Free trade benefits rich and poor countries alike by unlocking human potential, says Sir John Bond, who hopes the WTO meeting in Hong Kong will agree timetables to cut regulations and tariffs.
The World Trade Organization meets in Hong Kong this month to decide the fate of the Doha round of trade talks. It is a good choice. Hong Kong is the world’s 11th largest trading economy, and its prosperity was and continues to be founded on trade: gross trade stood at 370% of gross domestic product (GDP) in 2004.
Trade has allowed a city of seven million people with few natural resources to achieve a standard of living that rivals the best in the world. Gross national income per head in 2004 stood at $31,510 on a purchasing power parity (PPP) basis, putting it in 12th place globally and marginally ahead of the UK, Canada, France and Australia. For all the concerns about globalisation – some of them legitimate, others less so – the overwhelming burden of evidence is that free trade helps to create the conditions that allow people to prosper.
Living standards lifted
The intellectual case for free trade was first articulated by Adam Smith and later David Ricardo. Mr Ricardo argued that free trade allowed countries to specialise in areas of comparative advantage, thereby raising the world’s overall output of goods and services, and thus raising living standards overall.
It is a powerful argument but one that can be difficult to communicate and therefore sometimes fails to win support from the general public. I prefer to couch the arguments in favour of free trade in simpler terms: it has proved the best way to unlock the potential of our fellow human beings and alleviate extreme poverty.
The golden age of economic growth in the 1950s and 1960s was clearly ushered in by the dismantling of pre-war trade barriers. In the past two decades, the world has witnessed the biggest reduction in global poverty in the history of mankind, partly due to the opening of economies and freer flows of trade. In particular, China and India have lifted 400 million people out of extreme poverty.
There is clearly much more to be done: an estimated one billion people still live on less than $1 a day on this bountiful planet. It is shocking to observe that the tariffs paid to the US in 2004 by Bangladesh and France were roughly the same, when their exports to the US were valued at $2bn and $30bn respectively.
By eliminating trade barriers in rich and poor countries alike, the ministers who are meeting in Hong Kong could boost the annual incomes of developing countries by $200bn a year, lifting a further 500 million people out of poverty, according to William Cline of the Institute of International Economics.
The argument in favour of liberalising trade seems compelling. And yet the new competitive forces unleashed by the integration of emerging markets into the global economy are prompting a protectionist backlash in some quarters of the industrialised world.
The benefits of free trade accrue to both developed and developing economies alike. Completely free global trade, it is estimated, would boost US income by $500bn a year, equating to $4500 per household.
At the same time, it is necessary to recognise that there will always be individual winners and losers. As the former US Trade Representative Carla Hills has argued, it is up to governments to allocate some of the gains derived from trade to help those displaced by changes.
Rise to the challenge
The right response to global competition is not to raise protectionist barriers but to rise to the competitive challenge posed by emerging nations, by strengthening our infrastructure and the skills base of our people. The principal objective of trade policy in the UK, the EU and the US should be to set ambitious timetables to end tariffs, quotas, subsidies and unnecessary regulation.
If you look at today’s successful economies, you can see that they have both increased their integration in the world economy and depended upon it for their success. This is the lesson of the past 50 years, and no more so than in Hong Kong. It would be an irony of the cruellest kind if the trade talks that hold out the hope of extending prosperity to poorer nations were to founder there. As Benjamin Franklin argued in the 18th century: “No nation was ever ruined by trade.”
Sir John Bond is group chairman of HSBC Holdings plc.
