The coronavirus pandemic is the perfect metaphor for the perils of hyper-connection. We no longer need the help of rats or fleas to spread disease — we can do it ourselves thanks to mass international travel and supply chains. And we are no longer self-sufficient when things go wrong. When a corona vaccine is eventually discovered, we will have to wait our turn in the queue as we no longer have a UK-based manufacturer. Talk of the need for de-globalisation seems suddenly to be everywhere.
The pandemic also illuminates a wider retreat from full-on free trade that has been gaining in support and legitimacy over recent years—everywhere, that is, apart from in the economics profession. Democratic politics and national social contracts are starting to assert themselves against the laws of comparative advantage — which in any case turn out not to be quite as benign as the economics professors claim. This was brought home to me a few days ago when I heard a very senior Tory say that he was, until recently, an orthodox free trader/free marketeer but now regarded himself as an economic nationalist.
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He is not alone. World trade fell last year by 0.4%. There has been no multilateral trade agreement since 1993. Donald Trump wants to bring back some of the US supply chain from China. And this is not a Trumpian eccentricity, most of the US political class is behind him on this, acknowledging that allowing China entry to the global market economy in the belief that it would transform politically (and become less mercantilist economically) is a gamble that failed. There has been technological decoupling too, the world will not end up on single global platforms.
The ascent of climate change anxieties up domestic and international agendas is also making life uncomfortable for unfettered free trade, encouraging a bias towards localism, reduced travel and a degree of self-sufficiency. China’s air quality has improved dramatically in the past few weeks as a result of measures to contain the coronavirus. And more generically, Greta is asking whether you really need strawberries in March.
The truth is that the neat theories of free trade and comparative advantage have been oversold. Free trade, as Keynes pointed out, only works if the people displaced from good jobs by imports get equally good jobs elsewhere in the economy. The election of Donald Trump is one kind of proof that this has not been happening.
Hold on, say the free traders, of course there will be downward pressure on wages and job losses in the short run but, in the long run, the additional purchasing power we acquire from cheaper imports means we can buy other goods and services that will create equally good jobs elsewhere in the economy. Moreover, they say, when given the choice between protecting the Mid-West manufacturing plant and enjoying good quality, cheaper stuff in Walmart, people have voted with their wallets for the cheaper stuff.
But they have not been given a proper choice. Of course people would always prefer cheaper goods, but not at any price. If the choice was between slightly more expensive goods and services, and the preservation, or more gradual decline, of a certain agricultural or industrial way of life, they might well support such a deal. Indeed, they do so in the EU through the Common Agricultural Policy.
People are well aware that they are both producers and consumers. The end of production is not just consumption, as Adam Smith asserted, it is also about what sort of life you might have as a producer. This is one of those places where economics reveals its blindspot for culture and human beings in the round.
According to Keynes biographer Robert Skidelsky, most trade doesn’t follow any discernible pattern of comparative advantage, and Cambridge economist Graham Gudgin has shown that, for countries in North America and Western Europe, joining free trade agreements has caused slower — not faster — growth in recent decades. Unlike comparative advantage in natural resources, which is better described as absolute advantage, comparative advantage in manufacturing systems is usually quite marginal.
Much of the comparative advantage of recent decades has been achieved by simply taking advantage of lower labour costs in poorer countries. Apple makes iPhones in China, which does benefit US consumers, and to some extent Chinese workers, but the main beneficiaries are probably Apple executives and shareholders. Bringing some of that production back to the US, even at the cost of slightly higher prices, would not, I suspect, be unpopular.
The theory that free trade engenders a permanent peace has long ago been exposed as an empty dream, which is why national security and the threat of war (and pandemics) continue to provide justification for some degree of national protection. In the 19th century, Britain did completely embrace free trade. It was enormously to our advantage to do so, as the workshop of the world, and we imported most of our food by the end of the 19th century. The result was that we nearly starved in two world wars. After the Second World War, we did not make the same mistake; even with the enormous change in tastes and increase in food imports in recent decades, we still produce more than half of what we eat.
Nobody sensible is arguing for self-sufficiency or anything like it, though it might be a good idea to retain at least some national capacity in certain strategic areas like steel or nuclear power plants or, indeed, vaccine manufacture. And, after all, isn’t the logic of comparative advantage to produce specialist monocultures in a world that values diversity in all things.
But there are some economists and political economists such as Dani Rodrik, Ha-Joon Chang, Barry Eichengreen and Robert Skidelsky who are arguing, persuasively, that we need more democratic caveats to free trade. Rodrik argues that where there is a national consensus about preserving some aspect of an economy or culture, for example French restrictions on Hollywood film imports, these should be allowed and not attract sanctions from international trade regulators.
A UK government that is serious about regional and industrial policy, and shifting more high value economic activity towards the North, is implicitly protectionist. It is not going to promote high-tech export industries in Hartlepool and then allow them to be wiped out by imports. It will protect with either subsidies or tariffs. It is true that free trade theory does allow some such protection under the title ‘infant industry protection’, which is far preferable to senile industry protection, but EU state aid policy is not friendly to either.
The unlikely bedfellows of populism, environmentalism and technology are all pointing in the same direction — the reshoring of some forms of production, a bit more self-sufficiency, more teleconferencing with people in other countries rather than immigration, all in all a retreat from the hyper-globalisation of recent decades.
Free traders will, not unreasonably, point to the costs. It could mean a bit less growth, though neither the populists nor the greens will necessarily object. Global supply chains are, indeed, a force for peace and breaking them up could bring back inflationary pressures. It could also mean that the dramatic fall in poverty in poorer countries will slow or stop. So why not try to mitigate the costs of free trade better? Subsidise the losers more intelligently? Or, the free trade sceptic might reply, why not prevent there being so many losers in the first place?
As Barry Eichengreen says, the problem with the global economy is not a lack of openness, but a sense that “the nation state has fundamentally lost control of its destiny, surrendering to anonymous global forces”. And as Hans Kundnani put it in last week’s Observer: “it is time the UK Government adjusted its rhetoric and stopped its paeans of praise to free trade”. Part of the point of Brexit is to put politics before economics, democratic legitimacy before economic growth.
Of course, we still want lots of trade and sustainable growth but at less cost to other things that people hold dear. A new rhetoric is needed that combines an appropriate level of openness with a sense of national control. An economic nationalism that most liberals can feel comfortable with.
David Goodhart works at Policy Exchange, and is the author of The Road to Somewhere: The new Tribes Shaping British Politics.
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