This article first appeared in Forum, The Edge Malaysia Weekly on October 14, 2019 - October 20, 2019

Recently, I was asked a question about free trade — why free trade remains a one-way street in the sense that it opens the door for multinationals to enter our countries but does not allow the smaller local companies to sell and export? There are obviously no legal restrictions on the local companies to sell, but, according to the questioner, the sheer size of MNCs makes it impossible for the smaller companies to stay afloat and compete. Big companies can afford to absorb losses, which they accrue while operating in smaller markets for a long time until they drive out local businesses.

This is apparently happening now in the case of digital platforms where Ali Babas and Amazons of the world are not only killing smaller locally developed platforms but also driving traditional bricks-and-mortar businesses out. In a nutshell, what lies behind this question is that size does matter. Big companies are “free” to sell at the cost of smaller companies and can afford to stay in losses and capture market share.

In the bricks-and-mortar world, one can give the example of giant retail operations such as Tesco, Carrefour and Walmart. Once they enter a local market, say, Malaysia or Pakistan, they are most likely to disrupt local retail shops. Many owners of these shops will be forced to close down. If they are smart, they will become suppliers to the new giants. I recall receiving an angry email from a furnishing company when I published an article praising IKEA some time back. IKEA, accordingly, would bring small companies to their knees.

In the digital world, one can give examples of Ali Baba. It acquired Pakistani-born platform Daraz and Singaporean-born Lazada in 2016. In the process, there must have been many online start-ups that were launched and might never be heard of again. Daraz and Lazada are thriving today, but they are no longer owned by their founders.

The question I was asked about free trade was one that is often asked by small companies and local entrepreneurs: should free trade be allowed to destroy local companies?

This is not a new question; it has been asked at every phase of the industrial revolution in the past 200 years. Now that we are entering IR 4.0, the severity of this question has intensified.

Before we can answer this rhetorical question, at a deeper level, we need to ask ourselves these other questions. How do the multinationals of today grow in the first place, as certainly they had started small? Do we have a level playing field for multinationals and local companies? Is there any evidence of abuse of market dominance by the big companies? What is the impact of shifts in the consumer demand? What is the impact on job creation?

In other words, while discussing the potential impact of large companies on smaller companies as a result of free trade, we should be looking at not only the ownership structure but also the larger economic equation.

Let’s consider two examples by the same firm — the global ride-hailing platform Uber. Uber bought over the leading ride-hailing platform in the Middle East, Careem, earlier this year. However, in Southeast Asia, Uber was bought over by local platform Grab. Grab was originally founded in Malaysia, but then moved to Singapore in search of capital and became a huge success.

Take the example of IKEA. In China, the entry of IKEA did not lead to closures of local furniture companies. Instead, it led to the establishment of several local companies that copied the IKEA model, thriving by offering lower prices and creating their own market share.

In Malaysia, which is one of the prominent manufacturing and assembly hubs in Southeast Asia, free trade works both ways. It allows relatively free imports of electric and electronic items, provides reasonable incentives to both local and international firms, adds some value and exports the final products back to the world. The value added is only 7%, but the volume of exports is substantial. Malaysian exports have exceeded US$200 billion — at least 10 times that of Pakistan.

It is true that one needs to ensure a level playing field for domestic and foreign firms. However, in the absence of special incentives, China would not have seen the growth of special economic zones, which became the engine of the Chinese

miracle. And Pakistan would not have been successful in attracting China through the China-

Pakistan Economic Corridor investments.

Free trade not only brings goods and services, it also brings new knowledge. Protectionism can help some domestic firms, but it often leads to an overall economic loss.

Ali Salman is CEO of the Institute for Democracy and Economic Affairs

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