After decades of spectacular growth, world trade is experiencing a slowdown even as anti-trade sentiments are on the rise in Europe and the US.
These are not happy days for world trade. In September, the World Trade Organization (WTO) announced that it expected “trade in 2016 to grow at [its] slowest pace since the financial crisis.” This week, the White House that has long championed the Trans-Pacific Partnership (TPP), a rather controversial trade deal, admitted that the US Congress will abandon the TPP.
According WTO’s World Trade Report 2013, trade has increased dramatically over the last few decades. From 1980 to 2011, merchandise exports rose from $2 trillion to $18.2 trillion and commercial services trade from $367 billion to 4.2 trillion, which mean growth rates of 7.3% and 8.2% respectively. In volume terms alone, after accounting for changes in prices and exchange rates, “world merchandise trade recorded a more than four-fold increase between 1980 and 2011.”
Since World War II, Uncle Sam has been the leading cheerleader for trade. It led the charge to open up markets worldwide and to create the WTO itself. In part, this was a reaction to the “beggar-thy-neighbor” policies that took center stage after the Great Depression. Once the Berlin Wall fell in 1989, US trade policy embarked on a new era of trade liberalization. With the election of Donald Trump as president, this era is over.
Trump has declared the current US trade deals to be stupid, disgusting and “the absolute worst ever negotiated by any country in the world.” He has declared the $500 billion trade deficit with China as “the greatest theft in the history of the world.” As Trump memorably said, Americans “can’t continue to allow the [Middle Kingdom to] rape” Uncle Sam. Ironically, Trump’s fuming and foaming has come at a time when global trade is slowing down.
In fact, such is the scale of the slowdown that WTO Director-General Roberto Azevêdo has declared that it “should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalization sentiment.” He went on to make the argument that an open global trading system is important not only for consumers and traders, but also for job creation, economic growth and development itself.
Given that he heads the WTO, Azevêdo is right to be worried. Trade is declining because the global economy is in trouble. In the January 24 edition of The World This Week, this author pointed out that there is both a demand and a supply problem today. American consumption has fallen, creating a demand problem. Chinese factories, the workshop of the world, are struggling to find buyers for their goods. A debt crisis is plaguing far too many economies even as jobs are evermore scarce and are paying lesser by the day. Unsurprisingly, income, wealth and educational inequality are rising. Combine these with falling social mobility and you get falling demand for goods and services, which in turn lead to declining trade.
Many, including this author, blame central banks for some of this inequality. Mark Carney, governor of the Bank of England, vehemently disagrees. Carney says that the world needs structural reforms to solve economic problems. He takes the view that monetary policy was the only thing “keeping the patient alive” after the Great Recession. Carney has a point. This author has remarked in the past that the US Federal Reserve (Fed) was “caught between the Scylla of a bubble and the Charybdis of a recession.” Raise the rates and a recession turns into depression. Keep them low and asset bubbles run amok. Even if asset bubbles do not burst, the “animal spirits” they have unleashed are neither good for the economy nor for trade.
There is a larger problem afflicting trade and Azevêdo alludes to it by pointing to the anti-globalization forces gaining ground. In the June 12, 2015, edition of The World This Week, this author pointed out that trade is good, but not for everyone. That article examined how Africans were turning to trade even as Americans were turning off it. The US House of Representatives had given President Barack Obama a bloody nose as he pushed for the TPP, the biggest trade deal in history.
Then, this author pointed out a rather obvious fact. Trade is not always a win-win. It generally produces winners and losers. Consumers might win because of more goods at cheaper prices, but workers might lose out because of factories shifting to foreign shores. Similarly, investors in companies might profit when factories move overseas, but communities may be decimated by this phenomenon.
Americans have lived by the dogma that trade is good and free trade is wonderful. However, they could do well to remember that their infant industries developed under a high wall of tariffs that protected domestic manufacturers from foreign competition. Many countries have industrialized using tariffs intelligently. There is something to the infant industry argument if an economy merely exports cocoa seeds. Exporting value-added goods like chocolate is any day a better proposition.
Of course, this does not mean that tariffs are necessarily a good idea. Tanzanians and Indians implemented tariffs disastrously. India’s “license raj” imposed socialism via a colonial bureaucratic system that wreaked carnage to the economy. Similarly, “beggar-thy-neighbor” tariffs notoriously worsened the Great Depression.
Trade is an age-old phenomenon and the earliest civilizations learnt to trade with each other for goods if not services. Trade of the modern kind confers enormous benefits. Yet it has significant downsides too. Two of them are significant but given short shrift by the likes of Obama and Azevêdo when they are championing global free trade.
First, the big losers in the last few decades of global free trade are workers in the so-called “first world.” When the Berlin Wall fell and the Soviet Union collapsed, it really did seem like the end of history. What Francis Fukuyama forgot to factor in was that hundreds of millions or even billions now joined the global labor force. Since the supply of labor increased manifold, it was only natural that there had to be some movement toward wage convergence now that free flow of capital, goods and services were the order of the day. Inevitably, wages in the first world had to drop. Technology has added to the downward pressure on wages.
If free movement of people had occurred at the same time as many developing countries demanded, then the results for labor in the first world might have been even more catastrophic. What emerged was still a disaster to which the crumbling edifices of the once dynamic city of Detroit provide silent testimony. The halcyon days after World War II when good, solid, working class jobs with generous pensions were available to a large part of the population now seem overwrought figments of fancy.
Nasir Khilji, a senior economist at the US Treasury, is of the view that his country enjoyed the benefits of monopoly trade in the immediate aftermath of World War II. Europe and Japan had been bombed out. Newly independent countries were mere commodity producers. The US had a huge advantage in capital, technology and, above all, knowledge. After all, the great minds around the world from Albert Einstein to Friedrich von Hayek made a beeline to American universities, giving the US a great economic edge.
This edge meant the US had the most to gain from trade. For instance, Uncle Sam could export Fords to Latin America whilst importing bananas from the “banana republics” in the region. Besides, dollars made the world go by and the US was able to enjoy improving terms of trade. This means that for every unit of exports the US sold, the country could buy more units of imported goods. Adam Smith and David Ricardo became the patron saints of the US even as Karl Marx and Vladimir Lenin ascended to the Soviet pantheon. Americans lustily sang the gospel of free trade as a win-win for everyone even as they won more than others.
Thankfully for Uncle Sam, the Soviet model was fatally flawed. Joseph Stalin’s paranoiac purges, bloody collectivization of farms and brutal industrialization by decree might have avoided the Great Depression and impressed the likes of Jawaharlal Nehru, but they left millions dead, created a climate of fear and poisoned the economic system forever. In the words of French philosopher Régis Debray, there was “more power in blue jeans and rock and roll than the entire Red Army.” There was even greater power in the US economy and in trade.
So, why is the land of Uncle Sam turning against trade after championing it religiously since World War II?
The answer lies in the events that unfolded from 1989 to 1991, destroying the decrepit and drab Soviet Union. Unlike Fukuyama’s Judeo-Christian notion of history, the damned story of Homo sapiens will never quite end until the species goes extinct. Every stage brings twists and turns. Even as the US conclusively won the cultural, intellectual and economic battles, the victory sowed the seeds of its current social and economic discord. As markets from Eastern Europe and East Asia to Latin America and South Asia liberalized their economies, the US lost its exporting edge.
Companies seeking profit maximization started moving their factories to countries with cheaper labor. Trade deals championed by successive US administrations facilitated the process. As described above, the free flow of capital, goods and services proved a great boon for American investors and consumers. Investors laughed all the way to the bank as Wall Street boomed and consumers shopped till they dropped at Wal-Mart. Alan Greenspan’s low interest rates created “irrational exuberance” that led to rising housing prices that, for a while, hid the flat wages of the working and middle class.
When the housing bubble collapsed and the ensuing financial crisis turned into the Great Recession, the emperor’s new clothes were there for everyone to see. The first world working class that had lost out in global trade had nowhere left to hide. Even as governments and central bankers rushed to bail out banks using taxpayer money, the working class was left high and dry. This might not have mattered if, as in China, they could not vote. Sadly for the smug elites in cities like New York, London, Brussels and Washington, DC, these sans culottes can and do cast their ballots.
Michigan, home to Detroit, is a classic case in point. For years, the state has hemorrhaged jobs. Factories have not only moved overseas, but to sunnier climes in the Deep South where pesky unions did not bother them as in the Great Lakes State. Of late, the workers are making a ruckus and so are some politicians. A certain chap named Donald Trump was particularly vociferous in his criticism of the Ford Motor Company’s expansion of auto production in Mexico. Is it any surprise then that Trump flipped 12 counties to win Michigan?
Second, a big loser in this dash toward free trade has been the environment. In fact, some argue that lulu lemon wearers and skinny latte drinkers packed off factories that once polluted the Hudson and the Thames to the banks of the Ganges and the Yangtze. That might be a touch too harsh, but it is indubitably true that American and European companies operate in Asia or Latin America with fewer fetters about polluting the environment than in their home nations.
Even a brief visit to the Middle Kingdom demonstrates the downsides of driving through the biggest and fastest industrialization in human history. In 2015, an explosion in China highlighted how the country’s air, water, soil and food were highly contaminated. “To get rich is glorious,” said Deng Xiaoping, and the Chinese have certainly taken heed. So have other companies like Apple that manufacture their products cheaply in the workshop of the world. After all, their directors have a fiduciary duty to maximize profits for their shareholders. If this means that they or their suppliers dump effluents in a Chinese river, that’s not their problem.
Trade can be a jolly good thing but sometimes not so much. When the British East India Company grew opium in India and exported it to China, it brought famine to the brown man and addiction to the yellow man. It was a “buy one, get one free deal” for the two then-largest economies in the world. Objections to British notions of free trade or, as some would say, not-so-free trade were dispatched with the swift arguments of deadly cannonballs.
In an ideal world, trade could be a win-win. After all, the French might want cheap smartphones manufactured in China, while the Chinese might want Christian Dior crafted in France. It allows the Middle Kingdom to capitalize on its cheap and disciplined labor while enabling the French to prey on human vanity and sell alluring visions of their fabled sexiness. Surely, the world is a better place with more goods and services produced and exchanged.
There is a compelling argument for trade but, like all arguments, reality can trip up neat formulations. People are more than consumers. They can be workers or, heaven forbid, citizens. If jobs are lost in la grande nation because the French buy “Made in China” products, then it might be a good idea to compensate these workers and an even better one to retrain them. If only the gloriously rich buy Christian Dior because of a feeling of cultural inferiority that might not be such a wonderful development for the land of Confucius.
The trade that the WTO’s 2013 report chronicles omits the downsides and fails to mention the losers. For trade to be largely beneficial, societies have to mitigate the former and compensate the latter. Those who gain the greatest benefits from trade must sacrifice for those who suffer most from it. Failure to do so ruptures the social contract. Anger simmers. Demagogues exploit this discontent.
As Trump and his ilk kill the TPP and rail against trade, they must realize that the US still holds the cards. The terms of trade are still in Uncle Sam’s favor. US energy costs are low. No one can rival in technological firepower and talent pool. People still flock to US universities from around the world and often stay on. The next generation of products and services are emerging from the US whether it is the Tesla car or the Uber app. So, trade might not be such a bad idea for the US. Of course, the likes of Elon Musk and Travis Kalanick might have to pay off folks in Michigan and Florida to agree.
In any case, the global economy is now inextricably intertwined and in delicate health. Trade is not all good, but trade wars are almost invariably terrible as the 1930s remind us. So, the TPP may be dead but may we trade on.
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Photo Credit: Xavier Arnau