have a comparative advantage in the production of some goods. They will export goods where their relative disadvantage is least, and use those export revenues to improve their standard of living by purchasing foreign-produced goods. There is no country whose economic circumstances prevent it from engaging in mutually beneficial trade with other countries.
What determines a country’s comparative advantage? Specialisation can be based on a large number of factors like climate, natural resources, an abundance of cheap labour, education levels, the business environment and much more. These differences across countries are the primary driving force behind trade, and they can also change over time. For instance, there has been a shift in the developed world away from a comparative advantage in low-skilled manufacturing (which now lies in certain developing countries) and towards a comparative advantage in high-skilled, high value-adding manufacturing. When it comes to making an iPhone, for instance, the complex parts are made in places like Germany, the US and Japan, while the assembly is done in China.
WHY FREE TRADE?
TRADE AND JOBS
The argument against free trade that seems to resonate most strongly with the general public in developed countries is that it can destroy jobs in import-competing industries.
When foreign products from countries with low labour costs enter a country without trade barriers, they are sold cheaply there, giving consumers a greater choice of products and the opportunity to save money. Domestic firms often find it difficult to compete with those low prices - they must find ways of becoming more efficient. This often means investing in new technology, and layoffs can result.
We must not shy away from the fact that some people lose out from free trade. But it is vitally important to clarify the scale on which this occurs. Many more people lose out from protectionist policies. The overall effect of an open trading environment on the economy is undoubtedly positive.
Employment is determined by the number of people in the work force, not by international trade. Job losses are caused by many factors, including changes in consumer tastes, domestic or foreign competition, productivity growth and technological innovation. It is virtually impossible to disentangle all these interdependent factors; technological innovation, for instance, might be stimulated by increased domestic or foreign competition. The US Bureau of Labor Statistics produces annual estimates of the percentage of US layoffs due to import competition. In 2009, a year of particularly high layoffs thanks to the Great Recession, fewer than 1 percent of job losses were caused by import competition.
The vast majority of companies that produce things these days import some of their materials. Cheaper foreign imports help these domestic companies to stay competitive by reducing their production costs. This can have a positive impact on jobs in these companies. But there are some domestic companies that struggle to compete in the world marketplace, and may lay workers off in order to remain viable. How can we be sure that the number of jobs destroyed by imports will be matched by the number of jobs created elsewhere in the economy? If for some reason unemployment in a country rises, the government usually takes macroeconomic steps to stimulate the economy and thus create jobs. But the key point is that trade policy does not directly affect the overall level of employment.
A recent concern in some developed countries has been that white-collar service workers have seen their jobs move to low-wage countries such as India. Such offshoring has been shown to increase the productivity of domestic firms, and most studies conclude that the number of jobs moved abroad in this way is not significant. Statistics on jobs moved also don’t take into account the inverse phenomenon of “inshoring”. Countries like the UK and US are net exporters of services, and more foreign companies are taking advantage of the skills of those populations by moving jobs there. In 2004, Bharti Tele-Ventures, India’s largest private telecommunications company, transferred jobs in hardware, software and customer relations to IBM in the US and France. In addition, as wages in countries like India rise, it becomes less beneficial to move jobs there.
the “race to the bottom”
Some people worry that free trade creates a “bargain basement economy”, driving down average wages. In fact, wages are determined by a country’s productivity, so in as far as open trade helps to increase productivity it actually helps to increase wages. Trade, however, can affect the distribution of wages in an economy. The perception that foreign imports destroy good, high-wage jobs in manufacturing is incorrect. Developed countries tend to import labour-intensive products like apparel, while those employed in such industries domestically - those at risk of losing jobs due to foreign competition - are on below-average wages.
Conversely, developed countries tend to export more skill-intensive manufactured products like aircraft, and those employed in these kinds of industries tend to earn above-average wages. If imports reduce the number of workers in relatively less productive, low-wage industries, and exports increase the number of workers in relatively productive, high-wage industries, the overall impact of trade is to raise average wages. Protectionist trade policies might see employment gains for low-wage factory workers, but this would be offset by employment losses for high-wage engineers.
Interestingly, a domestic industry facing intense foreign competition tends to reduce employment but not wages. This makes sense because the industry wants to try to minimise the impact of job losses on output by retaining the best talent. Layoffs often occur as a result of upgrading technology in order to compete with foreign competition, and more skilled - and therefore highly-paid - labour is required to do this.
In the developed world there has been a decline in the share of employment in manufacturing, largely due to strong productivity growth (fewer workers can produce more output) and a shift in consumer demand away from goods and towards services. Technological change has been a larger factor in the loss of manufacturing jobs than import competition. In fact, domestic production and imports are often positively correlated - in strong and growing economies an increase in imports is a function of strong consumer demand, which is accompanied by an increase in domestic production.
As mentioned above, it is jobs in import-competing industries that are threatened by open trade. These tend to be in low-skilled manufacturing. As described in the section on comparative advantage, developed countries are moving towards high-skilled, high value-added manufacturing as the developing world’s comparative advantage lies in low-skilled manufacturing. Manufacturing in the US and the UK, for instance, is not dying, it’s just changing. A redistribution of the kinds of jobs people do in an economy is an inevitable consequence of economic progress, of which freer trade is just a part.
Import restrictions slow the movement of workers out of low-skilled manufacturing jobs, so this policy destroys jobs elsewhere in the economy. Here is an example of a policy aimed at protecting a domestic industry which actually inflicted net damage on the economy.
Protecting US tyre producers
In 2009, Barack Obama imposed a three-year duty increase on car and truck tyres from China; existing tariffs of 3-4 percent were augmented to 35 percent in the first year, 30 percent in the second year and 25 in the third. US importers looked elsewhere for their supply, but there were no alternatives as cheap as Chinese tyres, so their costs rose. As domestic consumers shifted their purchases from imported to domestic tyres, domestic tyre producers could increase their prices.
The Peterson Institute study on this particular case estimates that a maximum of 1,200 jobs were “saved” in the domestic tyre producing industry, while the cost to consumers was $1,112 million a year. With average salaries in the domestic tyre industry at $40,000, the cost of each job saved was $900,000, paid by the American consumer. Viewed this way, trade policy is a set of domestic battles between producers and consumers, rather than a war between countries.
But the sting in the tale is the overall effect Obama’s policy may have had on jobs. The study estimated that the negative effect of the higher cost of tyres on consumer spending on other products resulted in a loss of 3,731 jobs in other sectors of the economy. That’s a net loss of 2,531 jobs in the US economy thanks to this attempt to protect a small number of domestic tyre producers. In addition, the US chicken industry lost $1 billion in sales thanks to the antidumping duties China levied on US chicken parts in retaliation for the tyre tariffs.
Why do governments protect certain industries at the expense of the rest of the economy? Some industries have built up enormous political influence over time, including by making large donations to political parties and campaigns. And certain industries have very successful PR machines that have convinced the public to support measures to protect them and to oppose measures that would open them up to foreign competition. On the other hand, consumers do not organise themselves into strong lobbying groups.
The theory of collective action holds that the better-organized and better-financed interests win in the political process, and these tend to be small, concentrated interests with the ability and incentive to organise themselves. This goes to the heart of free trade’s bad press.
Free trade means fierce competition between producers as the market is open to everyone, foreign and domestic. This, of course, drives the price of goods and services down for consumers, leaving them better off. It also gives consumers a much wider choice of goods and services. If we embraced free trade, the gains would be widely diffused across the population, in the form of millions of consumers being slightly better off.
The losses, however, would be felt more acutely by a much smaller number of people. Take the US protection of its sugar producers: a small number of US sugar producers gain around $3.9 billion a year in higher sugar prices, while American consumers lose even more - $4.4 billion. The net cost of protecting domestic sugar is $500 million a year to the US economy. But the consumer feels that as an average loss of just $30 a year per household. Of course, the total annual loss to households of protectionist trade policies is far higher, since many industries are protected. But consumers tend to be unaware of these invisible costs; how many Americans know they pay a third more for their sugar than most other people in the world?
Other forms of protectionism
There are other reasons for politicians not to support free trade policies. As we discuss in our “poverty”, “health” and “environment” sections, free trade agreements and policies of open trade with certain countries or industries are often not supported by the general public due to misconceptions about the way trade affects these issues. Examples include the 1999 Seattle WTO protests, and more recent opposition to free trade agreements like the Transatlantic Trade and Investment Partnership (TTIP). Politicians will always listen to strong, organised public opposition to policies, since their livelihoods depend on public support. It is therefore vital that the message of free trade’s benefits reaches the widest possible audience.
Helping displaced workers
Calling for trade barriers in order to protect workers who might lose their jobs as a result of open trade is like suggesting we ban ticket machines in order to create more jobs at train stations. Having said that, it is important to assist those who do lose their jobs to these changes in the labour environment, especially since they tend to be those whose job prospects are limited by low educational attainment. The goal should be to help them transition as quickly and easily as possible to new employment, which may well include retraining and relocation.
trade deficits are bad
Many people confuse the trade deficit with the budget deficit, but they are very different things - the trade deficit is not a debt. A large trade deficit in a developed economy essentially means that lots of foreigners are investing in the country, and that there is strong domestic consumer demand for imports. Hence the great recession of 2008-9 caused trade deficits to reduce. High levels of imports have a positive effect on the economy because the things that a country sells to pay for its imports - either exports or foreign investment - are both domestic job creators. A little bit of accounting is needed to explain further...
The balance of payments is the accounting of a country’s international transactions. It is divided into the current account, that is trade in goods and services (and a couple of smaller categories), and the capital account, that is trade in assets (mainly portfolio and direct investments).
Current account + capital account = 0
Therefore, a country with a current account deficit (ie. a trade deficit) must necessarily have an equally large capital account surplus. In other words, if a country is buying more goods and services from the rest of the world than it is selling, it must also be selling more assets to the rest of the world than it is purchasing.
Here is an example from the US’s balance of payments in 2013: for every dollar Americans handed over to foreigners in buying their goods (imports), foreigners used 83 cents to purchase US goods (exports); 3 cents to pay the US interest; and 14 cents to purchase US assets. What kind of assets are we talking about? They can be financial assets such as stocks and bonds; direct investments like mergers and acquisitions; or real assets like buildings and land. In essence, the US is supplementing its domestic savings with foreign investment, and can therefore undertake more domestic investment that it could otherwise manage.
As long as foreign investors continue purchasing a country’s assets, a trade deficit is indefinitely sustainable. If for some reason foreigners stop buying up a country’s assets, the trade deficit will gradually adjust as the currency depreciates, making exports more competitive and imports more expensive. This doesn’t require direct intervention and need not be an economic shock. Trade policy itself does not directly affect a current account deficit because tariffs and quotas have little influence on savings and investment, which are the ultimate determinants of the current account.
For more on trade and jobs, see Douglas Irwin’s Free Trade Under Fire, Ch.4.
WHY FREE TRADE?
TRADE AND POVERTY
“Aid is just a stopgap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid, of course we know that.” - Bono
Economists used to fear that free trade would lock developing countries into specialising in the production of simple primary commodities, hampering their economic development. But economic thinking has moved on.
A study of developing countries since 1980 showed that those which had cut import tariffs during that time enjoyed annual growth at an average of 5 percent, compared with 1.5 percent for those that hadn’t opened themselves up to trade. This is illustrated neatly in the divide between South America’s open-trading, Pacific-facing nations (Mexico, Chile and Colombia), and those facing the Atlantic (Brazil, Argentina and Venezuela), which have remained suspicious of globalisation. The Pacific countries have experienced much stronger growth than the Atlantic ones. India and China went through massive economic and trade liberalisation in 1991 and 1979 respectively, and look what happened to their economies as a result.
In the developing world, even small improvements in growth can mean the difference between life and death. One study examined the direct relationship between trade openness and infant mortality and life expectancy, controlling for a country’s per capita income, average years of schooling, number of doctors per capita and more. People in countries with lower tariffs had longer life expectancy and experienced lower infant mortality.
Even charities like Oxfam acknowledge the role trade plays in poverty reduction:
“Since the mid-1970s, rapid growth in exports has contributed to a wider process of economic growth which has lifted more than 400 million people out of poverty. In countries such as Vietnam and Uganda, production for export markets has helped to generate unprecedented declines in levels of rural poverty. Where export growth is based on labour-intensive manufactured goods, as in Bangladesh, it can generate large income gains for women…”
Surely Oxfam isn’t singing the praises of sweatshops?
There has long been a concern that free trade allows multinational corporations to exploit workers in developing countries, employing them in their factories with dismal pay and conditions. But most foreign-owned firms pay substantially higher wages than comparable domestic firms. In Vietnam, for instance, those holding jobs with foreign-owned firms earn 210 percent of the average wage. The turnover rate for employees in such companies is lower than in local firms, and in some cases the jobs are so desirable that workers must pay a bribe to employment officers in order to get hired.
The wages and conditions in a foreign-owned factory provide a completely different life to the toil of agricultural work that many such employees were doing before (as many have pointed out, one sweats much less in the factory than in the field!). The improvement in the lives of women who moved from rural to urban communities in order to take up these employment opportunities in places like Bangladesh has been well documented.
Efforts to curb this kind of economic activity are often well-intentioned, and can take several forms: campaigning for multinationals to stop investing in developing countries, demanding higher tariffs on exports from low-wage countries, or trying to insert minimum wage or working conditions clauses into trade agreements with these countries. All of these things will only harm the people campaigners are trying to help, by taking away one of the few opportunities workers have to improve their quality of life.
Wages and productivity
People like Donald Trump and those representing the interests of Western manufacturers make similar kinds of policy recommendations, but for completely different reasons. They note the developing world’s comparative advantage in low-skilled manufacturing due to low wages and labour standards, so in order to protect domestic manufacturers they suggest various ways of limiting exports from low-wage countries. This damages developed economies by making consumers and import-using industries - a far larger constituency than the manufacturers which compete with foreign imports - poorer, and it damages the export market in developing economies, hampering job creation there.
A long-term fear behind these protectionist ideas is that somehow developing countries like China will increase their labour productivity and move up the production chain to compete in more industries, while keeping their wages low. This has never happened throughout history, and the rapid increase in Chinese wages in recent years suggests it’s not about to start. As the productivity of a country’s workforce rises, so do its wages, so the best way to raise wages and labour standards in developing countries is to enhance productivity through economic development. Efforts to limit trade or investment are therefore counterproductive.
Rich countries maintain high trade barriers for agricultural products from developing countries while subsidising their own farmers. This has a huge effect on developing economies as agriculture employs about 60 percent of the labour force of developing nations and produces about 25 percent of their GDP. Studies have shown that reduction of agricultural trade barriers by OECD countries could raise developing country welfare by $12 billion. The elimination of US cotton subsidies, for instance, has been estimated to produce a gain of roughly $80 million for the four key cotton exporting nations in Africa.
The “Fair Trade” initiative is aimed at overcoming the phenomenon of low market prices for agricultural commodities, and hence helping developing nations’ rural poor. Fair Trade organisations buy developing country exports like tea, cocoa and cotton at above-market prices and certify their goods, hoping that customers in developed countries will pay a higher price for a noble cause. The Fair Trade farmers must pay a certification fee, produce regular reports and audits, and agree to standards on pesticides and chemical fertilisers. These things can often offset the gains farmers enjoy from receiving a higher price for their produce. More worryingly, a SOAS report on the scheme in Uganda and Ethiopia showed that wages for workers on Fair Trade farms were generally no higher than wages for workers on equivalent non-Fair Trade farms. In some cases, pay and conditions in fair trade organisations was significantly worse.
Part of the picture
We must be realistic about the capacity of free trade to improve economic performance in developing countries. Poor domestic conditions, such as an unfriendly business environment, excessive regulation, underdeveloped infrastructure, high transport costs or conflict, can prevent the potential benefits of free trade from materialising. In sub-Saharan Africa, for instance, transport costs are five times higher than tariff charges. Helping countries to expand exports through focusing on behind the border trade costs is therefore potentially more important than reducing tariffs and quotas, but every little helps.
For more on trade and developing countries, see Douglas Irwin’s Free Trade Under Fire, Ch.6.
WHY FREE TRADE?
TRADE AND HEALTH
The use of public health as a pretext for protectionist regulations goes back a long way. In the late 1880s, for instance, European officials admitted to excluding American pork from European markets in order to protect domestic producers, under the pretext that the pork was diseased. European pork farmers had been struggling to compete against low-priced American pork, and unsubstantiated rumours of contaminated American meat came as a godsend. Even though the meat proved clean after testing, the Europeans kept using public health concern as a pretext for the ban.
Today, the European pork sector is internationally competitive and the focus has turned to beef. In 1984, the EU introduced milk quotas to reduce the oversupply of dairy products, which resulted in an increase in cattle slaughter. This more than doubled the stock of surplus beef, so a system of subsidies had to be put in place to maintain the profitability of domestic beef producers. The EU then banned the use of certain hormones it deemed unsafe for growth purposes in cattle and beef sold in the EU (both domestically produced and imported). A large proportion of US beef exports to Europe contained these hormones, declared safe by American and international scientific panels, so the US retaliated by imposing 100 percent tariffs on certain agricultural imports from Europe.
In 1995, the WTO’s Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) came into force, which clarified that trade-related sanitary measures should be based on scientific principles, maintained with sufficient scientific evidence, or be based on international standards. Measures should be nondiscriminatory, consistent and not “a disguised restriction on international trade”.
The US, Canada, Australia and New Zealand used the SPS to challenge the EU ban on beef imports containing these hormones. A WTO panel of five scientists evaluated the scientific evidence on the safety of these hormones and their use in the industry. Two of the scientists were chosen by the US, two by the EU and the fifth was selected by the other four. They unanimously concluded that the hormones posed no health risk, and noted that there is seventy-five times more of the most controversial hormone in a single, untreated egg than in a kilogram of the treated beef. Why did the EU not want to ban eggs?
WTO rulings in 1997 and 1998 declared the ban inconsistent with the EU’s obligations, but the EU kept it in place. The US retaliated, once again, by raising tariffs on certain EU exports. The ban remains in place today, and US tariffs on EU agricultural exports have caused great harm to, among others, the European dairy sector.
Unlike most other trading entities, the EU uses the “precautionary principle” for deciding whether products are safe, meaning that something must be scientifically proven beyond all doubt to be safe in order to be sold in the EU. This makes it easy for the EU to claim that a certain product has not met the standard, while making it difficult for countries to negotiate barrier-free trade with the EU across many different industries. The challenge for policymakers is to distinguish genuine health and safety protection from regulatory protectionism in the guise of consumer safeguarding.
When faced with genuine public health issues, the WTO supports action, for instance the US ban on EU imports of livestock and meat in 2001 (due to fears of mad cow disease); the ban of imports of certain farm-raised fish and shrimp from China (they had been found to contain unsafe drugs); and the current EU ban on American apples coated with the DPA preservative. The WTO is most concerned with nondiscrimination, ensuring that countries apply their standards equally across all relevant products, industries and trading partners.
For more on trade and health, see Douglas Irwin’s Free Trade Under Fire, Ch7.
WHY FREE TRADE?
TRADE AND THE ENVIRONMENT
It is often assumed that free trade is the enemy of a healthy environment. However, our most pressing environmental problems are not directly linked to trade at all, and barriers to trade usually damage efforts to solve these problems. The technologies being developed to help improve our environment are most quickly, widely and cheaply diffused via the most open possible trade policies.
Don’t blame trade
The worst instances of air pollution, water contamination and deforestation tend to happen in countries that do not embrace free trade, and do not even necessarily happen in exporting industries. The Amazon rainforest has been burned mostly for the production of fuel and charcoal for domestic use. The overuse of resources is usually the result of a lack of well-defined property rights, a characteristic of more closed or less well developed economies. China’s pollution woes stem from its system of centralised decision-making by unaccountable bodies and individuals. Using trade barriers or, as is increasingly popular, environmental provisions in trade agreements, to try to address this issue is therefore fruitless.
Blame protectionism instead
However, there are many examples of protectionist trade policies not only failing to address existing problems, but even working against the improvement of our environment. Here are just three:
A common misconception about agricultural produce is that we reduce greenhouse gas emissions by “buying local”. Emissions, however, are dominated by the production phase, not the transport phase; cultivation and harvesting methods, use of water, fertiliser and packaging are all bigger factors than the plane, ship or lorry’s emissions. Hence, a cut of New Zealand lamb arrives at a British supermarket with a smaller “carbon footprint” than the same cut of British lamb due to more efficient production practices in New Zealand.
Another commonly-believed myth is so-called “dirty industry migration”. It posits that polluting industries will move to developing countries where environmental standards are more lax, and some countries will therefore grow to specialise in dirtier industries. There is no empirical evidence for this, since the costs of abating pollution just aren’t a big enough determinant of a company’s location. However, studies have found that economic growth achieved by capital accumulation, as in the industrialisation of developing economies, tends to raise pollutants, while growth achieved by trade and technological change tends to reduce pollutants. Once a country has passed its industrialising phase, there is a proportionally inverse relationship between per capita income and pollution. So in as far as trade increases a country’s GDP, it contributes to a decrease in pollution.
More directly, trade facilitates the diffusion of newer, cleaner technologies. Currently there is a widespread problem of high tariffs on these technologies. For example, the US imposes stiff tariffs on solar panels from China, making solar panels more expensive for Americans and reducing the planned number of solar power systems. Rather than lobbying for environmental provisions to be included in free trade agreements, environmental activists might rather lobby their governments to reduce tariffs on such technologies, to eradicate agricultural and fisheries subsidies, or to stop protecting the domestic steel industry.
For more on trade and the environment, see Douglas Irwin’s Free Trade Under Fire, Ch.2.
WHY FREE TRADE?
TRADE AND PEACE
“Free Trade, Peace and Good-Will Among Nations” - Anti-Corn Law League
The idea that free trade promotes peace among nations has been around a long time. Enlightenment philosophers noted that when two nations become economically interdependent through trade there is a greater incentive to maintain friendly relations because it raises the cost of war. Montesquieu, for instance, claimed that “the natural effect of commerce is to lead to peace”.
With the door to trade closed, one nation might conquer another to claim its goods and services; but with open trade, producing goods and services for another nation is more profitable than conquering it. Hence French economist Frédéric Bastiat famously said “if goods don’t cross borders, soldiers will.”
Classical liberals of the nineteenth century sought to put this theory into practice. British textile manufacturer and politician Richard Cobden played a leading role in the repeal of the Corn Laws in 1846 and in the establishment of unilateral free trade in the British Empire. He spoke of free trade as "drawing men together, thrusting aside the antagonisms of race, and creeds and language, and uniting us in the bonds of eternal peace." The slogan of the Anti-Corn Law League was “Free Trade, Peace and Good-Will Among Nations.” In other words, by promoting communication across borders, trade increases understanding and reduces suspicion of people in other countries.
Many examples throughout history suggest a positive link between trade and peace. The century of relative world peace from 1815 to 1914 was marked by a dramatic expansion of international trade, investment and human migration, exemplified by Great Britain. In 1914, German steel producers strongly opposed going to war because they sold steel to France. Deeper trade ties between the two countries across more sectors might have produced more widespread opposition to war. The rise of protectionism and the downward spiral of global trade in the 1930s aggravated the underlying hostilities that propelled Germany and Japan to make war on their neighbours.
In more recent times, New York Times columnist Thomas Friedman has come up with the “Big Mac thesis”, which notes that no two nations with McDonald’s franchises have ever gone to war. A nation open and developed enough to be a profitable home for an established international franchise such as McDonald’s will find war an unattractive foreign policy option because of its economic dependence on goods, services and investment from abroad - especially from other McDonald’s-friendly countries.
It is not easy to establish a statistical relationship between trade and peace; countries that are at peace with one another are more likely to be trading partners, so it is hard to establish causality. But economist Solomon Polachek, who has researched the relationship between trade and peace for the past 30 years, finds that "the overwhelming evidence indicates that trade reduces conflict." Likewise for foreign investment. In his 2006 paper with Carlos Sieglie he concludes that, "The policy implication of our finding is that further international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world."
To the extent that democracies are more likely to be peaceful than other forms of government, it can be said that free trade indirectly contributes to peace through democratisation. Countries that have been more exposed to international trade since the late nineteenth century have been less likely to become authoritarian. As the rents caused by protectionist policies are eradicated, the kinds of individuals and groups that might benefit from such rents lose their incentive to take power. More recently, developing countries involved in free trade agreements (like Chile, South Korea and Mexico) have generally seen a strengthening of their democracies.
Studies have also found that the more open a country is to trade the less it will suffer from corruption. Protectionist policies, on the other hand, tend to breed corruption, especially when bureaucrats have discretion in allocating import licenses. Murder rates in India fell significantly after its 1991 trade reforms, when some of the trade restrictions that had bred smuggling and gang violence were lifted.
There are many strong economic arguments in favour of free trade, but perhaps these longstanding arguments centred on peace, democracy and stability might convince an even wider constituency to support open trade policies.
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19 November 2021
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