What the Banda Islands Tell Us About World Trade

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I was recently in a tiny group of islands in eastern Indonesia called the Bandas, remote even by the standards of that far-flung archipelago nation. They are the ultimate storybook stereotype of the isolated, tropical paradise – palm-fringed specks in the middle of a coral-rich sea, ringed by pristine, white-sand beaches and dotted with simple villages. The Bandas even have the requisite active volcano. It’s just about as far off the map of the modern world as you can get these days. Once you step away from a couple main islands, Blackberry and mobile phone service evaporates. (No emails!!!) In a world connected by rapid transport, the Bandas also exist in a different era. Your unsavory choices are an infrequent, overcrowded ferry or an erratic flight on a heart disease-inducing archaic propeller plane.

Why, exactly, am I telling you all of this? I’m not making holiday vacation recommendations (though the Bandas are lovely). This is the Curious Capitalist after all, so there has to be some economics in here somewhere. In fact, the Bandas can tell us quite a bit about economics. The lessons these islands offer have to do with the impact of global trade and how that trade shapes and defines the fortunes of nations and peoples. They also provide a cautionary tale, of the damage trade can do– if, and here’s the key point, those in charge don’t adapt to the change trade inevitably creates.

Though it is hard to tell by visiting the Bandas today, these miniscule islands played a pivotal role in global economic history. That’s because of what grows on them: nutmeg. For centuries, the Bandas were the primary source of the world’s nutmeg, once the condiment equivalent of gold. Prized for its supposed medicinal powers, nutmeg commanded outrageous prices inEurope, and awarded outrageous profits to anyone who controlled its supply. Finding the Bandas, and the rest of the nearby Spice Islands, was the main motivation behind Europe’s age of exploration. The dream of the Bandas sent the Portuguese around the Cape of Good Hope and Christopher Columbus accidentally towards America. The British and Dutch fought over the islands, and the Dutch, the eventually victors, grew fat off its monopoly of the nutmeg trade. One famous tale shows just how valuable these islands once were. In a peace treaty after a war fought in the mid-1660s, the English let the Dutch keep one island in the Bandas, called Run, that they had claimed. As part of the settlement, the Dutch recognized British control over another small island on the other side of the planet –Manhattan.

That deal seems ridiculous to us today.New York turned into the world’s financial capital, the Big Apple of the most important economy, covered with skyscrapers, luxury apartments and some of the best museums, theaters and universities anywhere. Meanwhile, Run is a rocky backwater covered with banana palms, nutmeg trees and a cluster of huts. While New Yorkers deal in high finance and international publishing, the residents of the Bandas still harvest nutmeg as they had centuries ago. Seeds can be seen drying in the sun outside of nearly every home. There are few signs in the Bandas today of their glorious history, beyond a handful of crumbling forts. And though the locals aren’t desperately poor – how can you be, when mangoes hang heavily from trees along village walkways – they’re not getting rich off their cherished nutmeg either. Now that the spice is a common ingredient, readily found in every supermarket across the U.S. and Europe, it has lost its value and could never command the lofty prices of yesteryear.

There is perhaps no better example in history of how trade rewards and punishes. When the Bandas had a clear comparative advantage over the production of a good in heavy demand – in other words, uncontested superiority over the technology, know-how and physical facilities (the trees) needed to make highly prized nutmeg – these islands could demand astronomical prices for their output and influence the course of global trade and world history. But no comparative advantage, no matter how secure it may seem or long it may last, can be perpetuated indefinitely. Though the Dutch went to great lengths to preserve their grip on the nutmeg trade, the high prices inevitably attracted competition. The British eventually figured out how to grow nutmeg in their own empire, global production increased, and the Bandas lost their unique comparative advantage. The islands descended from the pinnacle of the global economy into the isolated, anonymity of today.

The Bandas vanished from the global economy because they never changed with changing technology and consumer tastes. As the Bandas lost their dominance in the nutmeg trade, they needed to do something else – maybe capitalize on their farmers’ extensive knowledge of nutmeg to “move up the value chain” and shift into processing it into some new, more useful product. But that never really happened. To be fair to the locals, they did not possess the power to determine their own affairs. The Dutch ruled, and they were more interested in sucking what wealth they could from the islands back to Europe than developing a healthier local economy in the Bandas. Yet even since Indonesia’s independence, little effort has been made to turn the Bandas into much more than a bunch of nutmeg groves. There is talk of encouraging a tourism industry, but it remains mainly talk. That rickety propeller plane that flew us to the Bandas can never carry in enough brave tourists to make much of a difference to the local economy.

So, you ask, why is the story of the Bandas relevant to us today? When I listen to the usual discourse about trade these days, especially in the U.S.ahead of next year’s presidential election, the primary focus is on the preservation of the comparative advantages the U.S.possesses now. There is always much talk about saving manufacturing jobs under threat from lower-cost (and thus more competitive) countries, or even bringing jobs “lost” to others (like China) back home. But that’s not really the answer to dealing with the challenges of global trade and globalization. Looking backwards, as the Dutch did in the Bandas, doesn’t move your fortunes forward. Just as it was impossible for the Bandas to ensure their control over the nutmeg trade indefinitely, it will prove impossible for the U.S.to ensure its edge in the technologies of today. The Dutch couldn’t stop the British from learning about nutmeg; Americans today can’t prevent the Chinese or Koreans from developing their own iPads. Attempting to protect American advantages (or employment) by protecting American industry won’t stop others from contesting American advantages. If the Chinese or Indians smell profit in a certain industry, they’ll charge into it, whatever tax policies or tariffs the U.S. or Europe might try to employ. In fact, the risk is that, in a quest to keep what theU.S.has, the country ends up getting left behind, like the Bandas.

What’s the answer? Preparing for the future, not dwelling on the past. The problem in the U.S. and Europe today is that there is far more effort devoted to preserving the present than laying the groundwork for future economic competition. There is much babble about the need to strengthen education and improve the business climate to encourage investment and entrepreneurship, but not enough has actually been done. Rather than fixating on the way the American economy used to work, we have to look ahead to how it needs to work 50 or 100 years from now. I fear that’s not happening.

It would be fascinating to time warp 400 or so  years from now (roughly the same amount of time that has passed since the Dutch first arrived in the Bandas) to see how trade will by then have shaped the world. The question is whether Manhattan, the island at the center of the global economy today, will still sit in that prominent position. Or will it be something more like Run, a forgotten relic of a long-gone period of global economic history? Don’t think it can’t happen.

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