Why we need to rethink free trade
Author: Bas van de Mortel
October 20, 2020
Starting in January 2020, almost all parts of the world panicked about the supply of face masks running out. A few months later, the whole world panicked about the supply of medical ventilators. How could these problems arise in such a well-developed globalized economy? Does our system of free trade need to be reconsidered?
The founding father of modern economics, Adam Smith, believed that protectionism would slow economic growth. If you let the ‘invisible hand’ of the market economy alone and let people act in their self-interest, resources will be distributed between countries in the most efficient way possible, for the benefit of society. To quote Smith: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy”. This would not only be the case for families, but for countries as well: “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry…”.
Does this unfettered free trade lead to the most beneficial outcome for society? In the corona crisis we experience that this is not the case. In our attempts to create an efficient economical system, we created extremely complex and globally distributed supply chains. We wanted to make our products as cheap as possible, without realizing that the supply chains were, according to the economist Joseph Stiglitz, “plainly not resilient, insufficiently diversified, and vulnerable to interruptions”. Being only focused on efficiency, we have created a system which exists of just-in-time production and distribution because keeping inventories is unnecessarily costly. Today, the just-in-time economy does not work. Countries closing their borders block parts of the supply chain. Products do not arrive just-in-time. The system starts to falter and falls apart shortly after. In a just-in-time system with hardly any inventories even the smallest of problems will cause a disruption, let alone the enormous problem of a pandemic.
Next to that, this pandemic shows us that borders do matter. A system based on free trade cannot be trusted if countries keep their face masks and medical equipment for themselves. The system cannot be trusted if trade in particular goods is forbidden. The nation-state, according to Stiglitz, is still our basic political and economic unit and the pandemic reminded us of it.
On the other hand, we should not take shelter in fully protected fortresses either. The EU is highly dependent on trade with the rest of the world and changing this would be unwise. After all, protectionism does indeed slow economic growth. Therefore, we should reconsider the system of free trade and rethink supply chains and dependencies on untrustworthy trade partners. If one reads a bit further in Adam Smith’s Wealth of Nations, this is exactly what our founding father thought; he is not an advocate of unfettered free trade. He believes that a government should defend its economy for strategic national purposes.
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