Diversity and self-reliance vs specialization and trade

I was saddened to note that a new political party, the Australian Protectionist Party, has begun to raise its head in Australian politics over the last few years. This new party has taken its name from the Protectionist Party of Sir Edmund Barton and Alfred Deakin, the first and second Prime Ministers of Australia.

Advocating in favour of protectionist economic policies, Barton tells us:

"The tariff will not (be) in any sense prohibitive. It will be a moderate tariff. … I am a protectionist and I will endeavour to protect as far as possible the productions of our own soil. … Our industries have grown up under protection and the Government will not be a party to a policy that would be their destruction. It will be a tariff that will product sufficient revenue without discouraging industries. It will be a tariff calculated to maintain employment". (Taken from the Australian Protectionist Party website)

100 years later, while the small farm is practically a thing of the past, and Australia doesn't really have a manufacturing industry anymore, we find that unrestrained free trade is consistently championed by the smiling faces of the media, as well as by leading politicians from both the left and the right.

Call me old-school, but I actually think that there could be a lot of votes in protectionism; and this is why the emergence of this new party is making me sad. It turns out that the first Australian political party in living memory to actively advocate in the broad sense for economic protectionism is a small band of right wing extremists whose overriding concern is to protect us from an invasion of non-Anglo-Saxon migrants and refugees.

Last election they failed to register and I can only hope that they will once again fail to register their party for the next election. If they do succeed however, as much as you might like to see us move toward having more diversity, interdependence and local self-reliance within our domestic economy, please don't vote for them!

The idea of free trade is based primarily on David Ricardo's theory of comparative advantage, which tells us that even if one region is better at producing everything, the greatest efficiency in production can be obtained, and all parties will benefit, if each region focuses on specializing in producing what they are relatively best at, and trades with one another for everything else.

The simple beauty of the mathematics of comparative advantage has delighted economists for nearly 200 years now, beguiling them and apparently blinding them to any other possibility. For the modern day economist, the mantra, "comparative advantage is right, free trade is good" is central to their identity.

But there are actually some serious and quite obvious flaws in the theory. It turns out that our organic lives do not mesh so well with the mathematics. To begin with, comparative advantage does not take into account the costs (economic or social) of restructuring the productive infrastructure of a region so that it is producing what it is relatively best at.

Let us say that one region has a long history of growing bananas, but another region has begun growing bananas more cheaply (perhaps due to lower labour costs, better soils or more water). Comparative advantage tells us that the first region should accept the unrestricted import of the cheaper bananas, which will of course put the local banana farms out of business. The local population will therefore need to retrain, build new productive infrastructure etc.

Under such a circumstance, we can see that it is quite possible that the costs associated with this restructuring will outweigh the benefits of getting a cheaper banana. This is actually exactly the reason that WTO sponsored free trade talks have repeatedly failed: because developed nations can see that the cheaper banana available from poorer countries is not worth the economic costs –not to mention the political- of undermining their farming communities.

A number of thinkers, including David Ricardo himself and Herman Daly more recently, have also pointed out that the theory only works if capital is immobile. In other words, if one region is able to purchase the productive assets of another region, (through foreign investment, which is widely encouraged and practiced in the modern interpretation of free trade), the mutually beneficial aspects of comparative advantage quickly go out the window.