The recent uproar over the cross-strait service trade pact was born not only of public anger over the non-transparent way in which it was negotiated, nor simply of the way it went counter to accepted procedure in modern democratic politics: It was also exacerbated by the fears of those in individual sectors of the economy. This was because of the complex nature of the economic impact that the agreement may have, far more complicated than current economic theoretical models would be able to predict.
The government commissioned the Chung-Hua Institution for Economic Research to compile a report using economic model projections for this impact. The science behind the report was full of holes, but, interestingly, that has not meant that the general public, the opposition parties or economists have started thinking harder about the theoretical basis of free trade.
Instead, it has even caused opposition-ruled local governments to give strong support to the free economic pilot zones policy, which is based on the same theoretical foundations as the service trade pact and whose impact may be just as far-reaching.
Fundamentally, this emphasis on free trade is due to the concept having become part of the intellectual hegemony — what the elite defines as legitimate knowledge — in society and in academia in this country, and this has ossified the debate and blinded economists to where theory and reality deviate. It reminds us of the fascinating economic exchanges in the press between former Academia Sinica researcher Chiang Shuo-chieh (蔣碩傑) and former Control Yuan president Wang Tso-jung (王作榮) in 1981. Their debate was about how to deal with contemporary — to them — issues such as the oil crisis, inflation and the slowdown in economic growth, and at the very least showed that economists in Taiwan at the time were engaged in the debate over whether national economic policy should be interventionist or deregulatory.
The intellectual hegemony on free trade comes mainly from comparative advantage theory. As the opportunity costs of producing a given good differ for each country, comparative advantage theory contends that each country should focus on producing goods for which its production costs are relatively low, and then exchange these, via trade, with a second country for another product which that country can produce relatively cheaply, so that each participant in the trade can increase its economic efficiency. Comparative advantage theory is one of the core theories of economics, and has historically proven to be successful many times over in real-world application.
However, times have changed. In addressing the fierce competition in today’s globalized world, it fails to account for the crucial impact of differing technological capabilities on the distribution of benefits within global value chains. Many countries have fallen foul of trade liberalization because of how they have proceeded with deregulation, and how they have forgone their technological autonomy as a result.
Free trade in the world today involves not only goods, but also personnel and finance, and their free movement across national borders, increasing the magnetic pull of large economies. It is especially important for relatively small economies, such as Taiwan’s, to possess technological advantages, as well as economic and trade independence, if they are to resist this magnetic pull. It is not just a case of simply ratcheting up trade liberalization.