Free trade and protectionism – how much does it benefit small and medium enterprises?

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By: Kumaran Pillai

Free Trade Agreements (FTAs) were all the rage at conference held by the Singapore Business Federation, where one speaker after another spoke about the benefits of doing business in a tariff free world. The laissez faire model is taken to another level with the possibility of the Trans Pacific Partnership (TPP) coming into force in December 2017, which accounts for 40% of the Global GDP. Despite the promises it holds, the rest of the free world views FTAs with much skepticism.

We have seen the Clintons make a policy U-turn in the run-up to the presidential elections in the United States. Hillary Clinton, once a staunch supporter of free trade, appears as if she has traded sound economics for politics.  

As far as the theory goes, in a free trade model the consumers benefits. The consumer gets the best product or service at an optimal price. Whereas in a closed market like Pyongyang, the consumers suffer because they do not have access to the best products and services of the world.

But Kim Jong-Un, the supreme leader of North Korea, is not a shining example for anything but an eccentric leader of a renegade failed state. China on the other hand, has made much progress in the world stage pursuing free trade in strategic sectors while protecting vital industries.

Many view the admission of China in the WTO during the tenure of President Clinton as a turning point in the wheel of fortune between US and China. The US-China trade deficit stands at a whopping $365.7 billion in 2015 in favour of China.

China has amassed huge national reserves and is the largest creditor of US debt, raising the eyebrows of many political commentators in America.

To make matters worse, the US has lost much of its manufacturing capability and any rise in national income was quickly offset by a loss of factory jobs. Of course, there are corporate winners from this trade deal. Apple Computer, for example, has outsourced much of its manufacturing jobs to China and has neatly tucked away much of its earnings in tax-free jurisdictions around the world. Some lobbyist have accused Apple of impoverishing the world and the US in the process.

This beckons the question of whether trade deals really benefits the man on the street or if it benefits the business owners and rich corporations? The distribution of wealth seems rather disproportionate.

For the antagonist of FTAs, it really doesn’t matter whether we’re part of TPP and live in a tariff free world if we have lost our jobs and have fallen off the economic cliff, if we don’t have a job or any savings to begin with.   

It is no wonder that Trump has so much ground support for his eclectic speeches and his vision of protecting America and making it great once again. We may just see an era of protectionist policies from America if Trump trumps this presidential election.

As far as Singapore is concerned and from a historical perspective, being part of a FTA grouping benefits Singapore (or is it our national coffers?). Like China, Singapore protects its government-linked-companies while letting our small tiny enterprises compete vigorously in harsh open terrain with foreign companies.

Moreover, private companies that have benefitted from free trade agreements are far and few between perpetuating the notion that FTAs only benefits the larger SMEs.

Ludwig von Mises, an eminent Austrian economist once famously said, “it is the consumers who make poor people rich and rich people poor.” Taking a leaf from his book and his grain of wisdom we know that wealth and economies are built based on collective choices. We get the government of our choice; Apple Inc is successful because we have made a collective choice over the outmoded Nokia devices; and the pathways to the wealth that we create as a nation is a collective choice.

Without a doubt, protectionism stifles innovation and there needs to be some level of competition for innovation to strive. And the copycats of China have successfully launched several mobile applications and startups that have taken the Chinese markets by storm by keeping Google, Facebook and other competitors at bay. The success of the Chinese startups is partly due to the massive domestic market of 1.4 billion. China has the critical mass to live in a world of its own.

The truth is, while China and Singapore have amassed huge reserves by pursuing a dual strategy of free trade and strategic protectionism, it has not created an iPhone, or a Facebook or a Google. It is America that has given us the state of the art innovation at a huge political and perhaps economic cost.

Singapore’s logic of protecting her GLCs is ill conceived. Singapore is not China and protecting the GLCs does not bode well and neither has it given us the results – just look at how SMRT is being run. Besides we shouldn’t be just creating “me-too” companies.

America’s ambition of expanding its influence through a TPP deal gives them access to a combined population of 800 million from its twelve member states. Being a partner to this trade pact gives us the same reach. Going into this partnership, the local government needs to consider protecting those that are most vulnerable in a bigger market exposed to new competitive forces.   

Nevertheless, the ingenuity of the free world is unsurpassed and unparalleled by any other model. It is obvious that the innovators and the business owners take home the lion’s share in a laissez faire world but I still find it more equitable than the political elite and retired generals taking home the fattest and the most succulent bacon in our communitarian model.


Kumaran Pillai is the CEO of Apple Seed Pte Ltd and the Publisher of The Independent Singapore.