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Free to trade efficiency?

Summary:
From Peter Radford Fascinating. The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without. Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses: “Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?” You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom? The Economist goes on to

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from Peter Radford

Fascinating.

The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without.

Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses:

“Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?”

You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom?

The Economist goes on to present its case, which inevitably decries any diminution of free trade, and ends thus:

“Liberal governments need to find a new path that combines openness and security, and prevents the dream of globalization turning sour.”

All well and good.  And predictable.  We must not get in the way of free trade.  Must we?

Something niggles me though.  When the Economist talks blithely about trade between nations it overlooks the rather more complicated issue that trade is not actually between nations.  It is, more often, between private parties situated in different nations.  So the so-called American trade with China is not America doing the trading but private entities like Apple, or Google, or Microsoft etc.  Certainly the benefit of such trade, in the form of cheaper goods for American consumers to buy, can be thought of as a national advantage, but the truth is that there is a second and more potent incentive for the trade.  That is the profit going to the private enterprise shareholders.  The disadvantage to the far fewer workers who might have been displaced by the trade — with “trade” being extended to include the relocation of production offshore — also has to be included in the equation, but since this has been externalized away from the business doing the trade, it doesn’t show up on any private ledger.  It shows up in the social and economic costs borne by the areas whence the production was moved. 

We can go a bit further.  The entire trade relationship between, say, America and China, is predicated on and initialized by, private decisions and not democratically decided, public ones.  And yet national diplomacy follows the trade.  So subsequent diplomacy takes the form of protecting and extending where possible, private interests.  Trade wars begin with private incentives being exploited. 

In other words, the simpler conversation the Economist wants to pursue is more complex and involves questions that ought not be squashed into narrow concepts like “freedom” and “free trade”.  Whose freedom?  Whose fee trade?  Who benefits?

Now I am not anti-free trade,  far from it.  Lower prices provide a great advantage for consumers.  But the social cost, by being externalized tends to get lost.  It is why there has never been a proper accounting of and compensation for it.  The flow of profits that Apple, say, gets from “free trade” ought surely subsidize the social costs of offshoring production.  Does it?  Or does Apple play games with its profits so as to minimize the tax it pays and this renege on its responsibilities?

No one can be shocked at the answer to that query.  

And then the Economist rolls out another questionable concept.  Locked as it is within the walls of classical economics, the Economics bemoans the possible losses associated with less “efficient” production.  It says:

“The retreat by the West to cold-war spheres of influence or self-reliance would be a mistake.  The costs would be vast.  Roughly $3trn of investment would be written off for less efficient production that fuels inflation and hurts living standards.”

Efficiency is such a strange concept.  It always distills down to lower cost.  Here we are at the tail end of a pandemic that exposed the supposed efficiency of elongated supply chains as being a stark trade-off between lower cost and resiliency, and the Economist still hasn’t absorbed the lesson.  Efficiency is an illusion in a world of radical uncertainty.  Lower cost is demonstrably beneficial to shareholders in the short term.  But a cursory survey of the natural world will tell us that some form of adaptability, which is a costly luxury in the world of extreme efficiency, protects the profit over the longer term.  You just don’t know when the next pandemic or geopolitical crisis will pop up.  Just how efficient is the inability to adapt to a new circumstance?  What does efficient even mean in the context of constant change?  The lack of understanding of the costs associated with uncertainty continues to baffle me.  Lower costs in general are a good thing.  I get that.  But at the end of an attenuated and vulnerable series of links across the globe, the loss of any one of which destroys the integrity of the whole, such efficiency is a liability not an advantage.

Context is everything.  Efficiency is not.

So some retreat from the sort of free-trade that the Economist argues we need to protect is in the interests of the very private organizations that profit from such trade.  This is a lesson that both the pandemic and the crisis in Ukraine is teaching us.

And this, of course, ignores the perennial question of just how far national and private interests are entangled in free-trade.  If the national interest — in the name of efficiency — is to encourage and protect private free-trade, then the private interests thus protected have an obligation to help pay for the consequences of their pursuit of profit abroad.

Pay those taxes.

Fascinating.    

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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