AFR - Make Trade, Not War
Australian Financial Review, 3 August 2010
We sometimes think of globalisation as something new, but it's easy to forget that the world economy of a century ago was highly integrated. As John Maynard Keynes famously described the world economy of 1913: 'The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.'
What is striking about this era of globalisation is that it was bracketed by wars. The vast expansion of trade began after the Napoleonic Wars, and ended with the muddy carnage of World War I. One after another, countries raised their trade barriers, and the world moved from integration to isolation. To use the analogy of the great economist Joan Robinson, some nations placed rocks in their harbours, and other nations retaliated by placing rocks in their harbours.
But does the lesson of World War I have anything to teach policymakers today? In the latest issue of the American Economic Review, Daron Acemoglu (MIT) and Pierre Yared (Columbia University) revisit the relationship between trade and militarisation in the modern era. Using data on military spending (and the size of countries' armies), they investigate whether countries that are more militaristic also tend to be less enmeshed in the world economy.
Pretty much any way they cut the data, Acemoglu and Yared find that countries which became more militarised tended to do less international trade. The relationship holds up using either measure of militarisation (spending or personnel), and remains strong even omitting countries that are engaged in war. On average, the pair estimate that a 10 percent increase in military spending is associated with a 2 percent drop in that country's trade share.
Indeed, the effect holds up even if the authors focus only on the degree of militarisation in a country's trading partners. This implies that if military spending rises in our lead trading partners (countries such as China, the United States, Japan and Korea), then they are less likely to trade with us than they would otherwise have done.
As Acemoglu and Yared admit, it's difficult to be sure about the direction of causation. Their results are consistent with the theory that militarisation undermines trade, that healthy trade links make countries less likely to boost defence spending, or both. However, anecdotal evidence does suggest that trade helps to expand mutual understanding.
Underpinning Australia's $400 billion of imports and exports are a web of personal relationships which help to build trust across countries. As Austrade's chief economist Tim Harcourt shows in his entertaining book The Airport Economist, these ties help to bind businesspeople together across national borders. Stronger trade relationships make it more likely that Australians will learn a foreign language, and develop an understanding of the culture and history of another country.
Naturally, not all trade improves wellbeing. For example, the trade in slaves, heroin and AK-47s clearly contribute to human misery. But these are rare exceptions. In general, the flow of goods and services across national borders greatly improves our standard of living.
Indeed, one estimate by the Centre for International Economics found that trade liberalisation over the past two decades had benefited the average Australian working family by $3000-4000 per year. Part of this is because trade provides consumers with access to cheaper products and services. Trade also leads to higher productivity – shifting our employment base towards more highly skilled jobs. And there is a benefit from administrative simplicity: as the CiE points out, the 1987 regulations setting out customs duties ran to over 500 pages, with separate tariffs for everything from umbrella handles to bicycle tyres. Reducing this source of complexity helped make Australia more productive.
In addition to these economic benefits of trade, we now we have evidence that the rise in trade flows may also have contributed to making Australia safer. Plenty of nations have been bankrupted by war, but as US Founding Father Benjamin Franklin pointed out, 'no nation was ever ruined by trade'. In fact, Acemoglu and Robinson show that international commerce goes hand-in-hand with lower military spending. Perhaps organisers of the next major peace rally should ask participants to carry placards saying 'Make Trade, Not War'.