By Toby Gill
Part of a new series exploring the concept and consequences of ‘free trade’ from a variety of perspectives.
John, Tyrion and Ned lie patiently in wait. They have cornered their target, a colossal, fully-grown stag, grazing nearby. The three of them are in position, bows drawn, waiting to strike. Suddenly the stag bolts, leaping into the undergrowth. Tyrion jumps into pursuit. He knows he has little hope of catching the beast, but he does not despair – it is headed directly towards John’s position. The creature approaches the bush where John is hiding, its end clearly drawing near. But there is no shot. The stag runs past unscathed, and escapes into the night. Tyrion runs over to the bush, exasperated, ready to strike John with the back of his hand. But John is not there. He is around the corner – attempting to catch a rabbit with his pocket knife.
***
Free trade is a hot topic at the moment. With Brexit looming large, never has the term occupied such a prominent role in the national psyche. However, the manner in which free trade is discussed is often grossly simplistic. Very rarely do we stop to consider what free trade really entails. This short series of articles aims to examine the concept in more detail – in particular, to discuss aspects of free trade which are often overlooked. After all, it’s only the future survival of our economy at stake.
This story described above is one often employed in the realm of game theory. It is similar to the famous ‘Prisoner’s Dilemma’, but with a different order of preferences for the players. ‘Stag Hunt’ is a cooperative game, and is often used as an analogy for free trade. In order to catch the stag, and go home with a veritable mountain of food, the hunters all need to cooperate. However, each individual hunter has the opportunity to betray the group, and instead spend their time pursuing rabbits for a smaller individual pay-off. Clearly, the hunters are all better -off if they cooperate. However, none can be sure that the group will not be betrayed – the worst-case scenario is to be the only one pursuing the stag while others catch their rabbits, and end up the only one with nothing. If you could only stop the cheaters, everyone would be better off. Hence the dilemma.
The ‘Stag Hunt’ game. Image credit: Wikipedia Commons.
In economic terms, pursuing a rabbit is erecting tariff barriers to trade. The argument goes that, through trade liberalisation, everyone may become more prosperous; all we need do is stop the cheaters.
The objective of this article is to make one simple, but far-reaching, point: free trade is not just a ‘positive-sum’ game. It is not a Stag Hunt. Often, it is a relationship embedded within a dynamic of exploitation; a ‘zero-sum’ game with a winner and a loser, in which the powerful dominate the needy.
Free trade is not just a ‘positive-sum’ game. It is not a Stag Hunt. Often, it is a relationship embedded within a dynamic of exploitation;
The argument for free -trade as a positive-sum game is based on the notion of ‘comparative advantage’, espoused by David Ricardo in the nineteenth century. Ricardo proposed that, even if a country is worse at producing a particular type of good than a competitor, it has nothing to gain by erecting tariffs. By allowing more efficient foreign competitors to price local manufacturers out of the market, an inefficient country is then able to divert resources away from manufacturing this good and instead focus on an enterprise to which it is more suited. Free trade therefore allows countries to specialise in the industries at which they most excel, leaving everybody better off.
Or so the theory goes. In practice, however, it often doesn’t quite work like this. This is because some sectors of the economy are simply more profitable than others. In the modern world, for example, it is possible to make a lot more money by assembling cars than by growing grain. The country which specialises in cars will be a far richer one than the one which specialises in bread. However, if the bread-making country was able to price-out foreign competition by erecting tariffs on foreign cars, it could eventually, through systemic investment and practice, develop its own automotive industry to compete with foreigners (although its people would have to pay more in the meantime). This is known as the ‘infant industry argument’, and it was vital in allowing the US to industrialise in the face of nineteenth century British competition. Viewed in this light, free trade keeps the rich rich, and the poor poor.
The First Opium War, as painted by E. Duncan. Image credit: Wikipedia Commons.
Historically, this kind of free trade has been repetitively used by the powerful in the exploitation of the weak. There is a reason why Britain insisted on free trade relationships with all its colonies. Of course, those seeking to utilise the ‘infant industry’ dynamic may resist efforts to impose free trade. This is where military force comes into play, as was the case in 1842 once the British defeated the Chinese in the First Opium War, forcing China to open their markets via the Nanking Treaty. Having fought a war to force free trade upon a rival, the British proceeded to use this liberalised market to ensure the Chinese population remained hopelessly addicted to opium – which was sold by British companies.
Political power has been transformed in the modern world. The ‘power to death’ has been replaced by the ‘power over life’.
Free trade is not just a happy-clappy tale of mutually beneficial cooperation between equals. Contrary to the myth, it is often an exploitative relationship, imposed by the powerful upon the weak to keep them in their place. But of course, this kind of gunboat diplomacy doesn’t go on in the contemporary world. Does it?
States may no longer resort to naval war to achieve free trade. However, political power has been transformed in the modern world. The ‘power to death’ has been replaced by the ‘power over life’. In an interconnected society, the threat of exclusion from life-sustaining systems can be as potent as that of a gun to the head. At the end of the day, power is power.
It turns out free trade is not quite as free as we would like to think. It is coercive market liberalisation which keeps developing nations in a state of dependency.
With the conclusion of the Bretton Woods Conference in the 1940s, institutions were created to provide loans to countries in need: the World Bank for long-term development, and the IMF to deal with balance of payments crises, to maintain fixed exchange rates. However, these institutions were created and funded by the powerful nations, particularly the US, and inevitably served their interests above others. In the end, these ‘life sustaining’ loans to developing countries were often contingent on swathes of economic reform – privatisation, trade liberalisation, the acceptance of enormous trans-national companies into domestic markets (who have routinely destroyed domestic firms and exploited local labour). In its recent dealings with Greece, the IMF made its successive bailout loans contingent on the gutting of public sector expenditure and the total liberalisation of Greek markets to foreign firms.
Greek graffiti. The IMF uses debt as leverage to impose trade liberalisation. Image credit: Aesthetics of Crisis, Flickr
It turns out free trade is not quite as free as we would like to think. It is coercive market liberalisation which keeps developing nations in a state of dependency. What is so often invoked as an unproblematic example of international cooperation can in fact conceal a dynamic of sheer exploitation, woven with power.
Part 2 of Trade Secrets can be found here.
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