Blocking trade paths hurts economies and makes everyone a loser

Anti-globalisation sentiment has found political voice in many developed economies since the global financial crisis, most loudly in the US, where not one major contender for president advocated freer international trade throughout the primaries process.

Donald Trump, Ted Cruz, Hillary Clinton and Bernie Sanders have all expressed anti-globalisation views, most notably opposing the Trans Pacific Partnership, the most far reaching trade agreement ever to affect the Pacific region and which, ironically, provides an opportunity for the US to bolster its ­diminishing influence in the Asia-Pacific. Sanders even voted against the US-Australian free trade agreement in the US Senate in 2004.

Globalisation, or the international integration of economies' goods, ­services and financial markets, intensified sharply from the early 1980s until the GFC in 2008-10, dramatically ­affecting lifestyles, production, consumption and work practices in all hemispheres of the world. With the exception of the short-lived belle epoque that lasted from the late 19th century to World War I, the world had previously not experienced an economic phenomenon like it.

No story about the recent globalisation era can ignore the leading role played by China, both as a key driver and beneficiary of it.

China's astounding emergence as an economic superpower confirmed Napoleon Bonaparte's prescient observation that: "China is a sleeping giant. Let her sleep, for when she wakes she will move the world."

It took quite some time, but how right Napoleon proved to be.

China awoke from the early 1980s and grew astonishingly up until to the GFC. Assisted by a substantially undervalued exchange rate, China transformed from an impoverished developing economy to the world's second largest economy and became the world's largest manufacturing nation and exporter.

China's exchange rate is now more flexible and no longer seriously undervalued, though it no doubt played a part in hollowing out US manufacturing when China's trade growth exceeded its stellar average 10 per cent growth rate over that time. The issue now is whether international trade played on a now more level playing field is beneficial or not.

The positive impact of international trade is indisputable and, according to IMF managing director Christine ­Lagarde, helped reduce by half the proportion of the global population living in extreme poverty, creating a global ­middle class for the first time in human history.

World Trade Organisation director-general Roberto Azevedo has also recently pointed out technology changes and innovation have been largely responsible for job losses in advanced economies in manufacturing sectors in particular, not international trade.

Academic economists have largely remained silent against the escalating attacks on free trade, despite the strong consensus that exists in mainstream economics that on balance, free international trade mutually benefits the parties to exchange, raising their combined economic growth and living standards.

When economics Nobel laureate Paul Samuelson was challenged to name a proposition in all of the social sciences that was both true and non-trivial, he named the theory of comparative advantage that underpins international trade theory.

The classical British economists Adam Smith and David Ricardo first proposed this idea hundreds of years ago.

In essence, comparative advantage proposes that when any two countries specialise in producing the goods in which they have a comparative cost ­advantage, the combined output and hence income of both countries rises. Hence it pays economies to specialise in production and trade with each other. The same applies to regions and to individual production units within economies.

Ricardo used the example of ­England and Portugal.

If England was relatively more ­efficient at making cloth than wine, it followed that it should specialise in cloth making and export cloth to pay for wine imports.

Other reasons for supporting international trade are as follows. More international trade means consumers have a greater variety of goods and services to choose from. In addition, producers sell to bigger markets, which can lower costs as production is on a larger scale, while competition from imports checks the market power of domestic firms. Trade is also a powerful vehicle for spreading technology.

Why then does liberalising international trade create so much rancour if it delivers these economic gains? The answer is that although the winners from increased international trade generally outweigh the losers, the often not so visible benefits are diffused over large numbers of consumers, whereas the losers are usually concentrated in particular industries and are not compensated. Being concentrated, losers can also more easily organise and understandably have strong incentives to try and block any change.

Ideally, losers from increased international trade should be compensated by winners, though unfortunately, this usually proves impractical. Yet blocking new trade is a worse outcome as it means lower prosperity overall.