Salt and the railroad: Why trade matters

He went on, as reported by Politico, to say, “So, in a weird way, the fact that we have been so free-trade oriented historically actually impedes our ability to make new free-trade agreements.  And that’s something that I don’t think is very well understood, so I think it would actually do your readers a very good service to point out to them the fact that we have made so many unilateral concessions impedes having more free-trade agreements with other countries.  It’s an oddity of the way that we’ve behaved in the past.”

So, in the service to our readers, Talking Trade will explain exactly how Secretary Ross has gotten his point entirely wrong.

If the United States were negotiating with another party in an economy that contained only two goods—autos and steel—it is possible that getting an agreement would be challenging.  Even here, however, a smart negotiator might be able to figure out a win-win outcome as it is conceivable that one party is comparatively better or more efficient at producing one of the goods and trading with the other. 

This is, after all, the very foundation of international trade in the first place.  It is a fundamental principle that underpins free trade agreements—countries should specialize and trade.  In the long run, in the aggregate, scarce resources can be used more effectively and all benefit (even if not all benefit equally). 

While this idea is an old one, the John Bates Clark Medal for best economist under the age of 40 was just awarded in April to Dave Donaldson.  His work examines the concept of comparative advantage using painstakingly collected, granular details in different settings. 

He showed, for instance, that connecting to the railway in India boosted local incomes by 16% per year as it allowed specialization and trade to spread across the subcontinent compared to communities that were not connected by rail.  Those locations that were unable to connect and trade did not experience the same economic boom as they were forced to continue using resources less efficiently.

Donaldson tracked trade in salt across India to see what difference it made to local economies when trains arrived on the scene. 

The coming of the railroad brought widespread benefits, but it also brought dislocation to specific communities, sectors, and individuals.  Inefficient producers faced competitive pressures of the sort that had likely not been felt before the train arrived.  The rail lines were built across India quite quickly, from 1850-1930, which meant that the transition period was relatively swift, particularly for individual communities when the train first stopped in town. 

Those communities not connected by rail grew by only 22% over roughly the entire period.  The gap between those engaged in trade and specialization and those not is striking. 

Trade agreements are meant to help serve as the railways of today.  Of course, many will quickly argue, this is partly the problem, as free trade agreements bypass too many communities.  This is certainly true and remains the single most compelling reason for urging countries to return with all due speed to the negotiating tables in Geneva to relaunch new global trade talks at the World Trade Organization (WTO).

In the meantime, however, many countries have figured out that being connected delivers benefits and have done whatever it takes to make this happen. 

Unilateral action works—removing barriers to trade and investment do not require reciprocal changes from anyone.  Effectively, some countries have decided to unblock the lines to the railroad trunk lines without waiting for assistance from somewhere else.

Having more rail lines does not undermine the importance of connections.  On the contrary, it increases the gains of being networked together.  Hub cities and hub connections give more opportunities for greater specialization.  This was just as true for salt producers in India as it is today.

It is partly why places like Singapore or Hong Kong are willing to forgo having tariffs at all.  In spite of not having tariffs, for instance, more than 20 countries and regions have lined up to have free trade agreements with Singapore.

They have done so not because—with all due respect to the local business opportunities in Singapore—the five million citizens here are such fantastic consumers or the local suppliers are that amazing.  Instead, other countries want to join to Singapore because they want to build more rail lines with places that understand the importance of being connected. 

Trade agreements, Ross should certainly understand, are also about much more than just tariff reductions.  The best deals cover a wide range of topics of critical importance to businesses and consumers.  Creating the right frameworks for trade helps trigger the local growth that communities near the rail lines in India experienced in the 1800s. 

A good agreement should be the catalyst for domestic level changes necessary to support better integration and sustainable growth. 

Sensible policies create a mutually reinforcing cycle.  Ross has it exactly backwards.  It is precisely because the United States has been open and prepared to embrace global networks that it has become so competitive. 

No one wants to build a railroad to nowhere.  Trains only work when they connect to desirable destinations for passengers and cargo.

Here in Asia we are enthusiastically building new stations and rail lines.  The exact destinations are not always as clear as businesses would like or as helpful as consumers might prefer.  But the trains are still moving ahead.