Free trade versus protectionism

The free trade versus protectionism debate is a hoary old chestnut, but one which frequently raises its head in the Baltics. It has done so again recently with the on/off pork war between Latvia and its Baltic neighbors. As with all of these issues, it not only begs the question as to what is better for the development of the national economies of the three countries, but also what is right politically in the context of European Union integration and membership in the World Trade Organization.

Let me declare my interest from the outset. This column firmly believes in the concept of free trade as a fundamental pillar of increasing economic development and wealth. The vicissitudes of the global financial market during the past 18 months (South East Asia, Russia and most recently South America) have certainly dented the image of free trade, or more specifically of free capital flows, but have certainly not invalidated the theory altogether.

The idea that free trade is good for an economy is underpinned by the theory of comparative advantage. This has been recognized since the birth of modern economics in the 18th century and is unlikely to change. In simple terms, by allowing each country to concentrate on the production of those goods (or services) in which it has a comparative although not necessarily an absolute advantage, the theory has it that the wealth of all the nations participating in the trading will increase more rapidly.

So much for the theory. In practice of course, what it means is that where a country is able to produce certain goods more cheaply than its neighbor and sell them in its neighbor's market, the consumer will usually buy the cheaper goods, assuming that the quality is approximately equal. Such a state of affairs often proves politically unpalatable.

Politics dictates that almost any cross-Baltic economic cooperation is heralded as some sort of testing ground for the EU. Latvia has the added burden of its membership in the WTO. If the Baltics cannot create a common Baltic market, then what chance have they got of joining the common European market some day, is the usual cry. Do the latest disagreements mean that Estonia, Latvia and Lithuania are neither politically nor economically robust enough to withstand even competition among themselves, never mind with the rest of Europe and the world?

In fact, it probably isn't as bad as that. It requires enormous amounts of political courage for a government to stick to policies of free trade, particularly when they see short term negative effects on their national economies. Politicians in the Baltics are not reacting in any significantly different way from those in other parts of the world, when faced with similar situations.

In truth the EU is not itself the best example of free trade thinking and European countries are not averse to a bit of protectionism themselves from time to time. Baltic politicians can at least console themselves that the EU and the United States also have a trade war developing at present over bananas.

Call it unlucky, perhaps, but those who aspire to membership of any club often have to live up to a higher standard than those who are in already. Therefore while the Latvian government may be reacting in a very understandable way, it is my belief that the free trade versus protectionism debate is one that the Baltics, mainly for political reasons but also economic ones, cannot afford to allow the protectionists to win.

Footnote

Regular readers of this column might be interested to know that the multi-story car park in Vilnius is located on Rinktines Gatve, behind Kalvariju market. At least car parks are unlikely to be the cause of the next trade war. Go see.