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  • Writer's pictureTony Goodman

Hegemony versus Free Trade – why does the mismatch matter?

Ricardo set it out in all simplicity. Even if you are a better at making a product than a trading partner, you should let them make it. Why? Because that free trade ensures that they are able to trade with you and results in both of you becoming wealthier. Trade is not a zero-sum game as some might imagine. There is an elegance to this view that reflects the world as it was 200 years ago when David Ricardo, a Londoner, set out the theory of comparative advantage, his economic principle, that became the foundation of international trade

It has become apparent that we live in a world where the simple production of goods has become a minority activity – at least in the UK. There is much talk of the UK’s strength in services, especially in the relatively newer disciplines of finance and technology, and this is often seen as being a weakness. It is not.

In the very simplest terms services are distinguished as being the use of human power, physical or intellectual, to provide an economic opportunity for the sale and delivery of an intangible product. A tangible product could be a raw material, or a finished good that has been converted from a raw material, with the use of human power, natural resources and, increasingly, the use of capital.

The dividing lines between the tangible and intangible are increasingly blurred as they become more interrelated with the complexity of the goods we use. IT is a modern industry seen as producing intangible products and so is classified as a service industry, but increasingly the products we buy can only operate with the benefit of the IT. This tangible versus intangible is often referred to as visible and invisible trade. Visible trade resulting in the transfer of physical objects. This definition is easier to understand and more commonly used in references to international trade.

The nature of invisible trade is such that it becomes harder to identify the real location of the economic activity. A software package could, and often does, have contributors from around the world, each sharing in the economic activity and so a distributed part of the ‘invisible trade’. If the advent of the modern computer heralded the second industrial revolution, then the internet served to blow the world open for its use and both revolutionised and disguised the extent of international trade that flowed.

There is another, perverse, component that has become an important factor in international trade that mitigates against free trade:- debt. Instead of the exchange of products, one party promises the wealth of the future to pay for products now. Debt had its place in modern economic activity, and where it is to spread the economic cost of assets across their life, especially in the case of productive assets, it makes complete sense. But, to use the common analogy: using debt to buy the fisherman a boat and nets so he can catch fish makes sense; using debt to buy fish to eat creates trade imbalances that inevitably lead to tensions.

And those tensions are rearing their head all over the world, nowhere more than in the Trumpian rhetorical confrontation with China. Chinese exporting hegemony with the USA seen in the resultant massive trade imbalances has been made possible by the Chinese financing of the resultant debt.

It is also happening much closer to home and is much in evidence within the European Union. The massive trade imbalances between northern and southern European states, resulted in major civil unrest in Greece and other Southern European countries. These imbalances combined with the ill-fitting straightjacket of the Euro, resulted, not only in explosive confrontations, but also in very high rates of unemployment and debt.

How did this happen? The EU is not a free trade organisation as it is often portrayed; it is highly protectionist and inefficient body that, whether by design or incidentally, strongly favours some members over others, giving them an internal market hegemony, and externally protects members against the outside world.

Nowhere is this protectionism clearer than with the Common Agricultural Policy (CAP), which is a travesty in Ricardian terms. It serves to protect the interest and income levels of certain farmers against the overall interests of European consumers and as a protection against more efficient or lower cost base imports. It consumes a massively disproportionate part of the EU budget and typifies the worst of what the US refer to as ‘pork barrel politics’

The UK, a leading exponent of free trade for more than the 200 years since Ricardo’s Theory of Comparative Advantage was first published, has strained rather than prospered against the constraints of the ill named ‘Single Market’. There is a single market in goods, where the UK is relatively weakest, but it does not exist in the same way with services, a UK strength. The political requirements for economic integration in order to enable the survival of the Euro are considerably adding to those strains.

Ricardo would have been turning in his grave.

The tensions that this has created inevitably exploded, evidenced in much of the Brexit discussion, with many of the free trade arguments being mischaracterised as a ‘little Britain’ mentality when in fact a return to Free Trade would be in the UK’s interests, a rejection of the zero sum game and the encouragement of global growth.

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