Support for free trade should never be unconditional

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).