4. Free trade, interference with free trade

Free Trade is at the simplest two people exchanging things they own, with both parties being happy to do this. Remarkably, both people leave the trade being better off, which is kind of magic: by coming together and exchanging things they own, the world has got better. The benefits of invidual trade may be small, but when billions of people do it each day, it produces incredible things.

"The Adventures of Tom Sawyer" contains some memorable examples of free trade.

Trade is much older the economists, but when people such as Adam Smith started paying attention to it, they quickly worked out how it works. Economists also concluded that if trade is good, harming trade is bad. Societies has usually put barries in the way of free trade, sometimes to block it almost completely (the communist experiment of the USSR or in Cuba), which was disastrous, or the blocking of free trade in the 1930s which was one of the greatest catasrophes in human history.  All modern advanced economies mildly impede fre trade in the name of greater good. In these cases, societies sacrifice some benefits of free trade to achieve other objectives. The effects of impeding free trade become very expensive if pushed too far, harming employment and wealth, so we see waves of higher regulations followed by "reforms" to reduce it, and free up trade again. 

Is trade good? Does it make us better off? There is a lot of academic discussion, but there is also thousands of years of experience. Markets and trade are many thousands of years older than economics. What does human experience tell us? All around the world, given the chance, people have traded, which says it all. When two people trade, they walk away after the trade better off than before the trade: otherwise, why would they do it, year after year, for thousands of years?  

When Stamford Raffles wanted to counter Dutch influence in the East Indies, he realised that the Dutch administrators were charging traders taxes. Raffles, who taught himself Malay, went to rival local rulers and arranged a lease in what is now Singapore (but was then a few simple villages). He then simply announced a zero-tax trading port. With six weeks, many traders had gathered, and Singapore had begun. Hong Kong was likewise a sleepy fishing village, until British rulers made it a trading hub. Singapore is covered below.

Free trade is the recognition that if trade is good, more trade must be better, and therefore we should have as few barriers as possible to free trade. Countries which follow this broad principle are known as market economies, although there is no pure free trading nation. Singapore, New Zealand and Hong Kong are close. Singpare and Hong Kong: from inception. New Zealand was a convert to free trade after an over-regulated economy neared catastrophic failure.

Economists have models which show how free trade makes people better oaff. These are covered in the next section. Pure free trade is very unusual, partly because trade works better with support such as law, courts, schools, hospitals, scientific research, security and systems of money, and these have to be paid for (via taxes), and partly because powerful forces will seek to tilt the rules in their favour. For example, suppliers may try to block competitors from entering the market. Finally, the wealth created by trade and economic development benefits some people more than others.

Even though pure free trade is impossible in reality, we often consider it as an ideal way of distributing resources. Simple economic models show this to be the case, and many economic theories assume that every time we impair free trade, it costs us wealth. I find this position very convincing, both in the models which support it, and my own experience of working and living in different economies around the world.

This is not to say that we should not interfere with perfect markets. A crucial political question is to make sure that we understand the harm of interfering with free trade, compared to the benefits brought by the interference. Since the second world war, “western civilisation” has come to mean a country which follows a market economy and liberal democracy. The official group of market economy + democracy is the OECD group of nations, which includes non “western” countries such as South Korea and Japan. Taiwan should be a member but for China blocks this, so Taiwan is an “observer”. There are 35 members of the OECD (plus Taiwan) as of 2016.