Understanding how trade works


Economic history and economic theory are replete with examples showing that in the longer term interventionism and protectionism hardly have any chance of generating lasting benefit. In the past, they served rather for temporary protection of particular interests than the common good.

Heavily regulated isolated economies have historically not been successful in the long term. More or less prosperity for more or fewer people is as a rule associated with more or less freedom of trade. Innovation and competition as well as people and markets need rules of engagement and freedom to prosper. Stopping the clock doesn’t generate time, building walls doesn’t create space, restricting trade doesn’t create prosperity. Limitation benefits the redistribution of available resources rather than the creation of new resources.

Financial markets’ already observable pattern of reaction could continue. Investors might transfer funds from asset classes that are suffering from the expected measures to ones that are benefiting from them: from other currencies into US dollars, from shares in export-oriented companies in Europe and Asia to US shares – to mention just two examples. But when, as a consequence of politicians’ interventions, the US dollar apparently became too strong, the same politicians might think that immediate new – hitherto verbal – interventions were necessary. Not really a successful start to a supposedly new economic order. ‘The first time we are free, the second time we are servants’ and ‘The spirits I summoned up, I now cannot rid myself of’, Goethe wrote as long as 200 years ago.

As regards the longer-term effects, we return to two interlinked observations. First, that nowhere in the major industrial countries can politics withdraw from the realities of globalisation. Second, that open markets appear to be the economically superior response in the medium to long term. Open markets strengthen competition, promote innovation, increase influx of capital, improve investment conditions – including for domestic investors – and in the longer term increase a country’s growth potential. This potential, however, is often stifled by restrictive locally-driven political decisions, above all in order to provide a quick fix to meet current challenges, without taking into consideration their effects as a whole. In reality, economic-added value is threatened not by globalisation but by interventions that serve the interests of individuals and not the general public.

Therefore a replacement of globalisation and free trade by the state is not what is needed. This fundamental principle applies unrestrictedly, even today. What is crucial is the recognition that globalisation, with its international division of labour and the associated specialisation, differentiation and more intense competition, remains a strong driver of economic growth and prosperity. One should trust in market incentives, and for precisely this reason it is vital that one adjusts to a rapid change of pace, rather than try to ignore it.

So, in conclusion, we return to the point that we made earlier. Ever since Adam Smith, economists have been arguing that of all the well-known and achievable economic systems, the market economy is essentially the one that is superior to all the others in terms of its economic potential. Even though neither Adam Smith nor the economists after him have expressed it exactly in these terms, they nevertheless acknowledge the market economy as the order that mutually benefits all participants, one on which free and equal people can agree and that deserves recognition as a just order.

This requires courage and decisiveness on the part of politicians and companies, as well as readiness for change on the part of the people. People are by all means ready for change, but they want to know that any immediate privations will be worthwhile and that ultimately things will get better. Long-term economic gains may appear rather abstract, while the threat of short-term disruption can appear much more real. Moreover, public skepticism and confusion may be increased by the fact that appropriate reforms are often envisaged but implemented only half-heartedly due to concerns about people’s acceptance and political feasibility. This is a time for clear communication and the need for a solid commitment to continued free trade.


Source: CIO Insights Reflections – Buy global trade, April 2017