It turns out, in any form it takes, trade involves a double-thank-you, so to speak. This has become ever clearer since David Ricardo presented to the world the idea of comparative advantage. Put simply, in situations where one of the trading parties involved holds an (absolute) advantage in producing traded goods, both parties should produce what they are better at, and later down the line trade with each other. This way both parties will benefit, more so than if the trade never took place – something seemingly rather easy to understand, but ironically something the politicians of today cannot seem to grasp (or don’t want to for some reason).
For far too long, the fixed pie fallacy – a belief that the wealth of this world was finite and the only way of getting richer was to steal other people’s wealth – was the widely held belief among the populace, the intellectuals, and those in power. When wars over resources were too costly to fight, society (not understanding that the ultimate resource is the human mind) went back to the good old trade wars of the mercantilist era.
Something changed after the Second World War when Japan took a different road. It was through economic liberalization and the advent of trade that the then-devastated nation with no iron resources became a leader in electrical appliances, electronics, steel production, and a champion in the automobile industry. This rapid growth allowed Japan in 1968 to outpace the more-than-twice-in-size, resource-abundant Soviet Union, thus becoming the second-largest economy in the world – a title held for more than four decades.
The Asian tigers followed suit and showed in practice just how important trade is, proving that the Japanese miracle was not a one-time fluke. In time Mao Zedong died and China started liberalizing its economy and opening up to the world, lifting millions out of poverty. The Berlin wall fell shortly after, which meant globalization for the first time for millions who had been stuck behind the ‘Iron Curtain.’ Thirty years later, the pictures of Russians having their first taste of freedom when companies like McDonald’s first opened up shop are as important and exhilarating as ever.
In 1999, years before globalization became the popular boogeyman, Bernie Sanders saw it as the driving force for wealth inequality across countries, saying “globalization has contributed to an enormous increase in the concentration of wealth in the world and in fact the impoverisation of the poorest people in the world.“
Slamming globalization was a key talking point on the road to the presidency for Donald Trump. On the campaign trail, you could hear him say “globalism has taken so many jobs out of our communities and so much wealth out of our country,” making the “financial elite who donate to politicians very, very wealthy” which resulted in “millions of our workers with nothing but poverty and heartache.” When he addressed the UN, he told the world “the future does not belong to globalists” as “we reject the ideology of globalism” in favor of the “ideology of patriotism.”
But what does globalization represent if not proof that, in Adam Smith’s words, “the propensity to truck, barter, and exchange,” is what gives rise to the division of labor, and in turn global prosperity? Despite obstacles such as the Cold War, global trade flourished remarkably after the Second World War – and with trade came the know-how, foreign direct investments, innovation.
Although the relationship between trade and growth is uncanny, this does not paint the whole picture. Along the way, developing countries imported the necessary institution, to which they owe their great success. As Heritage Foundation’s index of economic freedom shows, institutions like property rights, competitive and open markets, and the rule of law (to name a few) are all parts of the ‘prosperity machine.’ But even when the right set of institutions allow the factors of production to work their magic, due to their diminishing marginal returns, infinite economic growth is not possible. The capital stock, just like human capital, depreciates and must be replenished. Meanwhile, there is so much that can be done on a single parcel of land. It is to technology that we owe the possibility of infinite growth (rates). As the market becomes more globalized, technology is more easily transferable across borders. This has led the poorer nations amongst the developed to grow faster and converge near the top, and all the while new members have joined the ‘developed club.’
Former President Trump talked the trade war talk and it seems like he delivered. Across the Atlantic, when Brexit finally saw the light of day, Boris Johnson paraphrased Cobden by saying “…free trade is God’s diplomacy — the only certain way of uniting people in the bonds of peace since the more freely goods cross borders the less likely it is that troops will ever cross borders.” Brexit, however is not a foolproof plan. From the first days when Brexit was only an idea, it faced problems. The complexity of it all left some questions with no good answers, especially when looking at the issue of the ‘The Irish border.’ This is especially more potent after the speaker of the US House of Representatives, Nancy Pelosi, threatened that if the U.K. violated the Good Friday agreement, there would be absolutely no chance of an Anglo-American trade deal passing through Congress.
We ended last year with a deal between the UK and the EU. Let’s hope we get to see the promised ‘Global Britain’ as a paragon of free trade. Let’s hope this will push the rest of the world onto the right track as well. Because the good times are not carved in stone. The free labor, trade, and capital markets must not be hampered, which the pandemic did so, even in the EU.
It is clear as day globalization is hard to control. That yearning for control, though, brings more problems in its wake than it boasts it solves. Instead of printing money like crazy with the desire to cover the unprecedented spending of what we don’t have (US, UK), we should lift the burdens on the market and allow free trade to blossom again. If not for anything else, then simply because we know of no better way towards prosperity.