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Anyone taking a look at the long-term global data on trade and prosperity would
struggle not to conclude that the two make perfect bedfellows. When trade
growth is weak, the global economy is weak and over the past generation, trade
growth has led economic growth. Over 50 years between 1960 and 2010, global
economic growth averaged roughly 3.5 per cent a year with the annual growth of
imports almost double that at 6.8 per cent.
With
such a record of success, trade liberalisation, globalisation and openness has
traditionally been a core ingredient of advice to rich and poor countries
alike. With trade growing twice as fast as an economy, increasing trade growth
by 1 per cent was thought to be linked to 0.5 per cent of economic growth.
Although there were always disputes about the direction of causation,
international organisations have bemoaned the more recent slowing of trade
growth because it became associated with a long mediocre spell in the global
economy.
In its September economic outlook, for
example, the OECD urged countries to accelerate trade expansion to deepen
global value chains and boost productivity growth. “Restoring trade intensity
to its pre-crisis path, including through easing trade restrictions, would help
close the shortfall of productivity growth compared with pre-crisis trends,” it
said. The International Monetary Fund last month issued one of its regular
warnings that “a shift toward protectionism would reduce trade and cross-border
investment flows, harming global growth”.
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But this consensus around the benefits of trade are not universally held and
have been challenged in recent years. Populist politicians, Donald Trump in the
US and the Leave campaign in the UK, have won elections by pledging to restrict
the movement of goods and people. And even among economists, trade’s natural
champions, some doubt has also crept in. Foremost among the critics has been
Dani Rodrik, professor of international political economy at the Harvard
Kennedy School.
“The
real case for trade is subtle and therefore depends heavily on context,” Prof
Rodrik says. Noting that public opinion strongly leans towards protecting jobs
and the economy through trade restrictions, he questions whether the public is
really naive in its protectionist views and whether simple economics has
oversold the ideas surrounding the benefits of trade liberalisation. While
simple economics expounds the benefits of trade, in more advanced theories, the
seemingly unquestionable benefits of trade become transformed into a statement
adorned by all kinds of ifs and buts, Prof Rodrik says.
“This
disconnect has always bothered me,” he adds. He worries about losers from trade
liberalisation, the fact that these losers are rarely offered compensation
within a nation and the tendency of economics to ignore these difficult issues
when advocating free trade to policymakers. “Why do economists’ analytical
minds turn into mush when they talk about trade policy in the real world?” Prof
Rodrik asks. But critics of the effect of trade, particularly on certain
communities, hit hard by the entry of China into the global trading system are
now extremely influential in the debate. David Autor, professor of economics at
the Massachusetts Institute of Technology, has made his name by describing the
effect of the “China shock” on parts of the US economy, particularly the
textile industries of the old South. His research shows that the adjustment in
local labour markets is glacial with wages, worker numbers and unemployment
rates continuing to be affected at least a full decade after the China trade
shock commences.
More
mainstream trade economists are not impressed by suggestions these criticisms
are new. Speaking at a World Trade Organization forum in September, Paul
Krugman, the Nobel Prize-winning trade economist hit back. “Textbook economics
never said that growth in international trade was painless,” he said. “I wrote
the textbooks so I know we always said there were distributional effects, there
were losers, not countries, but people within countries.” He admitted that
losers were never adequately compensated even though the textbooks said this
was possible.
But Prof Krugman wanted to extinguish any idea
that the solution to trade’s downsides was a return to protectionism and trade
barriers. “Turn our back on trade now, that would be highly disruptive,” he
said. “There is an old joke about the motorist who runs over a pedestrian and
says, ‘I’m sorry, let me fix that and so he backs up and runs over him again.’
That’s what a move to protectionism would do.” For the future, most economists
agree that there is a need to defend economies against populist political
forces suggesting an easy answer in protectionism, whether it is building a
wall to keep Mexicans out of the US or dismantling the North American Free
Trade Agreement. But they also think that over are the days of simply saying
trade liberalisation is good for you and you should take more of the medicine.
US
textile factories are not coming back, but as trade and technology threaten to
disrupt many industries, there is likely to be less of a knee-jerk reaction in
favour of creative destruction. Trade is still likely to grow faster than
global output, but the go-go days of globalisation are probably over and
substituting foreign for domestic production is unlikely to be the engine of
future growth. Economics is up for the challenge, according to Prof Rodrik.
Calling for close and empirical analysis of the problem, he says: “The economics
we need is of the “seminar room” variety, not the “rule-of-thumb” kind”.
Source: Arkansas Online, U.S.A Saturday, 18 November 2017