Global village: The future of international trade

By: | Published: July 9, 2018 12:54 AM

The rise of the global trading system as seen today, like many features of the modern world, began largely with the Industrial Revolution.

Countries may go beyond neoclassical theories to one-on-one partnership models

During my growing years, Asterix Comics, by Goscinny & Uderzo, were one of my favourites, as would be with many of us of the generation of the 1970s and 1980s. One of the titles was Obelix and Co, a parody on capitalism. In this, there is a part that typically depicts a scenario that is relevant even today. When the makers of Roman menhirs are banned from selling their stock, they block the Roman roads in protest—at the loss of their jobs. Nothing has really changed today in the context of the so-called global village. The scenario unfolding since the initiation of Section 232 in the US and reactions of nations across the world probably warrant a revisit of our understanding of economics and international trade, the trends in vogue and, most importantly, the attempt to gauge the future.

The rise of the global trading system as seen today, like many features of the modern world, began largely with the Industrial Revolution. Technological advances in the form of transportation—from ships, railroads, automobiles to airplanes—and the internet steadily reduced the cost of transporting goods, technology, capital and people around the globe. This “death of distance,” a modern-day metaphor, has been one of the most important forces shaping global economic development since the inception of Industrial Revolution. These technological forces were further supported by structural forces, facilitating and cushioning the rise of a globally integrated market. Globalisation has seen it all, right from the presence of the gold standard, the dense web of bilateral trade agreements to the advent of new multilateral economic institutions.

International trade and economics is quite a big topic for enormous deliberations but two of its most important questions are “why do nations trade?” and “how should a nation conduct its trade policy?”

The theory of comparative advantage is one of the most plausible answers to the former question. Yet it has had little impact on answers related to the latter one. The need of the hour is to explore the relationship between comparative advantage and optimal trade policy, and to understand, how the consequences of populist politics, economic dislodgement and technological alterations are going to impact the future of global trade.

The theory of comparative advantage is the core of neoclassical trade theory. Yet we are not aware much about its implications. How should nations conduct their trade policy? For example, should import sectors with weaker comparative advantage be protected more? Conversely, should export sectors with higher comparative advantage be less subsidised? According to the canonical Ricardian Model, optimal import tariffs should be uniform, whereas optimal export subsidies should be gradually decreasing with respect to comparative advantage, reflecting the fact that countries have more room to handle the prices in their comparative advantageous sectors. Thus, there would be substantial gains from such policies relative to simpler tax agenda.

Although there is a temporary push back against globalisation, the global economy is expected to grow, as the global markets and their prosperity are too intertwined to unwind. In the short term, we may see a deeper focus on proper enforcement of current trade agreements and concerted efforts to make them balanced from all sides. We may also go for a close review or perhaps a restructuring of the governance system within the WTO. Another interesting scenario would be the extent of motivation for US firms to stay in the domestic market and encouragement for foreign firms to set up their base in the US, amid growing protectionism.

The long-term scenarios seem intentionally vivid and provocative, and are expected to not only spark debate about the future of world trade among policy-makers and the wider trade community, but may also change the global structure on the basis of availability of resources and the willingness of global organisations to coordinate their actions. Today, to overcome current challenges and growth barriers and maintain sustainable trade, countries may go beyond the neoclassical theories to one-on-one partnership models. They need alliances across industry sectors and value chains, and these include their competitors and peers too. Even market leaders cannot make the necessary impact acting alone. In this context, industry may undergo a silent revolution in order to adopt a completely different approach that will lead to the path of long-term trade development in the form of accrued benefits such as adjustment of global economies to technological innovation, new production schedules and changing competitive patterns, thus raising productivity levels.

All these trade reforms, if undertaken, will yield substantial economic benefits, but sustaining the momentum will be a key challenge as the consequences of this trade liberalisation will be associated with societal and economic adjustments, such as regional and sectoral disparities, and urban migration. Institutions attached to labour markets need to be strengthened to enhance labour mobility and their skills. The government would need to ensure that the possible gains from trade reforms are shared by a wider segment of society. The only big question is, whether political will for market openness will be maintained or whether protectionism and inward-orientation are going to gain an upper hand? If the answer is we are falling back to a protectionist world, then sustainable trade considerations and collaboration will diminish in importance—they will be just add-ons, not a decisive criteria.

In the last scene in Obelix and Co, all complicated problems melt away under the stars, like snow melting in the sun, and the Gauls celebrate the re-establishment of their friendship with a quiet mind. We hope this would also happen in today’s scenario and the global village would endeavour to reach optimal trade relations.

By- Pritam S Purkayastha, OSD to Secretary (Steel). (Views are personal.)

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