LAHORE:
On January 27, business sections of various newspapers carried two contrasting news on free trade. Some papers reported the Secretary Commerce’s briefing to the National Assembly Standing Committee on Trade about the reluctance of the US to enter a free trade agreement with Pakistan and its suggestion to ask for trade concessions instead. On the same day, some papers reported about a seminar in Karachi on free trade, in which calls were made for Pakistan to encourage freer trade with its neighbors to ensure peace and prosperity. In light of these views, expressed by those in favour of free trade and those in favour of protectionism and trade restrictions, there is a course that our policy makers can take.
Those of us who voice trade restrictions and protectionism usually point to the scale differences between the developed economies and developing ones. According to this view, intelligibly put forward by Dr Kaiser Bengali in his speech in Karachi’s seminar, developed countries enjoy economies of scale due to which they are able to maintain average production costs at a significantly lower level than their competitors in developing economies. Thus the developing countries should give a handicap advantage to their producers to keep their competitive advantage in the form of subsidies or support prices.
For Bengali, free trade between the countries that are not equal is not workable as, for instance, the under-developed countries will continue to export only raw material whereas the developed countries will continue to produce value added while continue selling them back to the poor. This ‘center-periphery’ argument is a characteristic dependency theory case that was popularised by Latin American economists in the sixties.
The countries where policy makers believed the dependency theorists, such as India and Pakistan, ultimately followed import substitution policies, heavy investments in large scale capital intensive industries, often ignoring their natural competitive advantage in labour intensive products. These economies continued to remain backward and trapped in a low growth trajectory till India decided to open up international trade in early nineties, followed by Pakistan. Rest, at least in the case of India, as they say, is history.
During the sixties, in the heydays of both Latin American Dependencia school and the socialists grand nationalisation agendas, a set of countries, partly under the influence of the US, but mostly for their good, decided to take an unpopular course. They opened up their doors to foreign investment, focused on few labour intensive industries such as electronics, and adopted free trade. These countries are now known as Asian Tigers, spearheaded by Japan, and later on caught up by South Korea, Malaysia, Singapore and many others.
Going back further into the history, the industrial revolution was not due to mercantilists policies, rather it was made possible by adopting free trade policies, for instance by repeal of Corn Laws in the UK.
Such examples from history should provide for a reliable evidence to discredit trade protectionists, dependency theorists and socialists alike. However it is still important to look at the origin of ideas of free trade.
When someone asked the first American economist to win a Nobel laureate, Paul Samuelson ‘what is the economic concept which is most true and least obvious’, the professor replied: ‘comparative advantage’.
It is not well known that Imam Ghazali had discovered the principle of exchange based on comparative advantage as the foundation of all trade about 1,000 years earlier than Samuelson and 800 years before Ricardo. Quoted in Encyclopedia of Political Economy, Imam Ghazali had said:
“…farmers live where farming tools are not available. Blacksmiths and carpenters live where farmers are lacking. Naturally, they want to satisfy needs by giving up in exchange part of what they possess.”
Thus during the seminar in Karachi on free trade, when Dr Tom Palmer spoke of exchange and comparative advantage as the foundations of trade and prosperity, I was far from surprised.
US own track record of adopting free trade policies does not corroborate Pakistan’s secretary commerce’s claim that US is reluctant to enter free trade agreements with countries like Pakistan on the basis of size difference.
USA has FTAs have 17 countries including large and small countries like: Australia, Bahrain, Chile, Costa Rica, Guatemala, Israel, Jordan, Morocco, Oman, Peru, Singapore, Canada, and Mexico. The free trade agreement follows the principle of comparative advantage, and size does not matter. A small country like Finland can take global leadership by building just one brand, Nokia in this case.
While we have missed several chances in our history by picking up wrong policies, it is never too late to sit in the right school. It is high time we come out of influence from dependency theorists, development economists, and socialist economists. Our trade policy makers would do well by auditing some courses in Classical economics.
The writer works as a principal consultant at Development Pool and a founding member of Economic Freedom Network Pakistan.
Published in The Express Tribune, February 27th, 2012.
COMMENTS (9)
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Free trade, in many cases, is very beneficial. But Mr Salman, size certainly does matter...
Mr. Cynical so you are suggesting, we should leave everything and first make a war on the issue of Kashmir?? and you believe that the issue of Kashmir will only be resolved through war???
Too much emphasis on trade,people to people contact,cultural exchange etc. will ultimately take our focus away from the main issue i.e. Kashmir. If the people of this country wants it to happen, go ahead.
Our trade policy makers are everything but a true trade policy maker. It is far beyond them to even understand the real myth of comparative advantage in lieu of Pakistan. Their series of failed policies are reflective of their mind set. Secondly the notion of free trade must always be separated from the "Free Market Economy". Free Trade decision is always a political decision when two countries decide to undergo. The spirit of free trade agreement between two countries always based on mutual benefits and associated complementarities. The two countries weight the cost and benefits of making a free trade between them, if after the agreement the benefits of both exceeds their current trade benefits then it is logical to undergo such trade agreement. So having free trade agreement with US will never come true as here the major benefits receiver will be Pakistan only and no reciprocal benefits for US. Moreover historically free trade agreements between two neighboring countries are always more fruitful than with country of remote areas and a free trade agreement with neighboring countries will definite be more beneficial for Pakistan.
@khan:
Do you have empirical evidence of this? I hear this all the time but there is nothing to back-up this scary assertion. I think that is all it is; a scare-tactic.
To be sure, even America has suffered from "cheap" Chinese imports; it has the largest trade deficit with China and there are many Chinese-bashers in the US Congress. And there is the further view that the US is exporting jobs to China (and other countries).
Mr Ali Salman,
The irony is that Pakistan's economy is more open both on the trade, current and capital account compared with India! Being more protected, they, not we, should worry about free trade! I think we have it backwards.
Of course there will be sectors that will be subject to competition. I would say competition is good; its enhances consumer choice, improves quality and reduces price. The Pakistani consumer has been ripped off for far too long by anti-competitive abuses. It is time that Pakistan's rapacious producers should be subject to the sharp winds of competition. Nothing is to be gained by high protective barriers. It only breeds inefficiency and uses resources sub-optimally.
But trade needs to be conducted under certain rules and SAFEGUARDS. If local industry can prove that they are being unduly hurt by competition that is unfair, they can seek redress. There are avenues for that everywhere.
We have got it all wrong for persistently a long time. Policy is security centric so we cannot take fresh and innovative approaches. Our limited resources can be prioritized if the policy makers (establishment) wake up and realize that the world around us has progressed. We cannot go on applying obsolete approaches to present era problems. Setting low cost and high capital industries can give us competitive advantages. We can just immolate other turn around examples it's as simple as that. My fear is that we are not going to be sustainable with this approach forever....we will reach the ending line!
"free" trade does not mean exposing your vulnerable commercial community to unfair competition from developed countries. Pakistan should invest on technological ventures not just for developing weapons (that no one in the world will buy), but rather on producing goods and services for all people including its eternal enemies. Pakistan should focus on its strengths: developing agricultural-based industries; instead of making garments and looking for buyer in a competitive world, why not make a specialized fabrics?
I think the issue is a bit more complex. It is not simply about honing your competitive advantage but strategically moving from labor-intensive end of the industry spectrum to more capital intensive end. There is nothing wrong with investing in capital intensive industry at the outset (which many other emerging markets have done), but it should be complemented with a well designed human resource development and transition plan.
Free trade with powerful countries should not be allowed. Look what has happened with FTA with China.. it has completely destroyed our small, medium industry, millions are put jobless, and large companies today are sold out to the chinese through their loans.