This is the fourth installment of a continuing series of very small essays on protectionism and free trade. Those are daunting subjects neither the media nor schools explain well, I think. I am taking small steps on purpose. The first two installments where posted on the same day. All installments will comprise the word “protectionism” in their title for the sake of recognition.
Of course, next door to Hans, in France, there is a guy named Pierre. He is in his mid-forties. He has been working in a government-owned industry for fifteen years. He is comfortable, with a good pension awaiting him, but he is tired of his job because it gives him no chance of ever making it big. Also he is bored with it. Pierre and his brother-in-law, Jean (of course) share an interest in wine; both their grandfathers made wine. Of course, they know there is no shortage of wine in France although there is a chronic shortage of good wines. They consult with me and I point out to them the immense, fast-growing, under-served, and uncritical market of urban China.
Pierre and Jean rake off their savings and lease a cheap piece of land in a part of France not especially suited for good wine grape. They plant some vine there nevertheless. They live off their credit cards for a while and by eating the chicken they raise with glee in a corner of their-vineyard-in- the making. Life is tough. In three years flat, they harvest their first grape. It’s mediocre but abundant. Quickly, they turn it into an equally mediocre white wine. With good advice from me still, they bottle it on their property and they give it a French name that translates into Chinese as a lucky number. As a sub-name, they adopt the caption: “French Birthday Wine,” in English, of course. They find a first distributor that does not pan out. They fire him and sign an agreement with a second distributor who knows reasonably well what he is doing. The first year, their mediocre and moderately-priced French birthday wine does indifferently in China, by Chinese standards that is. They sell only 200,000 bottles. In the third year, they sell 800,000 bottles, still a modest success. But that’s for a net profit of two dollars per bottle. The birthday wine becomes a customary part of celebrations from Canton to Beijing, where lives a population of six hundred millions or more. The brand is easy to remember because of the lucky number. And it’s French wine, after all. Pierre is now prosperous and so is his brother-in-law Jean. (He even pays my commission without any problem.)
France is a good place to make wine and it’s a good place from which to sell wine. That’s not because of soil and climate. Grape grows well under a vast variety of conditions. It’s because of reputation, deserved or not. It’s also because the tacit knowledge that is the basis of wine-making is comparatively easy to pick up there. Digression: You might notice that wines that are successful internationally come mostly from a handful of European countries and from countries where immigrants from the first are numerous. (Australia, Chile, Argentina, California-USA). Where are the Ukrainian wines you might otherwise expect? Or the famous wines from India, a country where huge amounts of grape are grown?
Are you getting tired of reading the same story over and over again? Pierre moved from a position of less remuneration to much greater remuneration. His new income is so much higher than the old that if there had been three “Pierre” in my story, two of whom had failed, there would still be more income generated in France than before any of the “Pierre” did what they did. Pierre is suddenly buying a lot of new stuff, machines, of course but also a new car. He is making so much money he is even thinking of sending his smart second son to study at a pricey MBA program in California.
Again no one was cheated or hurt in the process. Instead, it is likely that many Chinese who used to drink no wine now imbibe mediocre wine on their birthday. Its’ subjective but I think that’s a lifestyle improvement. Again, the issue arises of who is filling Pierre’s old job.
Here is the summary of parts One, Two, Three, and Four:
If allowed to do so, some individuals will try and succeed in improving their income. It does not matter for this reasoning that many will not even try. It’s enough for some to try and succeed for general conditions to improve. There are two reasons for this assertion: First, the richer a person the more taxes he pays, by and large. Taxes go for waste and bureaucracy but also for infrastructure and education. Infrastructure and education benefit all. Second, rich people buy more stuff than poor people. By doing so, they increase employment somewhere. No doubt, they improve employment some close to where they live because many services have to be produced right at home, plumbing, for example. Also, if they buy any stuff near home, someone there has to sell it to them. I said several time that the process is messy. Some try and fail. There are individual costs to failure and also societal costs. More on this soon. Please, someone remind me if I forget to talk about costs soon enough.
Note what’s missing in this story: There is no effort of coordination by any government or by anyone else. In fact, there is no government intervention at all. All this virtuous spiral needs to form and grow is for governments to stay out of the way.
Preview: I have only spoken of individuals because it’s the intuitive way to go. Organizations, including business organizations, act more or less the same way as individuals in this context (not necessarily in others). The main differences is that organizations tend to be more clunky, to act less swiftly and that once they make their moves, their moves have bigger effects, out of proportion to their size. If this is not obvious, I hope someone will write me a Comment about it.