This is written as a tribute to Prof. Joseph H.H. Weiler’s lecture
Published in http://www.upiasia.com/Economics/2010/03/29/asean-china_free_trade_pact_is_not_all_bad/2619/
How do we generally picture free trade/trade liberalization? Dreadful competition, losing jobs and livelihoods. To make matters worst, freetraders and economists, such as Paul Krugman, claim free trade is not concerned of phony number of jobs created or lost. To the ears of commoners, this sounds pompous, non-chalant and remorseless, which I would personally call a lost in translation. This is misquoted and at large, misunderstood. There are two archetypal claims against free trade in general. First and in more specific context free trade with China, popular believers claim that we will buy more than we sell. Translating into economics term, we will import more than we export. This sounds bad in terms of productivity. It is bad in analagous sense that we spend more than we earn.
Second, a more subtle thinker against free trade would say perhaps free trade generates a larger “pie” of economy, but they are not distributed proportionally to every segment of the societies. Hence, sacrificing jobs of the paupers for the benefits of the rich is not worthy. They also note that, perhaps, the economics could have been more efficient if free trade is in the picture, but they prefer less efficiency as it helps the poor. In other words, it is better to have less money but used for the needy, rather than to have more money but amassed in the rich’s pockets.
Now, let me put this claim into a context of ASEAN-China Free Trade Agreement and elaborate why those two claims are not as bad as they sound. First, claims against ACFTA generally revolves around the fact that China’s manufacture industries is by no doubt the largest in the world currently. Moreover, it is also a fact that China can produce almost any goods/products. Chinese anecdote suggests that “We can duplicate and produce anything except you mother.” Hence, by liberalizing trade, we will import more than export.
What do we get when we import? Goods of all kind, shoes, clothes, washing machines that are produced in China using either natural resources from China or other countries. What does China get in return? Money, many pieces of paper. They accept money because money represents the store of value which they will use to buy oil or raw materials for the next wave of productions. Of course, if we buy more products from China, the money in terms of quantity would diminish, so we will need to print more money. But you would not run out of papers to print money or another way of putting it, the intrinsic value of money is much smaller than the nominal value. If you print more money, your money gets weaker. In economics jargon, it is called inflation or erosion of purchasing power of your currency. So the question is how much do we lost compared to how much we got? We get all the goods useful for our daily lives and they in return receive astronomical number of pieces of money.
A more subtle argument is to examine whether the money China received would be used to purchase materials their nature does not provide. Will they purchase oil and raw materials for their manufature industries from Indonesia? Even if they do, how many percentage of oils and/or raw materials. The argument boils down into this precept: Money is of no value if there are no underlying substances, be it goods or services. We put values into money with the assumption that the same money can be used to buy other goods or services we need. So the underlying assumption is that there are more goods and services out there than the nominal value of money. Imagine if today, the world has foods only sufficient to feed 2 billions people, will money be of any worth? People will be accumulating foods rather than money. We used to barter goods for goods. So money represents the value of goods. Without those goods, money has no meaning/value.
Now, if we apply the same precept into ACFTA, what do we lose if we import substantially more than we import? The other factor, government must heed on carefully is whether the money China receives from our consumers will be used to purchase goods and services from us. If China buys oil or raw materials from other countries, the store value is used against other countries. In simpler explanation, we do not trade any of our goods with China. On the contrary, we receive goods and give them pieces of money which will be substantially used to purchase goods, such as oil and raw materials, from other countries.
Second, claims against ACFTA/trade liberalization subsequently argues: But many jobs will be lost because those industries that should be producing goods for our domestic consumption will run out of business.
There are two negative implications for protecting non-competitive jobs. First, you prevent increased productivity and second, you penalize the rest of the people to pay more than the should for goods they need. If you protect jobs which produce goods of basic and mass necessities such as food and clothes, you penalize yourself twice since you penalize your economy and your people. Productivity is prevented as there is no incentive to produce efficiently. Efficiently produced goods cannot compete with subsidized and less efficiently produced goods because their price remain expensive relative to subsidized goods thanks to tariffs.
I would argue that it is much better off for you to send a check at the home front of people losing jobs than damaging the economy and force them to pay more expensively than the should for goods serving basic and mass necessities.
The core question is what do jobs mean? Do jobs mean generator of money or dignity/pride/status of life or both? If both, which one remains the priority? Will we still work on jobs for the purpose of dignity if it does not generate money? The point is in government’s mind, jobs are meant to increase welfare and protect livelihood. Since such were the premise, wouldn’t it be better for farmers to lose their jobs but their children can go to school and when they are sick they are government funded health-care? Or better, farmers look for alternative jobs and train their human potentials through courses or education of sorts?
In the end, we need to see clearly through the heavily fogged glass on ACFTA issue. They are not all bad and in fact they are not bad at all. Politics and vested interest should be set aside if we want this to work. Anyway, Indonesia has ratified the agreement and there is no way back, so let’s look ahead clearly by clearing up the fog.
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