Free trade has had its time

As one critic notes, the US has to decide how much further it is prepared to go in terms of the balance between cheaper goods and enough wealth to boost domestic economic activity. With the average wage in developed economies about 10 times the average level in emerging economies with less environmental regulation and worker protection, the number of US manufacturing workers dropped by one-third over the past decade. In terms of output, manufacturing declined from 14.2 to 11 per cent of GDP from 2000 to 2009.

Solutions will also not come from authoritarian China, unless mercantilism is our inspiration and developing a rich class while exploiting the poor is the new policy role model for the world.

Yes, China' new confidence sees its lecture the West on what we debt-laden nations need to do while it calls for Western markets to be opened further to Chinese companies.

But China hardly created its wealth from new ideas about social and economic organisation. Rather, it benefited most since 2000 by policing capital crossing its border, and by curbing its currency to aid exports and buy US dollars and other foreign currencies, thus amassing $3.2 trillion of foreign-exchange reserves (about 54% of China's 2010 GDP). It is also estimated that China's headline debt to GDP ratio of 17 per cent could be above 100 per cent if debt from local government, state controlled banks, state owned enterprise, and other government supported debt are included.

Authoritarian China will aid many poor nations as it searches for more and more raw materials, but it will never inspire the world given its mercantilism, corruption, and authoritarian paranoia about its own population? Just recently, Michael Sata won the Zambian presidency because of opposition to China given the latter's drive to secure supplies of raw materials and the way its nationals treated local workers. While China has invested $6.1 billion into Zambia, many Zambians were outraged by Chinese managers who shot Zambian coalminers during a labour dispute.

In truth, unless Western nations are willing to destroy their social welfare systems simply to compete against lower cost economies, or to double infrastructure expenditure to China's level of 50 per cent of GDP, then greater protection may be needed.

As The Economist predicted in January 2010, while noting the importance of China helping the world economy through its own stimulus package and its imports growing faster than exports, protectionist pressures are likely to increase as China's rising share of world exports receives more attention. This will include further calls for China to revalue the yuan on the basis that this drains demand from other nations experiencing low growth.

The Economist notes that over the ten years to 2008 'China's exports grew by an annual average of 23 per cent in dollar terms, more than twice as fast as world trade'. If that rate was to continue, China would increase its share of world exports from 8 per cent in 2009 to about a quarter by 2020, a level higher than the 18 per cent share by the US in the early 1950s.

The answers are difficult, but time will show that recent policy trends cannot be sustained. There is only a set time that silly arguments advocate pure free trade or smashing working conditions can be tolerated.

Perhaps new tensions will emerge between nations as many developed nations recognise the difficulty of finding win-win economic situations for all involved in the international economy.

But we either change or increasingly accept that a greater proportion of Westerners will see their living conditions and wealth eroded, notwithstanding Australia's more fortunate position because of raw materials. The days of relying on debt are over, and the world now demands different policy solutions.