Free yourself from the Free Trade Myth

Free trade is a hoax pushed by developed countries for their own self-interests. The mythical hoax propagated by the World Trade Organisation (WTO) is that free trade is pivotal to economic growth. In fact, the World Trade Organisation should change its name to Western Trade Organisation, since it really only serves the interests of the West. Let me first tell you what free trade is, and then identify its mythical nature. Free trade is similar to free love. Just the way in free love, you can love anybody and anybody can love you, in free trade, you can trade with any country and any country can trade with you. There are no barriers in either free trade or free love. This is, however, where the analogy ends. Unlike free love, free trade is not necessarily mutually beneficial. For example, if India and Denmark sign a free-trade pact, Indian could export cheap processed goods to Denmark (one of their leading industries) and flood their markets. While we Indians laugh our way to the banks, the poor Danes and their cows will be on anti-depressants. Why, you then ask, is free trade propagated? This, dear reader, is the start of the myth. Supporters of free trade, (hereafter referred to as free-traders), suggest that free trade is a very sound economic policy because consumers get access to cheap imports and producers get to sell in the remunerative world markets. Freetraders argue that if two countries engage in trade, specialisation of production occurs and the population of both countries start consuming more, thereby increasing material welfare. Hypothetically, they are correct; I say hypothetically because their  two-country free-trade scenario is based on hypothetical assumptions that both the trading countries are playing fair and do not have a comparative advantage over each other. We, however, do not live in a hypothetical world. The example of the US government subsidising genetically modified agriculture and thereby driving Indian farmers out of business clearly shows that countries do not play fair and are also unequally blessed with the resources to subsidise at will. The free trade implication of liberalising imports and promoting exports is also in direct contradiction with what National Income Accountants will tell you. They will quite rightly point out that national income increases with exports and decreases with imports. In fact, you do not really have to be Aryabhatta’s descendant (for the uninitiated, that means mathematical genius) to figure out why. In simple words, exports bring in money from other countries and imports drain out money. Therefore, the point is not to freely allow exports and imports but to promote exports while keeping imports at a bare minimum. After all, we are producers first (or relatives of producers!) and then consumers. Just imagine, what good are you as a consumer, if you are no good as a producer? It is only after you produce that you have the right to consume. Let us for example, assume that Ram Gopal Verma produces rubber ducks for a living. Now if Chinese rubber ducks are cheaper in the market and drive him out of business, would he even care for cheap Chinese goods? Our Ramu would instead try to save his posterior as a producer before he ever thinks of celebrating consumerism again. This is true in a macroeconomic sense too; we will not be able to consume if we jeopardise our producers. A free-trader will now counter-argue, “Yes, yes, we free traders know that exports bring income and imports drain income, but all that we are saying is that opening up borders for free trade will enable one to increase exports”. It sounds logical; that incoming imports will force a country’s producers to export. In fact, this is what Bangladesh did in 1981 after the World Bank forced it to open up its trading. This transition from a trade restrictive state, to one open to trade (exports and imports) increased Bangladesh’s export income from $1.3 billion to $5.2 billion, an increase of 300%. It is funny, however, that the GDP growth rate only increased by around 1%. Japan and South Korea, on the other hand, restricted imports to strictly what was needed and based their economies on exports. Note here that these two countries did not  freely trade, they exported while restricting imports as far as possible. In simple words, they maximised exports, minimised imports, and while doing so, achieved growth rates that touched 12%. This is what South Korea (a country economically worse off than India, in 1947) did to become the 27th most developed country (Human Development Index, 1999) leaving India behind, with a dismal ranking of 115 on the same index. Now hypothetically (again), we have a problem. What if every country restricted imports and promoted exports? What would happen to world markets, where would one export? Though this situation is way too hypothetical, it merits discussion because it is plausible in the future. It is important to realise here that when a country restricts imports, it does not ban them, it only minimises them. The aim of import restrictions is to ensure that producer welfare is not jeopardised. Therefore, the United States will never have a problem importing Indian software because this import won’t jeopardise American entrepreneurs (in fact they stand to gain). Similarly, India will import passenger airlines from the UK or the US, because we still do not make them. However, India will not (or at least should not) import expensive hybrid seeds from American corporations because our farmers (read producers) will be harmed. Since restricting imports is only confined to protecting producers and not banning them altogether, producers will always have reasonable markets for their goods in the world. If you closely follow globalisation debates (and are against it); the previous example (intentionally chosen) would have made you raise your eyebrows. You would want to know why India exports cheap software, whereas the Americans and British sell us expensive passenger airlines. The answer is unappealing but simple-we have to wait. You cannot expect Indians to suddenly sell indigenous computer chips and SUV’s to the world. The US did not start by exporting planes either; in fact, their initial exports were cotton, coffee etc. India has to export what it can, gain capital, invest and then move up the production line. The new Mahindra Scorpio (an indigenous 4-wheel drive) is one good example of how we are slowly climbing up the production ladder. So is all this the answer to India’s (and other developing countries’) economic problems? Is the answer as simple as maximising exports and minimising imports to protect producers? I am afraid not. As the cliché goes, it is easier said than done. As soon as producers are protected, they become complacent; they lose the incentive to produce export quality goods. This is exactly what happened in an over-protected India of pre-1991 when imports were heavily restricted, without promoting exports, unlike South Korea (which, as mentioned above, restricted imports, but exported heavily). Therefore, not only does the government have to protect producers, it also has to ensure that producers are efficient, cost effective and quality conscious, only then can it enter the export market. The South Korean Government won half its battle because of its wide support and influence amongst the masses, high rates of literacy, and lack of internal conflict. For the present Indian government, all three are a distant dream. However, these are only limitations, not barriers. A government with the right foresight can still lead the country to economic success. To sum up, I think it would be appropriate to identify my friends and foes. The World Trade Organisation, the World Bank and the International Monetary Fund would never come to my birthday party, even upon invitation. These institutions, though ‘worldly’ in name, are pro-West in function. They do not want India to restrict imports because this would directly hamper the ability of the West to maximise exports. The WTO will never support òIndia’s banning of imports of American hybrid seeds. Yet, we do not see them doing much for the protection of Indian Basmati rice in the American markets. One does not have to think hard to see whose side they are on. The Swadeshi theorists of India will be happy about import restrictions to protect producers (read rural producers). However, I am not too sure about their views on maximising exports. Sustainable development theorists should be bringing me gifts on my birthday as an import restrictive trade theory allows for banning hybrid seeds, excessive hydrocarbon use etc, as long as the restrictions are for producer welfare. I also hope that I have convinced you to come to my party.

Ronald Joseph Abraham
II Economics