Free Trade In Chains

International trade should be free and fair, because only then can it result in the largest possible profits of wealth for all. That is how most politicians of the world would probably sum up their credo for the exchange of goods and services in the global economy. Woe to him/her who dares to not participate and who would think aloud about putting chains on free trade or about raising import taxes or even about subsidising their own exports.

All of the good free traders are screaming bloody murder and are saying that opponents of free trade could be the death of global prosperity. Obviously the democratic presidential candidates in the USA are counted among them because they seriously throw the fact into the debates that free trade does not have to be an eternal dogma with regard to the supremacy of some countries on the world markets and with regard to the massive and ever increasing accumulation of debt in the USA compared to the rest of the world.

However, that is another one of those conflicts being battled by both sides in front of their favourite mirror instead of dealing with the actual causes of trade imbalances. The free traders are advocating an unrealistic doctrine – and the free trade skeptics are refusing to accept this doctrine without realizing that they should be tackling something completely different.

Only if the international exchange of goods and services occurs without the influence of the countries, so goes the classical doctrine, then the prices for exchanged goods will be set the same everywhere. It is exactly then that every provider can show off his/her specific production advantages without restriction, which would lead to an optimal product offer as a whole because each manufacturer would be compensated for his/her specific advantages: This one produces this because he/she is ahead by a nose in this branch, while the other produces that because he/she has a technical advantage.

According to this theory, it is not instrumental whether a product is produced in a developing or in a highly-developed industrialized country. This is because efficient trade ensures that the prices of the product are the same everywhere and that the workers in developing countries receive their fair share as well as the workers in industrialized countries. Even among countries that are equal in strength, no one has a lasting advantage because the compensation of the market ensures that the trees don’t grow into the heavens on either side.

But this wonderfully harmonious picture is already distorted by the fact that one can witness the openly expressed joy in Germany over the fact that a country with 80 million people holds the title of “World Export Champion” by far and even knocks a 1.3 billion population like the Chinese down to second place. What does this have to do with the factitious harmony of the free trade doctrine between all providers on the world market? What is worse is that some countries are trying to export but not to import. For many years, this phenomenon has been called “Global Disequilibrium”. China, Germany, Japan and Switzerland, to name the most significant countries, are feigning the ability to permanently please the world with their products without having to import that much more themselves, thus enabling trade partners in deficit to repay their debts at some point.

Where do the huge, current account surpluses of the one and the immense, current account deficits of the Americans and many smaller countries come from, if the prices are supposedly the same everywhere? Obviously, the countries on the world market that are in surplus can provide products less expensively than the competition from other countries. So the prices are not the same or have not stayed the same: Have the companies in the deficit countries completely slept through the technological transition while more intelligent investments were made in the surplus countries and how can this be aligned with the free trade doctrine?

One has to realize at some point that a very common, random product on the world market, which sold for an average of 100 dollars in 1999, regardless of whether it was produced by a German or by an American company, could be bought by a German company for only 66 dollars 3 years later, yet cost a whopping 115 dollars from an American provider. No wonder German producers gained a significant share of the market at the expense of American competitors. But trade policy was not in any way a factor in this dramatic divergence, as one could believe on the basis of the free trade doctrine. The reason was the falling Euro exchange rate and the wage restraints in Germany, which materialized from a substantial amount of political pressure. But according to official statements on both sides of the Atlantic, the exchange rate variations of a country and its wage dumping do not have anything to do with trade policy, although both phenomena are a thousand times more important for the trade flows than anything that could be manifested in trade policy within the same short time frame.

In contrast to trade policy sanctions or threats thereof, neither immense exchange rate variations nor wage dumping are a subject-matter for the free trade ideology or for any international negotiation about fair trade exchanges. That is why neither the American threat of trade policy sanctions nor the German flurry over it is justified. Forgotten is also the fact that with the current Euro exchange rate of $ 1.55, the prices have been assimilated again. The products from both countries now cost 150 dollars on the world market. The German price advantage has once again disappeared, although the market share profits that Germany has realized since 1999 in comparison to the USA are still not in jeopardy even at this “extremely” low dollar rate, which all sides are complaining about.

In plain language: Trying to control the trade flows today with trade policy is like trying to repair a vehicle with watchmaker’s tools. The really relevant questions will not even be discussed. What the globalized economy desperately needs even more than a doctrinaire dispute over trade policy is an exchange rate system. This would hinder individual countries from obtaining unjustified long-term advantages through wage dumping or similar measures. What also must be avoided – which is the other side of the coin and presently the case in many East European countries – is that the exchange rates, driven by speculators of the capital market, could destroy the competitive edge of the entire political economy in such a way that it can only be smoothed over again by a huge financial crisis and a massive currency devaluation.