Tuesday, 8 April 2008

Even free-ish trade is a good thing [update 1]

Clark_ChineseTrade Free trade?  Free trade doesn't come with tariffs, employment restrictions and other protectionist restraints on trade.  It doesn't come with pages and pages of agreements on duties, tariffs and quotas, and the continued entanglement of the state with economics.  Free trade is what it says it is: trade that's free of all government restrictions on sellers and buyers.

Genuinely free trade doesn't need pages and pages of lofty documents to protect them -- all that capitalist acts between consenting adults need to flourish is the disentanglement of the state from the loading docks and business houses of importers and exporters.  It's said that the US Declaration of Independence was written on one piece of parchment, and the ten commandments on two pieces of stone, but the European Union regulations on trade in bananas fill four hefty volumes that are less readable than a your average book of Chinese algebra. That's not how genuine free trade looks.

On that basis, the agreement the New Zealand government has just signed is not a free trade deal, but merely a freeish trade deal.

But that's still a good thing.   And it's damned exciting  to see two countries letting the breath of freeish air blow through their trade relations .. and damned refreshing to see politicians from all persuasions celebrating the opening up of trade and to announcing the slow abandonment of protectionism.  What we have today is better than we had yesterday -- even if it's not as good as we'll have in 2019 when the last of the tariffs is supposed to run out -- and more than you'd expect from two governments both on the reddish end of the political spectrum.

For those opposed, let's just remind ourselves of the chief benefits of trade:

  • There's the "double thank you moment." When you and I engage in trade -- let's say I pay you ten-thousand dollars for a container-load of iPods -- what we've both decided is that I value the iPods more than the ten-thousand dollars, whereas you value the money more than the noise-making equipment. We both win -- and the economy is the richer because both my money and your goods have moved to people who value them the most, and who can put them to the most productive ends -- and we all get to fill our homes and our counting houses with the stuff that we most want.

    This is a good thing, and it's proof again there's nothing "invisible" about Adam Smith's invisible hand. Trade benefits everyone.  "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest." The butcher, the brewer and the iPod-maker "direct [their] industry in such a manner as [their] produce may be of the greatest value," and we are the beneficiaries of their labours and their trade -- each intends only his own gain, but by the blessing of trade he is, said old Adam, "led by an invisible hand to promote an end which was no part of his intention."
  • International trade is a prime example of the virtue of comparative advantage, from which we all benefit.  Land-locked Switzerland for example produces watches and banking services in order to buy food and sailors, whereas we produce wool, beef, dairy products and sailors in order to buy the world's manufactured goods (and since most of these are now being manufactured in China, it's easy to see why trade with China is a good thing).  We all produce in order to trade, and the end result of all this industry is that the whole world is made better by the fact that we all specialise in doing what we do best: there are more watches, more food, more dairy products, more manufactured goods (and better and richer sailors) than there would be in the world if we all closed our borders and tried to do everything ourselves.

And let's remind ourselves that this is the reason we go to work every day: to be able to buy stuff that keeps us and our families alive and flourishing.  All that those remaining tariffs are going to do is make it more expensive for Ma and Pa Home-Owner to buy the stuff they need to make their homes better. Free trade makes everyone more prosperous (just look at that graph to the right for example to see what lowering tariffs, decreasing protectionism and increasing trade did for the US.)

Not everyone can see these benefits however, or if they do recognise them they raise other issues.

  • There are people who will argue that free trade kills local jobs. Just think for a moment about that. It certainly closes down jobs in industries and companies that don't perform well, and are doing things we don't do best -- but what it does by opening up trade is making goods cheaper for everybody who is working, leaving money in their pockets to buy from industries making use of that newly available labour to enter production in areas in which we're more productive.  In other words, trade allows us to move labour from less productive to more productive areas of industry, which will probably involve greater specialisation and increased comparative advantage.

    Everybody kicks a goal, and we're all made wealthier by it.  (And that's the case whatever China or anyone else does with regard to tariffs on our own exports.)
  • There are people who argue that trade with China encourages a government that persists in human rights abuses.  It's true: it does.  Recent events in Burma and Tibet and the ongoing human rights abuses and continuing existence of slave labour gulags suggest that with the Olympics just months away, Chinese politics now looks little different to Chinese politics at the time of the Tiananmen Square massacre

    But as we read news of Buddhist monks being shot on the streets of Lhasa, the chief question to consider is, "What can we do?"  The main thing to ask yourself whether free trade will 'open up' China more effectively than the Olympics, and the answer is "Of course.

    No one should ignore the liberating force that is free trade. Blockades and embargoes haven't made either Cuba or North Korea more free.  Imagine for example if trade with Cuba had been left as free as trade with Vietnam -- instead of fifty years of blockade and oppression and Old Busy Whiskers, Cubans would instead have been rewarded with the benefits of trade and the fruits of industry, and Old Busy Whiskers would be a long forgotten footnote in history.  Think about the example of trade and liberalisation provided by Hong Kong -- a beacon to all of us, let alone China -- and a prime example of how trade makes even the residents of a resource-free rock richer than Croesus could even dream about, and gives them all greater freedom.  Think about that when you oppose free trade on this basis.
  • There are people too who argue that trade with China will empower its military.  This is an argument that on the face of it has more legs, but on closer inspection is seen as just as illusory.  As Frederic Bastiat used to point out (and there's still no one better to read on the subject of free trade), "where goods don't cross borders, then armies will."  "Countries that trade," points out Bastiat commentator Lew Rockwell, "have a mutual stake in the preservation of open, friendly relations. This is one reason that free commercial activities promote peace, and why protectionism and trade sanctions generate war tensions...  Our lives – by which I mean the lives of regular people in [NZ] and in China – are made immeasurably better because of the freedom to trade. Our networks of exchange build private-sector prosperity in both countries."  This is a lesson learned by Japan and Japan's enemies in the death and destruction of the Second World War -- and if they'd read Bastiat instead of Clausewitz they would have learned it long before -- that when it comes to gaining a world full of resources, production and trade beats blockades and conquest every time.

    So we have to conclude again that as long as trade with China excludes trade in weapons (and Raykon aside, we hardly have any sort of comparative advantage in this area), then this is another argument that fails.

The fact is that this freeish trade deal is something to celebrate, just as it's something to celebrate that so many commentators are prepared to celebrate it.  That' real cause for a double celebration.  Cheers!

UPDATE: Not all commentators are prepared to celebrate. John Minto, as you may have guessed, isn't prepared to celebrate. He had an anti-trade piece in the Christchurch Press yesterday. Paul Walker makes a few comments on his article here, and good ones they are too. He concludes, not unreasonably, "Mr Minto should enrol in a first year economics course, he would learn much. But he would then have to buy the textbook ... and that is most likely to be imported."


  1. A splendid article, Peter...unfortunately everything you have said will be entirely lost on the braindamaged Socialists who still see things in terms of "This puts our brothers in the footwear and clothing industries out of work" ...unaware these industries have been dead for 50 years in New Zealand.

    I see this as a great opportunity to profit and by any stretch of the imagination it is the Chinese who will end up getting 'fleeced' by this agreement, contrary to what the Asian hating socialist/green provincials will claim.

  2. Correct me if I'm wrong, Elijah, but didn't you earlier this year express opposition to our athletes competing at the Beijing Olympics?

    Have you changed your mind?

  3. Yes, I am opposed to the Olympic Games.

    However, this is 'business'.

    This is an opportunity to make vast profits...taking from Communists and giving to Capitalists, so to speak.

    As I have said before, just because you do business with certain types of people does not mean you have to like them, or invite them to dinner.

  4. Not all commentators are prepared to celebrate. John Minto, as you may have guessed, isn't prepared to celebrate. He had an anti-trade piece in the Christchurch Press yesterday. I make a few comments on his article here

  5. "As I have said before, just because you do business with certain types of people does not mean you have to like them, or invite them to dinner."

    I don't dispute that, of course; it's not part of my original question. But your having said that is contradictory, in that surely the same would apply to athletes.

    AFAIC, the Olympic Games *is* business. Huge business. And as such, the Chinese - like any host nation - will be using the event for commercial purposes, as much as any PR exercise, don't you think?

    If I don't believe in opposing a NZ company doing business in China, then why should I oppose a NZ athlete from competing there? This is being philosophically consistent, surely?

  6. As I have said before, just because you do business with certain types of people does not mean you have to like them, or invite them to dinner.

    Why not? There was a female councilor in Australia who have been having dinner regularly with some wealthy property developers over recent years which she was charged for corruptions. She wasn't only doing business with those wealthy individuals, she was banging them at night regularly.

  7. I gather then that you opposed the international trade embargo on apartheid South Africa and the ongoing US trade embargo against Cuba? And that your purported concern for individual liberty is outweighed by your support for material self-interest?

    You fail to address the after-entry issues that were relegated to addendum in the FTA, as well as the investment/point of origin/domestic content aspects that were also left for "later."

    Uruguay's experience after entrance into the MERCOSUR free trade alliance with Argentina and Brazil (the combined economic size of these two countries being less than that of the PRC) is instructive as to what the future holds for NZ--and it is not the experience your quoted academic economists describe. In the real world size matters, as it confers leverage and advantages due to the economies of scale involved. The prognosis is that short term gains will be accrued to NZ in exports and relocated manufacturing (the latter good for shareholders but not local workers), but the post 2019 picture will be one of bilateral economic dependence, which will result in some interesting military-diplomatic alliance shifts. Or did you not think of that? Better start brushing up on your Mandarin and obsequious bowing technique.

  8. Anonymous

    I think that is going to happen to NZ anyway. The Pacific is becoming a Chinese ocean. All the Pacific islands have Chinese representation and substantial Chinese investment. NZ is merely another Pacific Island as far as the Chinese govt are concerned. NZ is a little larger than most and has somewhat more population and infrastructure, but in the end it is a small enough morsel to digest easily.

    Having spent the last few generations building a welfarist culture of dependance and easy priviledge, regardless of cost and heedless of the opportunities foregone, it is hardly surprising that the NZer is witnessing his way of life coming to a rapid end. As the quote goes, "Nature abhors a vacuum."

    Expect Chinese colonisation and a totally revised culture within your lifetime. It will be very interesting to see how quickly it occurs and how the Chinese manage it.


  9. Sue, you should decide various matters for yourself and you should not feel you have to look in some kind of 'Libertarian Rulebook'..(where on page 34, paragraph 18 it says "Boycott the Olympic Games and be suspicious of an FTA")

    I view the Olympic Games as being quite boring as a sporting event, and a propaganda exercise by the Communist leadership of China, and as such have no interest in it at all.

    A free trade agreement, however, opens up a myriad of profitmaking opportunities.
    Making a profit trumps everything as far as I am concerned.

    I suppose it is difficult to get my point across to people whose experience of profitmaking undertakings has been either theoretical or unfortunately brief, but I am sure the average successful businessman would fully understand what I am saying.

  10. the Drunken Watchman8 Apr 2008, 20:06:00

    ... see David Ricardo's Law of Comparative Advantage

  11. Caption for photo of Clark & Jechi

    "Helen takes a nervous look at what she just signed up for."

  12. Cuba and North Korea were former outposts of the Soviet empire which stretched the globe. The soviets were defeated through American and British leaders finally becoming intolerant of that vast evil not because they signed trade deals.

    If a Lib had been in the white house instead of supporting Walshe’s political movement they would have ordered a couple of ships from Walshe’s employer the Lenin shipyard.

    Sorry Walshe can’t help but just soak up that trickle down freedom.

  13. Simon

    It depends which libertarian in which whitehouse. For example, Rothbard (who clearly was a libertarian) would have a different opinion from, say, Harry Browne (also a libertarian). However, it is doubtful either would have purchased warships from anyone at all.


  14. Excellent article Peter, is always refreshing coming here, makes me wonder why i bother buying the paper at all.

  15. PC, I can not comment upon the pro's or cons regarding the FT deal, simply because global economics are out my league. However there is an issue which you address in your statement "There are people who will argue that free trade kills local jobs".

    And good for them.

    It is not a mere matter of poor performance on their part.

    New Zealand is not on the same playing field as China. NZ manufacturers are forced to compete with their hands tied behind their backs by resource & environmental, heath & safety, employment, employee, regulations, penalties, and bureaucratic administrative compulsions.

    A couple of other observations.

    In seeing the VAST cloud of smog in the background of tv reporters in Beijing, it makes NZ carbon credits look like a pimple on a fat ogre's butt.

    In trading with a communist regime which enforces censorship (for example) something which is so far remote from our western ideals, quite frankly disgusts me. The act of trade is the pursuit of profit and to contribute to the profit of the (integrity) of China is no different than supporting a charity that funds terrorism or like selling "Taranki gates" to Nazi Germany.

    I accept foreign trade for mutual benefit. But I can not accept foreign OWNERSHIP (in New Zealand) by any foreigners who's values threaten, impinge or malign

  16. I suppose it is difficult to get my point across to people whose experience of profitmaking undertakings has been either theoretical or unfortunately brief...

    Ha ha - never a truer word spoken - a phrase which I shall steal...you have just nailed the blogosphere.

    I suggest those who oppose the FTA, foreign ownership, the Olympic venue etc, show their displeasure by not buying ANYTHING made in China, and donating the items in their house which are, to charity.

    It's only right. Put your money where your mouth is.

  17. Rebel Radius

    You wrote, "New Zealand is not on the same playing field as China. NZ manufacturers are forced to compete with their hands tied behind their backs by resource & environmental, heath & safety, employment, employee, regulations, penalties, and bureaucratic administrative compulsions."

    That's all true. New Zealand manufacturers are ensnared in a morass created for them by...... New Zealanders, not by Chinese. Hard to see why the Chinese should cop the blame for Kiwi stupidity.

    In consideration of ownership rights, how about the property of productive NZ manufacturers expropriated and consumed (by other NZers) by threat, coercion and force. Once again, hardly the fault of the Chinese.

    Parphrasing; "Kiwis are doing it to themselves."


  18. "Put your money where your mouth is."

    I do!

  19. "Kiwis are doing it to themselves."

    True, some of them are, but they haven't reached communism as yet, although Helen is furiously building "a red brick road to China"

  20. So Rebel - you don't just have a religious bias - ie Muslims - you dislike foreigners and foreign ownership of NZ property, and you oppose trade deals by Canadians, Chinese, and whoever else.

    So how come you call yourself a Libertarian, and indeed are a spokeswoman for the Party?

    Interested people want to know. And not just me.

  21. "Libertarian rulebook"? Isn't that an oxymoron? Doesn't sound like my cup of tea, anyway.

    But minding one's own business is a libertarian principle - and principles are compromised to one's detriment.


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