If the economy is to recover while learning the lessons of the crisis, all countries are interested in participating in world trade, not turning their backs on it.
On 31 July 2020, the free trade agreement between the European Union and Vietnam officially came into force. Since that date, 71% of customs duties on Vietnamese exports have been lifted, and 65% of taxes on EU exports to Vietnam. This agreement will eventually lead to the elimination of 99% of customs duties between the two parties. The rest of the duties will be lifted gradually over the next ten years for EU exports and Vietnamese exports over the next seven years.
While the European economy is trying to recover from the devastating effects of lockdowns, the news has not been greeted with much enthusiasm.
In France, public opinion has perhaps never been as unfavourable to free trade as in this crisis. According to an Odoxa-Comfluence poll published in April, 9 out of 10 French people want the government to guarantee “France’s agricultural autonomy” and favour “the relocation of industrial companies”. The country’s executive which, not so long ago, defended an “open France”, today hammered home the idea that “consumption must be local”. As if free trade was beneficial in regular times but ceased to be so in times of crisis.
On the contrary, as economist Thomas Sowell points out in his economics textbook (which is not consulted enough by politicians), “the last thing a country needs when real national income is falling is a policy that makes it fall even faster, depriving consumers of the benefits of being able to buy what they want at the lowest price”.
As people look to their industries to boost the economy, turning their backs on the essential principle of comparative advantage, it is too often forgotten that free trade has always been a powerful lever for prosperity. This is not a matter of debate among economists. As Gregory Mankiw explained in 2018 in an op-ed piece in the New York Times, the exchange between nations is not fundamentally different from the exchange between individuals: “We are engaged in the task we do best, and we depend on other people for most of the goods and services we consume”. Furthermore, as David Ricardo later noted, you don’t even have to be the best in a field to get a job because specialisation in itself leads to productivity gains that the whole community can then benefit from. The larger the market, the greater these gains. So you can never have enough globalisation!
For example, over the last forty years, globalised value chains have allowed developing countries to increase and begin to catch up with rich countries, while rich countries have benefited from cheaper and often better quality consumer goods.
Contrary to popular belief, this development has therefore not been to the detriment of the Western working classes but to their advantage. A study conducted on 40 countries and relayed in 2016 by the newspaper The Economist shows that if international trade were to come to an abrupt halt, all social classes would lose out: the richest consumers would lose 28% of their purchasing power, and consumers in the first decile would see their purchasing power cut by 63% compared to its current level. The words of economist Thomas Sowell take on their full meaning.
However, these globalised value chains, which are the source of so many gains for consumers, are now the target of much criticism. The virus is said to have revealed the shortcomings of the “ultra-globalised” system.
Nevertheless, a closer look at the problem reveals that it is not so much hyper-globalisation as hyper-concentration that is at its origin. Therefore, relocating production to Europe does not solve the problem of dependence on a single geographical area or a single producer. Conversely, globalisation allows the diversification of supply sources and is by nature much more resilient than any autarkic system.
If the economy is to recover while learning the lessons of the crisis, all countries are interested in participating in world trade, not turning their backs on it. Free trade has already lifted entire nations out of poverty, so why should it not now be one of the solutions to the crisis?
Originally published here.
