'Reciprocity' Is Not Necessary for Trade to Enrich Its Beneficiaries
Faced with a protectionist U.S. Administration, the G20 for the first time issued a final statement that included the concept that trade must be “reciprocal.” There are advantages to reciprocity, of course. But the truth is, even if a country reduced trade barriers unilaterally, without any guarantee of reciprocal access for its goods, its people would be better off. The biggest advantage of free trade isn’t that it makes it easier for us to export – it is that it makes it easier for us to import.
Obviously, any discussion of free trade should concede the obvious: Free trade is better when it is reciprocal because a wider circle of people get to enjoy its benefits – economies of scale, increased specialization, improved technology transfer, wider choice, and enhanced competition. But those benefits do not flow exclusively to countries based solely on enhanced potential to export. They flow to countries that open up their markets. Unrestricted trade makes it easier for consumers, because it gives them the option of purchasing imports, makes it more efficient for domestic producers to source inputs, and pressures suppliers all the way down the chain to drive down prices and improve service.
Given that the advantages of free trade are obtained by any country that embraces it, why should adopting it depend on reciprocity? When Great Britain adopted free trade in 1846 by abolishing the Corn Laws, it did so unilaterally. The Brits did not demand that any other country match its move to free trade. They wanted, instead, to curb spiraling food prices that had exacerbated the Irish famine. The result of Great Britain’s unilateral embrace of free trade? Food prices went down, the cost of living declined, manufacturers were better able to afford workers’ wages – and Great Britain prospered.
Why then has reciprocity become a commonly-accepted basis for free trade? Partly because if a country were to embrace unilateral free trade, it would give up its seat at the table. Left with no concessions to make, politicians would have no bait to draw potential trade partners. But even more importantly, tit-for-tat trade concessions make it easier to sell an agreement. If governments tried to sell free trade because it makes it easier to import, many would agree – but few would be motivated to actively support a deal. However, when government sells free trade on the basis of how may jobs it can supposedly create, many are inclined to buy in. But, as is often the case in economics, the truth is counter-intuitive. We improve our standard of living based on how we fare as consumers. It is increased choice and reduced costs that drive forward our economic lifestyles, and they depend on our ability to import.
Politicians today are finding it harder than ever to sell free trade to a large blue-collar voting base that has seen their jobs eliminated by imports and new technologies. But politicians’ challenge is one of their own making: By selling free markets as something we enter into because it will generate more exports, pro-trade leaders have fed into a narrative that only undermines the argument for improved access to a wider circle of goods and services.
The majority of G20 leaders understand this. They compromised on the final communique to placate those that do not. But that is not really selling free trade; it is trying to sell a bill of goods. The best argument is an honest one: Free trade benefits us because it creates wide prosperity, not a few jobs.
