Fairer trade or freer trade ?

“This house believes that making trade fairer is more important than making it freer” – this is the current live debate hosted by The Economist here. This blogger is a complete and unabashed fan of The Economist and subscribes to the view that it is the best publication in the world. The Economist debates are a fascinating discussion of very relevant issues and it would be difficult to find as interesting a debate on economics as between fair trade and free trade.

The context must be clearly understood. Despite all the tall claims made, the world is nowhere close to free trade of an acceptable sort. The bastions of free trade are all fiercely protectionists in their own areas – agriculture in both Europe and the US, and pretty much everywhere else in the developing world. Everybody wants free trade in other’s homes, but not in their own backyard. Tariff and non tariff barriers abound. The crawling pace of the WTO talks, which go on for decades is testimony to this, although it has to be said much has indeed been achieved.

Ranged against free trade is an assortment of all sorts of constituencies, ranging from noble social organizations to bleeding heart socialists. Their noise making capability being much higher, free trade is being tainted as a four letter word and blamed as the originator of much misery. Arguments against free trade range from exploitation of workers in the poor countries, loss of jobs in rich, threat to way of life in all sorts of places, inequality, etc etc. There is some merit and much bunk in these arguments.

What is fair trade anyway ? Fair to whom ? Fair to the producer or fair to the consumer ?

The value free trade has brought to so many millions of people is often not given the credit it deserves. Prices of almost every good or service is lower because of free trade and competition. Producing something in the best place it ought to be produced, makes both quality and price better. While the opponents of free trade propagate the cause of the producer (the poor French farmer who will lose his French way of life if the big bad beast of free trade is unleashed), nobody propagates the right of the consumer ; why should the average Pierre on the streets in Marseilles pay more to keep the French farmer in Brittany in cosy comfort ?

Think about this. All arguments of protectionism are made by people unable to compete. If they could compete and win, they would not be scared of free trade. They are scared of free trade because they do not offer the best cost quality equation. Therefore they want the guy who offers the best deal to be kept out because only then can they survive. So they want some poor sod of a consumer to subsidise them. For every compromise somebody makes on free trade, it is the consumer who is jacked.

This is an opinionated blog, of course. This blogger believes that the only fair trade is free trade.

But read The Economist's debate. The excellent Ngaire Woods makes a powerful argument for fairer trade. As does Prof Jagdish Bhagwati for free trade. I am delighted to say that at the time of writing this piece, 52% of those voting agreed with me. But it is indeed true that the Economist reader is no average Joe Public. If there was an open vote amongst the population, I am sad to say that not even 5% is likely to take this view.

ICICI Bank is a foreign bank !

This blog started life a year and a bit ago with the very first post titled “What is 'American Goods' anyway ?" . Now I return back to the same theme after reading a news item that the Reserve Bank of India has declared both ICICI Bank and HDFC bank to be “foreign banks”.

For those unfamiliar with the Indian banking environment, throughout the socialist days of the 70s and 80s India lived with a nationalized banking environment. Government owned banks were the only choice. While they had their strengths, technology and innovation were not among them. They were forced to give out buffalo loans to “poor farmers” and then write them off (collecting buffalo tails as proof of death).

Two banks changed the landscape in just 5 years – ICICI Bank and HDFC Bank. Both were private banks and they revolutionised banking in India. Sure, they have their faults (many actually), but they were a completely different experience to the government banks. In no time they shot up to be market leaders.

They are listed in the Indian and US stock exchanges. Probably 90%+ of their business is in India. Most of their branches are in India. The management is entirely Indian. They are headquartered in India. But apparently more than 50% of their equity is now held by foreign entities, as they are freely traded on the stock exchanges. Voila – the country’s central bank has declared them to be foreign banks.

This just goes to show the devilish difficulty in trying to decide nationalities of corporations. Many companies today are truly global. Their shareholders are from all over the place. Actually which nationality do you ascribe to ICICI Bank. More than 50% of the shareholding may be in “foreign” hands, but that is many nationalities put together. Almost certainly the single largest shareholder nationality will be Indian. So if ICICI Bank is not “Indian”, then what is it ? Stateless person ??

So what IS the nationality of a company ? Does it indeed have to have a nationality at all ?? Usually in law, the place where the company is registered is deemed to be its nationality. To determine whether its “foreign” or “local”, its usually the % shareholding that is considered. Some countries, most notably Britain and France, value heritage. Cadbury is always a ‘British” company and Danone always a “French” company, no matter what. Some value where its headquarters is – HSBC is a prime example. Its name says Hong Kong & Shanghai Banking Corporation. Its listed in Hong Kong and in the UK. Its boss is British, but he recently moved to be based in Hong Kong. What about companies which have split personalities – companies like Unilever, Royal Dutch Shell and Reed Elsevier which have two headquarters, two parent companies, etc ?

Actually it doesn’t matter. Except when you have clauses like ‘Buy American” and “Buy Chinese”. Except when you discriminate “foreign companies” from domestic ones. Companies are the truly global manifestation of the human race. Companies have gone where the species should go – being truly global and one – but where societies and nations will never go.

Here’s an aside. You may recall the post about a company standing in the US elections. Presumably only “US companies” are entitled to stand. But we come back to the old problem – what is an US company ? Imagine Osama bin Laden floating a company with majority holding by his US followers, registered in the state of Delaware and standing for the office of the President of the United States. That would be something !

Chinese tyres vs American chicken

There’s a spat going on between the US and China that is threatening to become a trade battle, if not a war. The US imposed tariffs of 35% on Chinese automobile tyres on the grounds that imports were surging and that the domestic industry had to be protected “temporarily”. China immediately appealed to the WTO and there the matter stands now.

But China is a prickly nation. It is quick to take offence. It announced last week that its launching an investigation in American “chicken parts” being dumped in China and putting Chinese poultry farmers out of business. Of course, this was entirely unrelated to America’s action on its tyres.

Reading this made me sit up. Is America capable of exporting something that undercuts China ?? How on earth was that possible ? But it indeed does seem to be the case. The “chicken parts” in question are wings and legs. Apparently these have no use in the US – they are virtually worthless and go for 2 cents a pound. But these are delicacies in China – one of the quaint experiences of mine in China is to see elderly women go out early in the morning to buy fresh chicken legs, just as Indian women might buy milk. These “chicken parts” sell for 40 cents a pound in China. Lo and behold America is cheaper than China !

A spat is brewing and if nationalistic fever is stoked (all too easy in both the countries), this can escalate into a mini trade war. This is exactly what the world does not need today, although politically this will be, unfortunately, popular. It will be a sad day if the world’s economic direction is dictated by the likes of Rush Limbaugh and the prickly faceless mandarin in Beijing.

These are difficult times for free trade. Capitalism is on the defensive and free trade is becoming a four letter word to far too many people. But it is precisely in these recessionary times that the world needs more of free trade, not less of it. But then a free market evangelist is somewhat akin to a paedophile these days.

Whatever might be your views, surely there are more worthy causes to fight wars on than chicken feet !