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The government’s response to the financial crisis has been a shambles. It has coddled “British” firms (such as Indian-owned Jaguar) with tax-payers’ money and restricted foreign lending of some of Britain’s biggest banks (whose UK clients work around the world). It trumpeted the G20 meeting in London, where leaders committed themselves not to indulge in protectionism, and have gone away and broken this promise, most notably through government-driven Buy Local “stimulus” packages triggered by Barack Obama’s “Buy American.”

These moves illustrate how trade policy is so out of touch with the reality of 21st Century commerce.

A generation ago, the factory floor was bound by four walls and usually by national borders too. Today, a product might be designed by a team in Bristol and Bangalore, have raw materials from South Africa, Peru and Thailand, and then be assembled in Slovakia or Taiwan, from where it will then be shipped around the world. This has been made possible by dramatic reductions in trade and investment barriers, and revolutionary changes in communications and transport, which have unleashed a truly global division of labour, specialisation and exchange that would have astounded the great Adam Smith – and certainly reaffirms his insights.

Trade can no longer be characterised as a competition between national producers – or “Us” versus “Them”. Instead, it is now a competition between collaborations of some of “our” producers and some of “theirs” – to our mutual benefit.

Take the iPod. It begins life in Apple’s design lab in California. Components from Singapore, Taiwan, Korea, and Japan are then assembled in China, before the finished product is shipped around the world. The biggest winner from each iPod sold is Apple because they add the most value through design and marketing. The Chinese, who manufacture almost everything, actually add the least value.

This new commercial reality demands policies that welcome imports and foreign investment and that minimise regulations or administrative obstacles – all based on misconceptions about some vague or ill-defined “national interest.”

The only stimulus package that will work is removing trade barriers.

Alec van Gelder is Network Director at International Policy Network. To read IPN’s latest report by Dan Ikenson, No Longer Us versus Them, click here.