Lend me your ears
“Friends, readers, global citizens, lend me your ears. I come to bury global trade, not to praise it.” The U.S. pulled out of the Trans-Pacific Partnership, killing the deal within the new President’s first few days in office. The TPP was dead long before the November U.S. election, as Secretary Clinton was also against it (as was Senator Sanders). The U.S. also intends to renegotiate aspects of NAFTA, and has taken a harder stance on immigration. The UK says it champions free trade, but is ready to give up the EU’s common market for the sake of limiting immigration. Globalization has become a four-letter word.
“The evil that trade deals do lives after them; the good is oft interred with their bones.” Ironically, TPP would have been especially advantageous for the US.. It would have strengthened intellectual property protection; imposed limits on government support to State Owned Enterprises; and protected cross-border data flows, facilitating the growth of the digital economy where the U.S. is firmly in the lead. Globalization has helped pull one billion people out of poverty in the last twenty years, as rapid growth in trade powered global growth. It has been disruptive: as the competitive balance shifted, industries have come under pressure and workers have been displaced. The net impact has been positive — the U.S. today has five and a half million jobs more than at the previous employment peak before the recession — but many countries have done a poor job of helping those who have been hurt. The benefits of global trade have been forgotten, while the damage lives on in the public debate and looms larger and larger in the collective imagination. A recent article by Berkeley’s Bradford DeLong notes that global trade has played a very limited role in the decline of U.S. manufacturing jobs, and yet is seen as the main culprit.
“The noble protectionists have told you that globalization was ambitious; if it were so, it was a grievous fault, and grievously hath globalization answer’d it.” Maybe globalization had been oversold — as the fastest way to raise everyone’s living standards through free and efficient resource allocation. Free trade is never fully free — believe me, from my perch at GE I do see how it works in practice. There will always be reasons to complain that someone is manipulating their exchange rate, subsidizing their national champions, or applying arbitrary regulations. And so globalization has already been beaten back for several years, by a rising number of local content requirements and other subtle protectionist barriers. Now the attack on globalization is ready to brandish blunter and heavier weapons.
“I speak not to disprove what protectionists spoke, but here I am to speak what I do know.” Free-market economics works; free trade works. Though imperfect and not totally free, it remains the best mechanism to create faster growth, more jobs, rising living standards. The same U.S. Administration that ditched TPP is launching an effort to reduce taxes and regulations at home. Prominent financial columnists and international organizations have lambasted successful exporting countries for several years (notably Germany and China), accusing them of ‘stealing growth’ from their trading partners and undermining global financial stability — yet they now seem hesitant to applaud the U.S.’s tougher stance on trade imbalances.
“You all did love it once, not without cause: what cause withholds you then, to mourn for it?” Measuring the benefits of trade in rising GDP numbers sounds abstract. But so many people across the world have benefited in so many ways. In emerging markets, easier access to smartphones and to more reliable electricity improves living conditions by leaps and bounds; we have gained access to better health care thanks to innovations developed across the world; consumers enjoy a wider range of affordable products and services, from electronics to entertainment; companies have access to a wider range of higher quality intermediate inputs. Protectionism hurts the importing country as much as the exporter. Levying tariffs on a product might save some jobs at home, but at the expense of higher prices for domestic consumers. If you have friends in Singapore, ask them how much a foreign-made car costs. (If you then feel bad for them, ask them how much they pay in income taxes…). The current surge in protectionist zeal could do a lot of damage, slowing growth and cutting consumers’ purchasing power.
“For economists have neither wit, nor words, nor worth, action, nor utterance, nor the power of speech, to stir men’s blood.” Protectionists have always made a much more vivid and persuasive case. For the next several years, we should not count on any multilateral trade deals, and we will see more protectionist measures. But global trade is not dead. Supply chains are more globalized and intertwined than ever, and thanks to the internet, we are all more open to the rest of the world. As the U.S. and others take a step back, other countries will seize a greater role. China positioned itself as a champion of global trade with President Xi’s speech in Davos. Beyond the rhetoric, China is making a major push in bilateral trade and infrastructure deals along the path of its One Belt, One Road strategy. It will play a bigger role in shaping trade relationships and investment opportunities. A number of countries, notably in fast-growing Asia, will be looking for opportunities to deepen trade links with willing partners. The U.S. could still play a leading role with tough but pragmatic negotiations — as I noted, free trade is never fully free and fair. But the risk of destructive trade wars looms large. Meanwhile, companies will adapt, leveraging new technologies to make supply chains more resilient to trade shocks. Most importantly, governments and companies together will need to devise better ways of cushioning the adverse consequences of trade, before we can eventually reverse the protectionist tide.
What do you think? I would love to discuss this with you in the responses below or on Twitter.
