Free Trade vs Free Aid

March 28th, 2010 at 3:50 pm by David Farrar

Amelia MacDonald of Takapuna Grammar has been selected as Phil Twyford’s Youth MP for this year’s Youth Parliament. Each of the 11 contenders had to do a short video on “what they thought NZ should do to make the world a safer, fairer and more sustainable place”, according to Phil at Red Alert.

Amelia’s video is above. I want to argue an alternative point of view to what Amelia advocated. Now if people comment, I don’t want any negative comments on Amelia – just a discussion of the topic. Personally I’m a huge fan of young people taking an interest in politics, and think the Youth Parliament is an excellent way to foster this. Anyone who gets to be selected as a Youth MP, has my respect – even if I disagree with their views.

Incidentally I thought her video was very quirky and well done. But turning to the substance:

I actually agreed with her on the need for armed intervention in Sudan. But sadly China blocks UN action there – one of the problems of needing a UN mandate.

Amelia calls for fair trade, but says this should happen through education, not through cutting off ties with China. Now while I think fair trade is more a slogan than anything else, I am pleased to see realism that cutting trade links is not the way to go.

At 3:50 Amelia says we need to stop importing so much un-necessary stuff, and asks why on earth is it necessary to be importing oranges from California when Kerikeri can do it perfectly well.

This is where I seriously disagree with the notion that importing is bad. But before we talk importing generally, let me address the specific – one reason we import Oranges from California is because they are seasonal, and that is the only way to get them 12 months a year.

More generally one country’s imports is another export’s. If we take a position that one should discourage imports, then we are asking for our dairy, lamb and wool exports to be blocked by other countries.

But more importantly it is about comparative advantage. Let’s use an example of apples and oranges for the US and California. If NZ produce apples for $1/kg and the US produces apples for $2/kg, while NZ produces oranges for $3/kg and the US does oranges for $2/kg also.

The best use of resources is for NZ to produce apples and the US to produce oranges.

Amelia says “less importing means more money for our economy to be spent elsewhere”. This is not always the case. Often NZ will be better off importing something, and exporting something else.

Amelia goes on to say that the money saved from importing can be used to increase aid for developing countries.

My view is that free trade would do far more for developing countries that free aid. The EU and US have massive protectionism in place against imports from developing countries, and that the best thing they could do for Africa, would be allow them to sell their goods in Europe – even if it undercuts local suppliers.

Why have China and India reduced massively the number of citizens they have in absolute poverty, compared to Africa? Because they have freed up their economic, and embraced trade.

This is why even left wing parties like Labour, sign free trade deals with China. Because trade benefits people in both countries.

While well intentioned, I don’t think the solution for poverty in Africa is to trade less, and give more aid. I think it is to trade more, and allow countries to become sustainable without aid. Singapore used to receive aid, as did Taiwan, Hong Kong and South Korea. Aid is necessary for many countries, but it is not a long-term solution. The long-term solution is good governance, property rights (to attract investment) and trade.

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