We all gain from free trade with China and should not give support to temporary protectionist measures, argues Philip Booth in The Tablet. If we suffer unemployment from the opening of trade, it is our internal labour market policies that are at fault

Economic Liberalisation is not enough
Tablet, 9th September, 2005
Philip Booth

The chaos surrounding the import restrictions on Chinese clothing has brought to the fore some enduring concerns about free trade and globalisation. The dispute between China and the European Union has arisen because the EU, under pressure from certain members with a tradition of protectionism and other members with large textile industries, has replaced the multi-fibre agreement with specific textile import quotas on China.

The multi-fibre agreement and its predecessor regulated trade in textiles for 43 years and were notorious for the costs they imposed on developing countries. The main concern of those who oppose free trade in textiles is that the EU will be “flooded” with cheap imports putting at risk thousands of jobs. Concerns have also been expressed that countries that have traditionally exported to the EU – for example North African countries such as Morocco– will suffer and their development will be impeded, as China corners the world market in textiles.

These views are encouraged by the caricature of international trade as a “competition” that some win and some lose. Political journalists talk of trade “disputes” being resolved by “negotiations” and “deals”. On the day that a provisional “deal” was agreed between the EU and China, the BBC reported that the US was embroiled in a “textile war of words”. But, the development of new trading opportunities involves quite different processes and leads to mutual advantage. A world where the EU, or even one country such as Britain, produces nothing and imports everything from China is not possible. How would we buy Chinese goods if we did not have foreign currency from selling British made goods? Why would the Chinese work to produce goods for Britain whilst not receiving anything in exchange? Trade between the EU and China involves the EU producing goods and services that it is relatively better at producing and exchanging those for goods and services that are relatively costly to produce in the EU. Both sides benefit from the specialisation that results from trade.

Thus, in Britain, high value-added engineering products, insurance and banking services and education are traded for cheaper clothing and toys. British consumers benefit from cheaper products and British workers benefit from specialising in the production of higher value-added goods and services. With the money generated from the fees from a handful of Chinese MBA and Masters students at my university, Cass Business School, all the citizens of a medium sized English town could buy an imported Chinese shirt each. Trade is a two-way process, not a one-way process. Of course, the MBA graduates then return to China to assist further in the economic development of their country.

So why is there pressure for protectionism? The costs of changing trade patterns are frequently highly visible and concentrated amongst groups who have a loud political voice – for example, clothing manufacturers in southern Europe. The beneficiaries of increased trade with China are hidden and may not even realise themselves that they are beneficiaries. The political voice in favour of trade and against protectionism is therefore a weak one. But, also, in much of the EU, there is a very real chance that a smooth transition of economic activity from one sector to another, as market conditions change and trade liberalises, will not take place. Europe’s constipated labour markets make the running down of one industry that much more painful and the development of alternative, higher value added, forms of employment much less likely.

A similar problem besets countries such as Morocco which is now an exporter of clothes to the EU but whose exports may be undermined by cheaper Chinese goods. Part of the reason for the import quotas on Chinese textiles is that protectionists within the EU wish to preserve traditional trading relationships with former colonies. In theory resources in Morocco should move to other industries if the textile industry is undermined by more efficient Chinese manufacturers. However, there are real fears that this will not happen and, instead, North Africa’s textile industry will suffer and nothing will take its place. If that should happen, one reason will be the West’s policy towards the import of agricultural products and processed food from developing countries. This cuts off an important potential area of economic activity for North Africa. But, Morocco’s internal policies are the main enemy. The Heritage Foundation/IEA Index of Economic Freedom describes Morocco’s trade policy as having a “very high level of protectionism” with average tariffs of nearly 30% and inconsistent and cumbersome customs regulations. Reform is now belatedly happening, but it is not free trade that is harming Morocco, it is Morocco’s inability to respond to changes in economic conditions because of the absence of a free economy. The story is the same in virtually any other developing country that proponents of EU protectionism suggest will be harmed by free trade in textiles.

Greater openness and freer trade also bring to the surface problems that were hitherto hidden. Anti-globalisers often point to the wide income disparities in China as well as to the child labour that is often used to make the cheap products exported to the UK.

In a perfect world, there would be a smooth transition from being undeveloped to being developed, with all that implies for the elimination of poverty. We do not live in that perfect world. China is not liberalising in a uniform way. Countries never do. The opportunities that the market offers are not available across all markets and in all regions of China, partly because of internal political constraints on the process of economic liberalisation. Thus some people gain faster than others from the process of industrial transition. The process of transition is still desirable though. China has a growth rate of 8% and its per capita income is twice as high as that of Pakistan and four times as high as that of Nigeria – two countries that have not followed China’s example. Poverty is falling in China too. The number of people living on a dollar a day in China has fallen by over 200 million in the last decade. It is notable that, if India alone were to reduce the proportion of its population living on less than a dollar a day in the next ten years at the same rate as China has in the last ten years, through a policy of economic liberalisation, the UN Millennium Development goals for the whole world would be half way to being achieved without any of the proposed development policies being enacted.

We should also be careful of heavy-handed intervention to restrict child labour through trade policy. German economists Krisztina Kis-Katos and Gunther Schulze, show in a forthcoming article in the IEA’s journal, Economic Affairs, how trade sanctions used against countries that employ child labour can damage those who are most vulnerable. Prohibitions on children working can often drive families deeper into poverty and trade sanctions can hit the income of the poor disproportionately. Even the purchase of “ethically sourced” products from firms not using child labour can harm children who will be worse off unemployed or in illicit employment than they are working in the regular economy. Indeed, the Church recognises these pragmatic issues in its own social teaching, though the employment of children in dangerous conditions and the use of children in the sex trade and other immoral activities can never be justified. Kis-Katos and Schulze cite an example where thousands of children in the Bangladesh garment industry were fired in response to threats of US trade sanctions in the late 1990s: many of them ended up stone crushing or in the sex trade.

The political situation in China is not satisfactory. Economic liberalisation is welcome, but that does not make other policies of the Chinese government any more acceptable. One of the problems of the approach to trade liberalisation that has been pursued in the last twenty years is that it has emphasised negotiations between governments. As with the current disagreement between the EU and China, the process of multi-lateral negotiation gives the impression that there are “winners” and “losers”. The World Trade Organization (WTO) negotiation process encourages the development of political power centres (the USA, the EU, China and, at some stage in the future, no doubt, India). This does nothing to help promote a culture of political liberalism in politically important countries that are opening up to world trade. Nineteenth century free trade advocates believed that economic and political freedom and world peace were hand maidens of each other. Those who believe in trade liberalisation should not put too much trust in politicians to achieve their goals. They should push the EU and US negotiators to give up their jobs and allow us to buy as much Chinese clothing as we wish. At the same time, the West, including the Vatican, should not be shy of telling the Chinese government that constraints on political and religious freedom are unacceptable.