Comeback to protectionism: Free trade is important; here’s why world must realise that fact

By: |
October 20, 2016 6:20 AM

Pro-trade policy elites across the world have ignored the redistributive impact of trade for too long

One of the biggest challenges facing global policy elites now is to make a convincing case for free trade. The current wave of globalisation was fed by enormous increase in volume of world trade. The increase was not limited to trade among developed countries. Emerging markets, as well as low-income countries, became important actors of global trade.

Commerce expanded rapidly as barriers came down on movement of goods across borders and countries began lifting restrictions on investments. Matters were helped by liberal immigration policies adopted by many countries making the global labour market a great domain of opportunity for many as people began moving rapidly to jobs.

Ironically, it is the labour market that has now become the biggest threat to the legitimacy of global trade. While people moving to jobs has invited socio-cultural repercussions, the reverse—jobs moving to people—has created deep economic imbalances among societies and income groups. Studies point to the steady decline of wages as proportions of national incomes in both industrialised countries and emerging market economies. A considerable part of the decline has come from loss of jobs due to automation, particularly greater use of industrial robots. But a part of the jobs have gone because of trade, too.

Neo-classical theory of comparative advantage argued equalisation of wages among labour markets of the world over time. What it didn’t account for was dispersion of production itself across labour markets. As global value-chains developed, companies took to outsourcing of production and letting cheaper locations do more activities at the expense of the more expensive ones. One of the major implications of these decisions was the loss of jobs in countries with higher wages. As industrialised-country businesses decided to shift bulk of their manufacturing jobs to low-wage locations, workers in several industries in the US and Europe, found themselves out of job.

Proponents of trade theory would argue that loss of jobs in the US and the EU were compensated by more jobs created in low-wage countries, while, at the same time, national incomes of the former as well as the latter expanded due to higher profits made by businesses from both. This might be true. But it is also true that, over time, the number of jobs getting lost became larger under the twin pressure of outsourcing and labour-saving innovation. The result has been the emergence of a very angry constituency of jobless workers in industrialised countries. These workers are among the main supporters of Donald Trump, who has attacked trade as the main villain behind the loss of jobs.

Anti-trade sentiments are not confined to supporters of Donald Trump alone. They extend to workers in industries that have been experiencing ‘jobless growth’ in most parts of the world. They also include workers engaged in ‘growthless jobs’. These typically include workers from industries that are competing with workers from same industries in other countries. Textiles and apparels are relevant examples, where workers from various developing countries of the world are competing with each other for keeping wages low. Similar labour-intensive industries fighting for retaining shares in global markets also have workers in ‘growthless’ jobs where wages have hardly increased.

Globally, there is little doubt over efficiency having led to redistribution of income in favour of businesses and corporates at the expense of wage-earners. Trade is only partly responsible for this redistribution. However, it has become an easy target for political attack. It is ironical that the attack against trade is led by many business leaders like Trump who have probably benefitted more from global dispersion of production than others.

At this point in time, global growth is slow, and growth in world trade is even slower. Trade is no more a driver of global growth. Low wages are acting as a constraint on consumption of wage goods leading to decline in trade of several categories of products. The overall economic contraction does not offer a conducive background to support of trade as countries hardly have the economic bandwidth for justifying pro-trade measures.

Pro-trade policy elites across the world have ignored the redistributive impact of trade for too long. Trade might have created winners, but at the same time, it has also created many losers. The latter are no more marginal when looked at in the context of labour market. Elections are won or lost on the basis of abilities of politicians and political parties to draw major chunks of the labour market on their sides. Workers comprise much greater political might in this regard than businesses by virtue of their sheer numbers.

The end of the presidential election campaign in the US is unlikely to mean an end for anti-trade sentiments. It is important for pro-trade establishments across the world to understand the importance of making free trade as fair as possible. Barring such efforts, trade is unlikely to capture popular attention any time soon and the world is likely to experience forceful comeback of protectionism.

The author is senior research fellow and research lead (trade and economic policy) at the Institute of South
Asian Studies (ISAS) in the National University of Singapore.
Twitter: @Amitendu1
Views are personal

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1From plate to plough: Boosting farmers’ income in Punjab
2The Chinese century: China is not only at our borders but is building a ring of relationships around us
3Good comeback, now for inclusive growth