Perhaps more than any other economic phenomenon, international trade has played a major role in the advancement of human civilization through the ages. Inter-country commerce in goods and services has raised the overall standard of living of people across the world and one only needs to look at Dubai, Singapore and Hong Kong to see how untrammelled trade transformed these former backwaters into the thriving and prosperous centres they are today.
We have recently witnessed an emergence of rhetoric and regimes espousing a different worldview – one of turning inward and slamming the doors on economic integration and trade. The spectre of protectionism has begun to cast a long shadow over the globe.
Today, the world is interlinked through trade like never before. China and Brazil are twelve time zones apart, yet China’s economic slowdown has affected GDP growth in Brazil. As China’s voracious appetite for raw materials decelerates, Brazil, with excessive reliance on commodity exports, finds demand for its products decreasing and is in the midst of stagflation, with GDP falling and inflation rising. Other examples of interdependence between countries abound and the question of economic integration and its pros and cons has never been so critical.
Diligence, persistence and a genuine desire to lift average real incomes resulted in multilateral trade agreements like the North American Free Trade Agreement (NAFTA) and, more recently, the Trans Pacific Partnership (TPP). The TPP is in fact a next generation trade treaty that goes beyond the more obvious trade barriers that lie at the borders of countries and delves into technical standards, intellectual property and environmental criteria that would actually benefit the United States. Tearing up this agreement without apparently bothering to understand its nuances and benefits, as the incoming US president has done in an ostensible move to spite his predecessor, is hazardous for the US. It will pave the way for countries like China to push its own Regional Comprehensive Economic Partnership (RCEP) forward and assume a leadership role in Pacific basin trading arrangements in the future, leaving the US on the sidelines. It is interesting to note that China’s RCEP initiative is being held up by none other than India, which runs a large trade deficit with China and possibly fears an invasion of cheap Chinese goods into its markets as a result of RCEP becoming a reality.
So, instead of focusing on the future, old hackneyed arguments about big, bad trade deficits, which were fashionable in the 1980s when Japan ran large trade surpluses with the US and the OECD countries are now being dusted off, with China replacing Japan as the punching bag. The fact is that the US has run large current account deficits with the rest of the world as far back as anyone can remember – without deleterious consequences.
The present US viewpoint is thus a somewhat naïve one and is predicated on the simplistic thesis that trade has caused jobs in manufacturing and services to leave American shores, disadvantaging US workers. It is well known that trade creates jobs as long as increases in productivity lead to maintaining comparative advantage in goods and services. The US president speaks about ‘bringing jobs back’ but the jobs he is referring to cannot be brought back as they never left in the first place. He also may not realise it but the US economy is operating at very close to full employment at present.
If we look at manufacturing over the past three decades, it has either been a case of technology replacing humans (robots in automobile production) or productivity rising sharply and allowing more output to be produced with fewer people. The US should be lauded for its continuous increase in productivity because this is the foundation for long-term economic growth. If the US lost 7 million manufacturing jobs during the first decade of this millennium, it also gained 30 million jobs in the services sector. This is not exactly a bad thing as it means that the country is moving up the value chain and leaving economic activities like certain types of manufacturing to countries that are more adept at it. The US is not alone in this. The European Union is also heading in the same direction.
The arguments for free trade (or almost-free trade) are compelling. Protectionism makes domestic firms less competitive in the export market by raising prices of intermediate goods used in the production of goods for export. The OECD estimates that each dollar of increased protectionism leads to a drop of 66 cents in GDP. And for major trading nations, an increase in import tariff revenues can result in a drop of double that amount in world exports. How can this possibly be good for a world that has just emerged, after a lot of hard yards, from the worst recession since the Great Depression? America blames China for the loss of manufacturing jobs.
Are there really firms in the US who can produce, at a competitive price, all the hundreds of thousands of SKUs that are found in US hypermarkets like Walmart? Similarly, are there sufficient numbers of resident US programmers who can fill the void that might be left by the new H1-B visa rules announced by the US president? More importantly, in an age of outsourcing, will domestic firms be able to survive the high costs of ‘insourcing’?
Trade barriers meant to protect infant industries in developing nations made some sense in the latter half of the 20th century. But India carried it too far and was a case study in import substitution gone wrong in the 1950-1990 period. The country protected hugely inefficient state-owned behemoths that produced shoddy goods at costs that were multiples of the prevailing world prices. It took the millennium change in 1999-2000 for India to finally find its mojo in IT and to realise that it was in services like IT, and not in manufacturing, that it would ever gain a comparative advantage over other nations.
Today’s world is all about specialization. David Ricardo, who first enunciated the principle of comparative advantage almost exactly two hundred years ago, would probably not rest easy if he knew what was afoot today. Only Boeing and Airbus can make large commercial aircraft at a viable cost and of unquestionable reliability. India has established skills in business process outsourcing. Dubai attracts expats and visitors at all levels from all over the world because of its attractive business climate and tourism infrastructure. Countries specialize in activities that afford the lowest opportunity costs and leave the rest to international trade to sort out.