Support for free trade should never be unconditional

According to Chris Berg (Institute of Public Affairs) on October 17, "free trade would be beneficial even if Australia was the only country in the world that believed in it".

But is such commentary reflective of the policy difficulties ahead for Western nations, or do such statements merely represent poor scholarship based on wishful thinking?

For myself, also offering a perspective which supports free trade (within reason), commentary also needs to inform the public of likely trends to reflect the potential conflict that results from efforts to reconcile how the world should be and how the world is.

As The Economist stated on December 18, 2008, when urging greater macroeconomic stimulus as the best insurance against protectionism, there was an increasing risk that many governments would seek "to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies".

Even then, Washington was providing a bail-out for Detroit's carmakers, while Nicolas Sarkozy, France's president, suggested then that Europe will turn into an "industrial wasteland" if it too did not prop up its manufacturers, strategies that would invite retaliation.

The rest is history. Just recently, and only weeks after the US Senate passed a bill during October 2011 supporting US retaliation against China's currency manipulation, the China Daily (November 2011) reported that the US government was considering a 100 per cent tariff on Chinese PV solar cells because of fears that Chinese companies are selling solar cells below cost and receiving illegal government subsidies. The article also argues that "China has been a victim of trade protectionism for years", and that "China has been hit by 602 trade remedy cases worth $38.98 billion since entry into the World Trade Organization a decade ago".

And, predictably, the Chinese government announced in mid-December 2011 that it will, for the next two years, target US vehicle imports with engine capacities of 2.5 litres or more through anti-dumping penalties ranging from 2.0 to 21.5 per cent and anti-subsidy tariffs at a maximum 12.9 per cent.

But for Australian free trade zealots, such as Chris Berg, Western protection in response to the rise of mercantile China is a mistake given that latter nation "is taxing its citizens in order to prop up businesses", which means that "these subsidies are a direct wealth transfer from third-world taxpayers to first-world consumers".

To Berg, even Tony Abbott, the leader of Australia's major centre-right political party which generally supports less government intervention, was wrong to support a more interventionist industry stance towards China. Abbott had indicated a trade agreement with China was less of a priority than one with Japan on the basis that China is not a market economy. He had earlier suggested tougher laws against anti-dumping to penalise goods subsidised by foreign governments in order to ensure a "genuinely level playing field with a fair go for Australian companies".

But Abbott's comments are in tune with wider international concern about the rise of mercantile China.

Simple truth is that no Western society or government will always adhere to the promotion of freer trade without considerable consideration to its own strategic considerations.

As the Howard government realised with its own efforts to encourage freer trade yet preserve the national interest, Australia would struggle to have a high-tech manufacturing industry without substantial industry assistance. Howard, in 1999, also had to accept US restrictions on Australian and New Zealand lamb imports, despite rhetorical commitments from the US to free trade.

Supporting the ideals of free trade requires much than merely taking the lead and assuming that the theory with play out correctly to support both economic and political freedom, as free trade zealots may suggest.

Sure, liberal diehards can point to academic studies that show the link between economic and political freedom. For instance, Chris Berg cites one academic study by Indra de Soysa and Krishna Chaitanya Vadlamannati (published in Public Choice July 2011) which found "that market-orientated economic reform is unambiguously beneficial for human rights", thus answering Berg's chicken and the egg question by suggesting the need for economic freedom to come first.

But the increasingly hostile reaction to mercantile China does indeed have an important rationale on the basis that China is hardly embracing democratic ideas or becoming an open economy.

While China is increasingly important to the global economy, as evident by its 2008 stimulus measures amounting to near $US1.2 trillion (15 per cent of GDP) compared to other G-20 countries which averaged around 2 per cent of GDP, many Western nations will be much less likely to accept their own demise while China's economic growth grows at a high rate (averaged 9.6 per cent per year between 1990 and 2010).

Although it has been argued that China's rising labour costs for manufacturing now compare unfavourably with Vietnam and Bangladesh, China continues to move production inland where wages are significantly cheaper (up to 25-30 per cent). Along with migrants working on the east coast now returning home to take jobs inland, it has been estimated that China has a "substantial pool" of about 80 million potential migrant workers with Stephen Roach, non-executive chairman of Morgan Stanley Asia, declaring that reports a dearth of low-cost Chinese workers was "really an exaggeration".

While China's economic fortunes also must overcome higher transportation and infrastructure costs, and its economic fortunes still may depend on Western national economic growth levels, Zhang Zhiwei, an economist at Nomura Holdings Inc. in Hong Kong, suggests that China's share of global exports could more than double to 23 percent in a decade.

Even The Economist (Dec. 10, 2011), while noting China's ten years in the WTO has been worthwhile and made us all richer through cheaper manufactured goods, states that "China's rulers now badly need to grow up when it comes to trade as their "cheating is harming their own consumers and stoking up protectionism abroad". This is despite The Economist noting that China's sins are no worse than other rising nations: it has been more open to imports than Japan was at the same stage of development, more open to foreign direct investment than South Korea was until the 1990s, and its tariffs are capped at 10% on average compared to Brazil at over 30%.

The Economist hopes that the US (and others) could "make more use of the WTO's rules to curb China's worst infractions" rather "than delivering congressional ultimatums", but the US is becoming less tolerant of Chinese mercantilism.

While the US has long taken the lead to promote international trade by accepting large trade and current account deficits, and continues to promote free trade (deals with Panama and Colombia in 2011), US debt levels and trade deficits needs to be addressed. In 2010, the US traded goods deficit with China was $US273 billion ($US364 billion imports compared to $US91 billion exports).

It remains to be seen how long the US will rely to the same extent on consumption. As one article points out, while the captains of American industry sent production to low-wage China so Americans could buy cheaper products at home, Americans lost their jobs and their buying power resorted to mortgaging their homes to maintain their addictive and wasteful lifestyles. Hence, the real estate bubble eventually collapsed and took Middle Class assets down with it, thus making it harder for the average American to afford those cheap goods, send their kids to college, or contribute taxes needed for the US to reinvest itself.

If the IPA wants us to believe that free trade is okay based on recent trends, even if this means that authoritarian China will eventually surpass the influence of the US, then it needs to offer detailed analysis about all relevant political, economic and strategic factors rather than offer rhetorical support for free trade.

In other words, has much changed since Howard promoted the idea of a free-trade pact between Australia and China in 2003? At the time an Australian Industry Group survey indicated that one in five manufacturers believe they had encountered Chinese goods priced below cost, while only 13 per cent of manufacturers thought a trade deal with China would be beneficial (John Garnaut, 'In trade, Australia looks to China', SMH, 9 August 2004, 44).

Just recently, another article pointed out that US tolerance towards China is waning after 16 Republican Senators approved the anti-Chinese currency manipulation bill during October. Further, the highly regarded free trader Robert Samuelson wrote in the Washington Post of a possible 25 per cent tariff on China that "the policy's only recommendation is that it might be slightly better than the alternative: condoning China's ongoing assault on our industry".

Another article acknowledges that the Chinese people are admirable competitors yet states "their hybrid Totalitarian-Capitalist government is not our friend" on the basis that we do not share philosophies on human rights, labour rights or geo-political issues. The article reminds Americans that "every time an American patriot buys a Made-in-China product at Walmart, he or she is investing in China's military expansion, which forces us to invest more in our military to counter the threat".

Contrary to the simplistic plea by Berg for Australia to support free trade, even unilaterally, much more astute commentary is emerging overseas to explain why concern is evident about the future of free trade.

According to Simon Tilford, chief economist at the Centre for European Reform, while the "country that moves first to erect trade barriers will no doubt take the blame for the resulting damage to the trading system", the "real villains will be the countries that skew their exchange policies, tax systems and industrial structures to gain export advantage".

With households and firms in deficit countries saving more, he notes that there has been no offsetting decline in private sector savings in the surplus countries. In other words, "deficit countries need more domestic savings and surplus countries more consumption".

While quantitative easing in the US has pushed up inflation in countries with currencies linked to the dollar, including China, Tilford argues that the US has little option but to continue pumping dollars into its financial system, in order to compensate for the drag on its economy from the trade balance.

In line with the evidence, it appears that Abbott's concerns about China are much more astute than Berg's given that much international commentary highlights the policy difficulties ahead and why a simplistic pursuit of free trade today is both wishful thinking and unlikely.

The West's future, and the viability of free trade, is in its own hands. They can accept their demise or do something about it.

Hard questions for Western societies are emerging. In Iceland, and despite its own immense financial difficulties, its Government recently rejected a bid by Huang Nubo, the billionaire chairman of China's Zhongkun Investment Group, who wanted to build a $200 million tourist resort in Iceland on the basis that Huang's interest was more in Iceland's energy potential rather than tourism.

Freer trade must reman a guiding light for humanity, but it will never be achieved through wishful thinking as if it is a concept that always delivers a win-win situation. The IPA needs to lift its game to indicate how the destructive potential of protectionism can be minimised rather than offering wishful thinking more in tune with a lucky country mentality.