Fisher Investments Editorial Staff

Promoting Peace and Prosperity

By, 11/03/2011

While most in the media were preoccupied speculating on what the Fed would say or not say Wednesday (and they didn’t say much, as it turned out), another development, much less emphasized in the press, occurred half a world away: Pakistan agreed to normalize trade with India. Not only that, they granted India Most Favored Nation trading status, which is anticipated to boost bilateral trade.

As frequent readers of MarketMinder likely know, we’re always fans of freer trade—mostly for its economic benefits, which redound on all participants. But among myriad other benefits of free trade is that countries heavily trading with each other—whether predominantly through exports, imports or an equal amount of each—have a shared interest in each others’ success. Consequently, wars between them tend to be rarer.

And anyone vaguely familiar with historic tensions between Pakistan and India—who’ve fought three wars since gaining independence from Britain in 1947—likely also knows trade there has consequently been much less than free. The most recent round of peace talks began in 2004 and was suspended in 2008 in the wake of a Pakistan-tied Mumbai, India attack that killed over 160 people. Since then, the two countries have attempted to continue negotiations, though primarily through trade officials rather than diplomats likely more focused on political issues like disputed territory in the Kashmir region. And it seems now that decision may be reaping benefits, particularly considering it seems trade is even set to take place between divided Kashmir.

Why is this potentially an important development, in our view? A brief counter-example: When the US enacted the Smoot-Hawley Tariff in 1930, among the most significantly impacted countries was Cuba. Cuba’s economy before 1930 was hugely dependent on the US as a market for sugar exports—but given the increase in sugar duties, it’s estimated some 10% of Cuba’s national income between 1929 and 1933 was effectively erased, which represents roughly a third of the overall decline in Cuba’s GDP over the same period.* And what happened in 1933? Cuba had a revolution, ousted the largely pro-American government and began a slow march toward the revolution of 1956 which installed Fidel Castro and a mostly communist government.

Now, this isn’t in any way to say the increase in US sugar duties was the only negative influence on Cuba’s economy (after all, a global depression was underway) or the Cuban revolution doesn’t happen without those tariffs. But the deleterious effect of the tariff likely played an important role in deepening Cuba’s economic downturn then. And it does highlight the law of unintended consequences and speak powerfully to trade’s efficacy in promoting freer societies more interested in mutually beneficial economic exchange than war—of either the military or trade type.

And it doesn’t necessarily mean the opposite happens for Pakistan and India—at least, not immediately. But it’s certainly a step in the right direction and likely leads ultimately and at least to more open communication between the two.

So what’s the benefit for global economies? Well, for now, probably not much. But as India and Pakistan increasingly open to one another, overall economic production in both countries likely goes up, lifting per capita income. And as Pakistanis and Indians earn higher incomes, their demand for consumer goods probably goes up. And it increases their ability to trade for any of those goods in which they lack a comparative advantage (economist for the ability to produce a good more cheaply and efficiently than a competitor). (David Ricardo strikes again!) Which in turn lifts global trade. Now that’s all likely a ways down the road, but overall, this is an interesting development, and one worth watching, in our view—particularly since the announcement seems to be mostly unnoticed.

We’re in a world where one popular perception is that globalization has increased risk. Suffice it to say we don’t think that’s the full story. Fact is, improving trade relations globally can play a significant role in reducing geopolitical risk, while simultaneously aiding economies and consumers. The new deal between India and Pakistan is not a panacea to prevent tension—but it is a significant step forward along the road to better relations. And this deal follows two agreements signed between China and Taiwan the last few years—two more countries with a history of antagonizing one another. Increasing trade ties between nations—especially those with long histories of hatred—represents a key step along the road to both prosperity and peace.

*Irwin, Douglas A. Peddling Protectionism. Princeton, New Jersey: Princeton University Press, 2011. pp. 162-163.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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