Free Trade Continues to Help Developing Countries
Imagine being the President of a developing country. Your country is poor, but it has great potential for future prosperity. You saw how countries like South Korea, China, and Taiwan boomed in recent years, seek to achieve similar things in your country. China offers you a major development project that will help your economy. At first it seems like a good plan – China will offer generous loans to build a railway or a seaport or an airport, that will help your country connect to the global economy.
But there are downsides. There is a real possibility your country could get trapped in debt. The agreement would give the PRC government influence – perhaps undue influence over the country. Despite these problems, lacking any other option, many people would choose the Chinese deal.
These types of deals are going on right now in many countries around the world. China’s Belt and Road Initiative (B.R.I.) is among the largest programs of foreign investment ever seen in the world. It has done a great deal of good for many of the countries involved. And yet it is not a free market program, and the majority of the benefit often goes to Chinese companies, usually with executives close to the Communist Party elite.
An example of such a situation lies in the previously rather sleepy Cambodian seaport town of Sikhoukville. Cambodia is a poor country having been devastated by war and genocide, and the recent prosperity experienced in Vietnam and Malaysia hasn’t transferred to Cambodia. Chinese investment in the area seems to be a positive development, but as The Guardian’s Hannah Ellis Peterson reports there are few tangible benefits for local entrepreneurs and many have seen fewer European tourists (and thus lower revenues) and dramatically increased costs of living. The benefits are largely missing the local population, and it’s not clear whether they will last.
Perhaps the most famous example of Chinese investment gone awry is the Hambantota Port, which was recently handed over to a Chinese company for management for 99 years as part of a deal to relieve Sri Lanka of debt to China. An international airport nearby funded by the Chinese government has seen little use and is now a claimant to the dubious title of world’s emptiest commercial airport. (https://www.reuters.com/article/us-sri-lanka-china-ports/chinese-firm-pays-584-million-in-sri-lanka-port-debt-to-equity-deal-idUSKBN1JG2Z6)
And in Malaysia, new prime minister Mahathir Mohamad canceled a pair of Chinese backed projects, and cited concerns that Chinese debt dependency was creating a new form of colonialism. Mahathir’s return to the prime minister’s office happened in part to a scandal involving an investment bank that brought down his predecessor, Najib Razak.
The truth is that countries across the world want to invest in infrastructure to boost their economy. The global economy today is, in fact, quite good at creating opportunities for developing nations. Countries like Ethiopia, Bangladesh, Vietnam, and Senegal have all shown strong economic growth in recent years, a sign that poverty can be overcome and lives of millions can be improved remarkably fast. But the BRI initiative is not an economically liberal proposal. It mirrors high growth and is dominated by politically connected state run industries. This isn’t how to build region wide prosperity.
Fortunately, the United States and its allies can offer something better. Earlier this year, the European Union and Japan signed a free trade agreement that will remove most tariffs between them. Contained in this group are some of the world’s most important economies. Each country involved is some form of a market economy (nearly every member of the EU ranks higher in economic freedom than China according to the Wall Street Journal’s Index of Economic Freedom) and each has an elected government that is far more respectful of human rights than China’s Communist government.
Despite the withdrawal of the United States, the Trans Pacific Partnership is advancing anyway, linking several countries on the rim of the Pacific Ocean in a more closely aligned trade relationship. In addition, the EU is in negotiations with the United States on a free trade agreement. Both of these agreements have been met with justified concerns over labor, environmental, and sovereignty issues, and all of these concerns must be taken into account if these agreements are to benefit all involved. But forging ties among developed, free market, and democratic countries will create a powerful economic alliance. Furthermore, the United States, Japan, and Australia have proposed an alternative infrastructure investment program that would be an alternative to the BRI (India has discussed joining this partnership, but thus far has declined to do so).
Countries will act in their own self-interest and it should not come as any surprise that the Chinese government is investing in projects that benefit China and its economy. The world should not object to this. But it should also not come as any surprise that if the only opportunity to advance a countries fortunes is to participate in an uneven deal with Beijing, that many countries will do just that. However, the principles of a free market economy (used in the US, Europe, Japan, and South Korea) have proven to be more effective than a statist system in delivering economic growth. People in developing countries recognizing this. In Vietnam, for example, ninety-five percent of people polled by the Pew Research Center support capitalism as an economic system.
If the United States works with our allies to create a global economic system based on freedom and free markets, our alliance of free nations will be better off. This is the road we take, it will be a win win, benefiting both the United States and the rest of the world.