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Of Blackberrys, pineapples and trade

Free trade helped power a dramatic rise in living standards in the West in the nineteenth and twentieth centuries. In the last three decades, it has had a similar impact on the welfare of billions of people in emerging economies.

Yet in the face of a backlash against globalisation, free trade is arguably more at risk than at any time since the 1930s. Those who want to limit trade see it as a way of ‘bringing home’ high-quality jobs and reinvigorating industry.

Argentina’s recent experience with trade barriers tells a different story.

Argentina has pursued relatively restrictive trade policies since the Second World War. Starting in 2007 Argentina’s former president, Cristina Kirchner, adopted new protectionist measures as part of a ‘Made in Argentina’ drive.

Some categories of imports were limited or subjected to long delays. Companies were required to seek permission before importing goods or services. Other rules required importers to match the value of imports by exporting an equal value of goods. It resulted in a Porsche dealer exporting wine to offset imports of cars. Other car importers found themselves in the business of exporting soya, peanuts and biodiesel.

Faced with these restrictions, Apple withdrew from the Argentinian market. To retain its access to the Argentinian handset market, where it was a major player, Blackberry was obliged to shift production from Mexico to Argentina.

In 2007 Blackberry set out to create a manufacturing operation in Tierra Del Fuego, a remote, sparsely populated part of southern Argentina whose main industries are agriculture, fishing, tourism and gas and oil extraction. The choice of location was the government’s.

To attract workers to the region Blackberry had to pay a salary premium. The Economist estimates wages were some 15 times higher than in Asia and costs were far higher than at its Mexico plant. The Tierra Del Fuego factory cost $23 million to build, much of it paid for by the government.

When production finally started the first Blackberry model was two years out of date and cost significantly more than the Mexican-made version.

Unsurprisingly, Argentinian consumers were unwilling to pay an above-market price for an older model. Almost immediately travellers started to smuggle cheaper, more modern Blackberrys into the country.

Sales of Argentinian-made devices plummeted and, after two years, the Tierra del Fuego plant closed.

The episode illustrates a wider truth. Free trade gives consumers the best products at the lowest prices. For this reason, protectionism tends to be self-harming. Import controls increase costs for consumers and create an untaxed, unregulated black market. In Argentina’s case state aid for the Blackberry plant diverted resources from sectors, such as agriculture and commodities, where Argentina is internationally competitive.

‘Bringing back’ good jobs and making things ‘at home’ are good slogans and have a simple appeal. But they make little economic sense.

Consider an extreme example. It would be possible for the UK to meet its demand for pineapples by growing them at home. Indeed, the eighteenth and nineteenth centuries’ fashion for pineapples led to their being grown, under glass and using a variety of sophisticated techniques, in a number of estates. The costs were sky high. In an experiment five years ago, the Lost Gardens of Heligan, in Cornwall, produced a crop of pineapples using traditional Victorian techniques. The cost per pineapple was about £1,200.

Cheap, refrigerated transport killed home-produced pineapples. The UK could produce them today, but they would be hugely expensive and, unless imports were restricted, unviable – just like Argentina’s home-produced Blackberrys. The pineapple would go from being an everyday food to the preserve of the rich.

Many other products that industrialised nations import today, from electronics, to textiles to toys, could also be made ‘at home’. Were that to happen, prices would soar and resources that could have been used to develop the industries of the future would be used to prop up low-cost, low-tech industries and activities.

People are better off if the market, not government, decides where Blackberrys and pineapples are produced.

 

Ian Stewart is Deloitte's Chief Economist in the UK. This article is reproduced with permission from Ian’s blog, The Monday Briefing.

3 Comments
Laurent
April 07, 2017

Oh! I agree with the premises that "Free trade helped power a dramatic rise in living standards in the West in the nineteenth and twentieth centuries. In the last three decades, it has had a similar impact on the welfare of billions of people in emerging economies". Free trade is good, that's not the problem.

The problem is that in the 21st century the benefits of free trade have been fully kept by the 1%.
- Thomas Picketty's book "Capital in the 21st century" shows the growing inequality (both wealth and income) between the rich and the poor.
- Oxfam shows that today just eight billionaires are as wealthy as the poorest half of the world.
https://www.oxfam.org.au/media/2017/01/just-eight-billionaires-as-wealthy-as-poorest-half-of-the-world/
- Even McKinsey observes that the real incomes of households in most advanced economies were flat or fell between 2005 and 2014
http://www.mckinsey.com/global-themes/employment-and-growth/poorer-than-their-parents-a-new-perspective-on-income-inequality

If we don't fix this inequality problem, it's not going to end well.
Brexit, Trump and populists in Europe and Australia are only the beginning.
Watch again Ray Dalio's video on "How The Economic Machine Works"; there are only 3 ways out of this: taxing the rich, wars between countries or revolutions (see at 23').
https://www.youtube.com/watch?v=PHe0bXAIuk0

So unless we get a war, if we don't want a revolution, at some stage there will be no other solution than to tax the rich.

hughDive
April 07, 2017

superb and well written article Ian, substituting England and Portugal's production of cloth and wine for Blackberries and pineapples.

David
April 06, 2017

This should have been the lead article this week, it includes some excellent insights.

 

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