Free trade

The APEC summit held in Singapore last week might not have found enough of a consensus to set clear targets for carbon emissions over the foreseeable future. But the leaders gathered there found no difficulty agreeing on two items vital to the global economy.

The first item concerned the continuation of the stimulus programs of the member-economies in order to ensure the momentum of global recovery. We all know that while the stimulus programs are undertaken by individual governments, they become effective only when done in concert among all the dynamic economies of the world.

When the leaders of Europe met earlier, they made the same affirmation about continuing stimulus programs. That consensus removed some of the persisting doubts about the sustainability of the early signs of recovery we see.

Stimulus programs involve some amount of deficit spending by individual governments. In order to arrest recession, governments front-load their economic investments. The boost in public spending translates into a commensurate boost in domestic demand. The boost in domestic demand keeps industries going, sustains employment levels and prevents a downward spiral in the economy characteristic of a depression.

The largest stimulus package is that of China. Beijing injected tens of billions of dollars in stimulus spending. That program has produced good results. China paces the rest of the world in economic growth; which, in turn, tended to pull up the other economies trading with the emerging economic superpower.

The second item the leaders agreed upon was to vigorously resist a drift to protectionism.

When times are tough, domestic constituencies tend to fear trade. They would want to hold on to what they have rather than exchange them for something better. It is akin to the panicked impulse of people who are drowning: they tend to cling to the person trying to rescue them, creating the danger of two people drowning rather than just one.

During a recessionary episode, interest groups lobby to raise trade barriers as a (mistaken) means of saving domestic jobs. We saw, in the US, how some legislators tried hard to attach a “Buy American” provision in the stimulus legislation.

But we should know better. During the Great Depression, nations began closing down their economic borders and restricting trade. These measures merely abetted the depression, causing it to plunge even deeper and hold fast even longer. It took the world well over a decade to climb out of the depression.

Protectionism is an ignorant response. It is based on fear of trade. It does not foster the will to compete on even terms — and thus the willingness to innovate in order to compete.

But governments are usually besieged by large constituencies demanding protectionist measures during times of economic difficulty. It is easier to fear trade and much more difficult to continue boldly with free trade policies in order to raise economic activity across the board.

It is easy to confuse political boundaries with economic boundaries. In actuality, political and economic boundaries do not fully correspond. Governments must try harder at educating their publics about the realities of the modern economy for citizens to appreciate the need for competitiveness in a free trade regime.

It helps governments to maintain trade-friendly policies if all other countries are linking arms and committing to free trade. When one major economy begins erecting barriers to trade, the response could be immediate: other economies retaliate by raising barriers themselves. That will cause the global economy to resemble Laguna de Bay: a body of water choked by fish pens.

It was reassuring to hear the Russian president call on his Asian partners to maintain the momentum towards free trade. Not too long ago, Russia (as part of what was then the Soviet Union) had a centrally planned economy impervious to global trade. Now the Russian mentality has dramatically opened up to modernity.

When governments find the means to reassure each other about sustaining an open global trading regime, individual governments will have an easier time telling their own domestic publics that trade need not be curtailed for recession to be overcome. In fact, trade protectionism will only deepen the recession and make recovery difficult.

When China’s rapid expansion manages to pull up other economies, it is because of trade. That is the conduit than enables economic growth to become contagious.

Economies that trade the most with China also post stronger recovery characteristics. That is brought about by the increased economic activities among the economies that trade with each other. The more trade, the stronger prospects are for economic growth. Conversely, the less trade, the less growth becomes possible.

The Philippines is a country with deep-seated fears of trade and cross-border investments. But we are also an economy more than ever dependent on exports. If our trading partners restrict trade, that will curtail our exports and bring about stagnation of our own economy.

We cannot possibly hope that when we restrict trade, our trading partners will not do the same. Restricting trade can become an epidemic when countries begin retaliating for the anti-trade measures of others.

Fortunately, we have forums like the APEC, where leaders can perform rituals of solidarity in upholding policies that best ensure growth. It helps these leaders resist shortsighted domestic political pressures demanding counter-productive policies.

Those who say the APEC has not much use because the grouping does not have mechanisms for enforcing agreements miss the point. The opportunity for demonstrating solidarity in key policy issues is good enough reason for the APEC to continue being there.