The anti-trade movement

Syed Ahmed :
From time immemorial, international trade has served as the driver of economic prosperity for nations. However, recently the strategic importance of trade as a catalyst for economic growth has been called into question. Debate on free trade has gathered full steam during the current US Presidential election. Free trade has been ‘fair game’ for debates in previous election years, but in this election the debate has been raised to an unprecedented height. Interestingly, the most vocal opposition has come from both the extreme left (Bernie Sanders, runner-up to be the Democratic Party nominee for the President) and the extreme right (Donald Trump, presidential nominee of the Republican Party). So it looks like protagonists of both parties want to renegotiate or renege on recently concluded trade deals such as the North American Free Trade Agreement (NAFTA), Trans-Pacific partnership (TPP) and Trans-Atlantic trade and investment partnership (TTIP).
Anti-globalization sentiments are not limited to the USA. The European Union (EU) and Canada are witnessing similar trends. The EU-Canada comprehensive Economic and Trade Agreement, is in the pipeline, taking a long time for ratification! A common theme in the arguments against free trade is the loss of jobs. In the USA, job losses have been attributed to free trade, particularly trade with China. But economists argue that it is the vast increase in productivity and efficiency resulting from automation and other technologies which reducedem and for labor. According to a study by Ball State University and reported in Foreign Affairs (July/August, 2016), increase in productivity accounts for 85% of job losses in the United States between 2001 and 2010.
Loss of manufacturing jobs has become a worldwide phenomenon. It is not only industrial power houses in North America and Europe that are losing jobs, but also the newly industrialized countries of South Korea and China. The ‘product cycle theory’ in international trade theory tells us that countries move on from old products to new products for exports as they reconfigure their production to changing comparative advantage. As wage rates rise in China, that nation’s comparative advantage in producing goods that require low skills for labor is shrinking.
Another point missing in the popular argument is that a trade deficit is not necessarily a bad phenomenon.First, a trade deficit may be the inevitable consequence of economic growth. As per capita income in the USA increases, imports also increase, so trade deficit can be an unwelcome side effect of economic growth and higher standard of living.
Second, a trade deficit (or more broadly, current account deficit) is usually financed by a financial account surplus. A US trade deficit means that Americans are buying more goods and services internationally than they are selling. In order to finance, or pay for, the difference, the US economy needs to borrow from the rest of the world.
This is done by selling financial assets to foreigners. In other words, Americans are able to sustaina high standard of living because countries like China and Japan are willing to lend to the USA against US financial assets.Currently China is holding more than 1 trillion US dollars in US government financial assets, especially US treasury bills. So long as the investors across the world are confident enough in the stability of the US dollar to hold their wealth in the form of US dollars, or financial assets denominated in US dollars, the USA will continue to enjoy the enviable position of net borrower with its financial assets.
Any protectionist policy taken by the USA may backfire for several reasons. First, the country against which tariff is levied will retaliate by putting tariffs onUS exports to that country. To avoid a tariff war orimposition of protectionist policies that are sure to hurt not only trade between US and Japan, but also their political relationship, they agreed to enter into an agreement of “Voluntary Export Restrictions” (VER). Second, a selective tariff on imports of one country or a group of countries may not work. If the USA puts a tariff on one country’s products, production may move to another low-cost country instead of coming back to the USA. Third, imposition of tariffs on imports from all countries will hurt”innocent bystanders” such as the European Union, Canada, etc.
Despitethesearguments against protectionist policies, anti-trade sentiments are running high because scapegoating other countries for problems at home sells well politically. But these sentiments do not stand up to fact.According to a recent issue of the Wall Street Journal,the number of unfilled jobs in the USA has risen since 2009 and is at its highest in 15 years. Factories have evolved, using new precision tools and requiring complex sets of skills of the workers needed to operate those tools. Wrong diagnosis produces wrong prognosis. If trade is made the scapegoat for loss of jobs, wrong policies like trade assistance program targeting only workers who lose jobs from trade will continue to be applied. Instead, a new set of policies that will address job loss from technological changes needs to be in place.
There are repercussions of protectionist policies whereby the cure may be worse than the disease itself. Trade wars produce no winners. I will conclude with a quotation by John Kasich, governor of Ohio, published in a recent issue of the Wall Street Journal, “We must help workers overcome – and quickly – the impacts of global competition and technological change, and move past the notion of bringing back old jobs and industries that, frankly do not fit in a changing economy.”