Malaysia in the Era of Globalization #92
Moral Arguments For Free Trade
Daniel Griswold of the conservative Cato Institute in Washington, DC, argues that free trade is morally right, quite apart from the benefits that accrue upon the participants. Free trade respects individual dignity and sovereignty. When one engages in honest work, one has the basic right to enjoy the fruits of one’s labor. No authority has the power to forbid someone from exchanging the fruits of that labor with something else produced by another person, whether that person is in the next village or across the globe. Ibn Khaldun first expressed these views in the 14th Century. Protectionism is just another form of stealing; taking from one group of people (consumers) and giving the spoils to another (usually domestic producers and others who are politically powerful).
Free trade also encourages individuals to cultivate moral virtues. To be successful in trade, one must be reliable and provide the goods and services that are needed and at a price that is affordable. Rewards go to those who are trustworthy, reliable, and deliver on their promises. These are the same qualities that are regarded as virtues in any religion. For Muslims, it is instructive that Muhammad (pbuh) was a trustworthy merchant who brought great profits to his employer before he received his prophethood.
Free trade brings people together through their mutual interests. It is not surprising that inhabitants of port cities and trade centers are very cosmopolitan and receptive to new ideas. Malacca was for a long time a trading center along the East-West maritime trade route, and their people were welcoming of the ways of both East and West. They readily accepted Islam because they were open to new ideas. Residents of inland areas and others not exposed to the outside world tend to be xenophobic and insular.
Another important consequent of free trade is that it encourages other basic human rights. With the free exchange of goods and services comes the free exchange of ideas. This encourages tolerance. The wealth created through trade helps nurture civil institutions. People tend to be more tolerant and less selfish when they are prosperous. Today race relations are so much better in Malaysia than Indonesia because Malaysians are so much more affluent. They have a lot more at stake should disturbances of any kind develop. Similarly as China and South Korea become more open and prosperous through trade, democratic and civil institutions there will be strengthened.
Free trade also fosters peace. It does not guarantee peace but as nations become more integrated and interdependent, they have more to lose with the disruptions of trade. Granted, when Japanese imports were flooding America and American workers were displaced as a result, Japan bashing was rampant among union workers and opportunistic politicians. The spectacle of senior members of Congress smashing Japanese cars on the steps of the Capitol in the 1980s was indeed pathetic. What is often forgotten in such crass displays of patriotism is that most Americans do not share those views. Those scenes are prominently replayed on television screens purely for ratings. The fact is for every factory worker laid off, there are many more jobs created in west coast ports to cater for the increased imports. Besides, as the Japanese become more affluent, their disposable income is spent traveling to America and playing golf at expensive resorts. And to cater for the flood of tourists, Japan Airlines had to buy more 747 jets from Boeing. Trade is a “win-win” encounter.
As for the effect of those politicians smashing Japanese cars, Nissans and Toyotas are still very popular in America. Check those hyperventilating politicians; many drive Japanese cars.
Lastly, free trade helps those at the very bottom of the economic pile, those most deserving of help. Americans may sniff at the peanut wages paid to Indonesian Nike factory workers, nonetheless that same income enables the workers to feed and clothe their families. The income may be peanuts by American standards, but it is a heck of a lot more than what the Indonesians would have earned planting rice or pulling rickshaws. Americans, by buying Nike shoes made in Indonesia, do a lot more good for the Indonesians than all the foreign aids that were poured to that country. Lord Bauer was a strong proponent of trade instead of aid as an effective route for developing a country. The success of South Korea, Taiwan, and hosts of other countries is testimony to that wisdom.
The difficulty in understanding free trade, especially international trade, is that we are burdened by the traditional concept characterized for example, by America buying Malaysian rubber and Malaysians in turn buying American planes. These kinds of trading still go on, but modern trading is much more complicated. For example, according to US Department of Commerce figures, 40 percent of American “exports” are not actual trading as described, rather transfers of goods and services to foreign affiliates and subsidiaries of American companies. These are not trade in the traditional sense but more correctly intra-company transfers, even though they occur across borders.
International trade today is also increasingly not in goods but services like management consultancies, insurance, and professional services. An increasingly important component in this service trade is of course tourism. With countries like Jamaica, it is the major source of foreign exchange earnings. Even in Malaysia tourism is now the second leading foreign exchange earner, after manufacturing. For America, a major source of foreign funds is the tuition and living expenses incurred by foreign students studying on American campuses. That can be in excess of US $30,000.00 per student annually. Malaysia is aggressively trying to tap into that market.
Within the last decade yet another wrinkle has appeared that would dwarf all previous activities of international trade. Today the transfer of funds across borders has less to do with the trading of goods and services, as with traditional trading, but more with trading on money itself. That is, currency speculators trying to take maximal advantage of infinitesimal differences in exchange rates. As the Indian-born Columbia University economist Jagdish Bhagwati noted, while the clear benefits of traditional free trade in goods and services have been clearly demonstrated, no such gains have been demonstrated by the free flow of capital. In his words, “The claims of enormous benefits from free capital mobility are not persuasive. Substantial gains have been asserted, not demonstrated, and most of the payoff can be obtained by direct equity investment. [This] myth…has been created by the…Wall Street-Treasury complex.” Mahathir could not have expressed it better!
Bhagwati’s and Mahathir’s views notwithstanding, nonetheless to those with the money (portfolio and other money managers of the First World) trade is trade, whether it involves widgets, services, or currency. Until the world’s financial architecture can decouple currency trading from other forms of “genuine” trade, this perception will persist.
When Malaysia imposed capital and currency controls in 1998, the investment world took that to mean that the country was no longer open to all trade and foreign investments. The ensuing government’s campaign to prove otherwise came to naught.
Malaysia’s decision to impose capital controls came at the worst possible time, just as the competition for foreign investments became very intense brought on by two confluent events. One, with the breakdown of the former Soviet empire, there are many more newly independent countries all clamoring for the same investment funds. Two, also with the collapse of communism, many countries are now discovering the wonders of free enterprise. They too are clamoring for foreign investments.
For Malaysia, the stiffest competition comes from China and India. They have huge domestic market that is very alluring to investors. China is effectively exploiting that advantage while India remains smug, believing that its large domestic market is attraction enough. Another major competitor is Mexico. Since the adoption of the North American Free Trade Agreement (NAFTA), Mexico has been the recipient of the bulk of foreign investments from America and elsewhere. Even Malaysian manufacturers are setting up plants in Mexico to position themselves more competitively in catering for the American market.
When capital control was imposed, foreign investors deserted Malaysia for countries like China and Mexico. Although those controls are now effectively dismantled, at least for foreigners, the distaste still lingers.
A major misconception not only in the Third World but also in the West is to equate free enterprise with big businesses, in particular large multinational corporations. Much of the criticisms and purported failures attributed to capitalism are more accurately the failures and excesses of big businesses. In America (and also in Japan and Europe), big businesses collude with big government and powerful labor organizations to thwart free enterprise and free trade.
Earlier I referred to the massive agricultural subsidies given to European, American, and Japanese farmers. Similarly, with the giant America steel companies whose inept managers are more adept at lobbying Congress than making their plants more efficient. Their unionized workers too are more skillful at milking featherbedding work rules rather than being productive. The industry is thus forever seeking government help with import quotas and substantial tariffs. President Bush, his commitment to free enterprise notwithstanding, recently buckled to their lobbying and in April 2002 granted the industry substantial tariff protection. There will be other subsidies coming up, with the farm sector next in line. The shipbuilding and cruise industries in America are essentially moribund, unable to compete outside of fat government contracts and subsidies.
Unfortunately many Third World leaders like Mahathir seized upon such behaviors to justify their own retreat from free trade. After all if leaders of capitalism see fit to protect their own industries, why should not Third World countries do the same? I suggest that America progresses despite and not because of these protectionist measures.
Malaysia should rightly challenge America, Japan, and Europe to live to their commitment of free enterprise and free trade. It should not use their protectionist maneuvers as excuses for Malaysia’s own retreat.
Under Mahathir, Malaysians saw their standard of living improved dramatically, despite the 1997 economic crisis. Not coincidentally this occurred at the same time that the country was committed to foreign trade and investments. Under Mahathir, the nation leaped to be among the top twenty trading nations. Malaysia’s experience is by no means unique.
A study by the World Bank showed that in the past two decades the “globalizing” group of nations, that is those nations that had a significant portion of their GDP in foreign trade and investment, grew at the rate of 5 percent annually as compared to about 2 percent for the developed world. That is, they grew over twice as fast. In contrast, the “non-globalized” nations grew at barely 1 percent annually, a rate half of that of the developed world and a fifth of that of the globalized world. This is a remarkably strong correlation that Malaysian leaders simply cannot ignore.
Malaysia should follow the example of Mexico and other countries and seek a free trade agreement with America. Surely Malaysians can compete with the Americans in many sectors. The lives of Mexicans have improved immensely since the adoption of NAFTA. Singapore is also desperately trying to get a similar agreement with America.
Capitalism has served Malaysia well; she should not abandon a proven successful strategy. Malaysia should continue to embrace free enterprise and trade and not take any step that the world may perceive rightly or wrongly as a diminution in her commitment to this cause.
Next: Encouraging Entrepreneurialism