The past year’s populist resurgence has brought to the fore ongoing debates about trade and underscored public concerns about internationalism. Can the mechanisms of globalization that shaped the twentieth-century world economy be salvaged to continue delivering prosperity in the coming decades?
WATERLOO, CANADA – With ample prodding from US President Donald Trump and other populist demagogues, public angst about globalization has become one of the defining issues of our time. Indeed, out of all of globalization’s many manifestations, populists have singled out international trade agreements for special criticism. To hear Trump tell it, “horrible” trade deals are to blame for almost everything that is wrong in the world today.
To be sure, populist nationalism appears to have suffered a setback in recent months, losing badly in national elections this year in the Netherlands, France, and the United Kingdom. But globalization is not out of the woods yet. Public concerns about the impact of international economic integration have been building up for years, and will not simply dissipate as a result of a few elections or referenda.
Ongoing debates about globalization have naturally focused on individual free-trade agreements, and on bilateral trade arrangements such as those between the United States and China. But they have also addressed more abstract questions, such as what the future of globalization may hold, and, specifically, whether a new rules-based global consensus can be forged for the twenty-first century.
Project Syndicate commentators have been leading participants in these debates; and, although they tend to support political and economic openness in general, and free trade in particular, their views are hardly monolithic. Taken together, their differing perspectives provide a nuanced prognosis not just for international trade, but also for internationalism itself.
Sour Deals
One crucial indication of where global trade is heading came when Trump took office, and immediately withdrew the US from the 12-country Trans-Pacific Partnership (TPP). But another indication will come later this summer, notes Harvard’s Christopher Smart, a former special assistant to US President Barack Obama for international economics, trade, and investment, when the Trump administration’s strategy and objectives for renegotiating the North American Free Trade Agreement will finally “receive prime-time scrutiny.”
During his election campaign, Trump called NAFTA the “single worst trade deal” ever signed by the US. But it is worth recalling that when NAFTA came into force in 1994, it went far beyond the existing international-trade norms and practices at that time, and it significantly advanced the goals of economic liberalism. This was especially important for Mexico, whose membership in NAFTA signaled its intent to become a modern, developed economy. As Laura Tyson of the University of California, Berkeley, points out, “After NAFTA’s passage in 1994, trade between the US and Mexico grew rapidly,” such that, today, “the US and Mexico are not just trading goods with each other; they are producing goods with each other.”
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It isn’t evident that the Trump administration understands this fact, not least because standard trade figures tend to hide the full impact of cross-border value chains. According to one estimate that Tyson cites, “40% of the value added to the final goods that the US imports from Mexico come from the US; Mexico contributes 30-40% of that value; the remainder is provided by foreign suppliers.” When these value-chain dynamics are considered, the US trade deficit with Mexico actually falls by half.
And that doesn’t even account for the millions of US jobs that are directly connected to imports, notes Anne Krueger, a former World Bank chief economist. After all, “Foreign automobiles,” Krueger points out, “would not be sold [in the US] if the parts and mechanics for servicing them were unavailable.”
Were Trump to impose a higher tariff on Mexican imports, as he has repeatedly threatened to do, US exports of intermediate goods to Mexico and Mexican exports to the US would both decline. The result, suggests Daniel Gros of the Center for European Policy Studies in Brussels, would be a smaller market for US exports to Mexico, more expensive Mexican inputs in US production, and higher prices for US consumers. In fact, one area where US consumers will almost surely foot the bill, contends Smart’s Harvard colleague, Jeffrey Frankel, is in the sugar industry, which has long enjoyed “trade protection, in the form of import tariffs and quotas, to ensure that domestic sugar prices far exceed those in supplier countries like Australia, Brazil, the Dominican Republic, the Philippines, and Mexico.”
According to Frankel, these protectionist measures have cost US consumers “an estimated $3 billion per year,” while fueling environmental degradation and job losses in other sectors of the US economy. But despite this poor track record, Frankel expects Trump’s NAFTA renegotiation to “produce a sweet deal for the US sugar industry,” owing to “a small group of wealthy sugarcane growers, largely in Florida, who offer generous campaign contributions to the relevant politicians.” And, beyond exposing conflicts of interests – a prominent feature of Trump’s presidency – Smart also suspects that the NAFTA renegotiation will reveal “fundamental flaws in Trump’s thinking” on trade.
That’s too bad, because, as Frankel points out, the decades-old trade deal could stand to be updated. For example, NAFTA does not currently cover “e-commerce and data localization,” and it could do more to protect the environment and workers. Moreover, the US in particular would benefit from adjustments to the current investor-state dispute resolution system and stronger intellectual property (IP) protections.
A reconceived NAFTA could also be expanded. With more countries in the mix, Canada could agree to import more dairy products from the US, in exchange for easier access to Japanese markets for its pork, beef, and lumber exports. Of course, at that point, Frankel concedes, NAFTA would closely resemble the ill-fated TPP.
Likewise, Smart argues that if Trump had kept the TPP on track, he could have improved not just the US position in Asia, but also his own position in the NAFTA renegotiation. Indeed, Mexico was “more willing to engage in a conversation about modernizing NAFTA when the prize included US-backed access to Asian economies through the TPP.” Now that the “TPP is off the table, Mexican enthusiasm for a new NAFTA could dim.”
Be Careful What You Wish For
This points to the many unintended consequences that could stem from Trump’s approach to trade around the world. As Yale’s Stephen Roach warns, the stakes are especially high in the case of China. The US and China have long had what he calls “a highly reactive relationship” of economic codependency, whereby one wrong move could set off a destructive downward spiral. Keyu Jin of the London School of Economics provides one example: If Trump acts on his campaign threats against China, she says, “China could stop purchasing US aircraft, impose an embargo on US soybean products, and dump US Treasury securities and other financial assets.”
So far, a US-China trade war seems to have been avoided, owing to Chinese President Xi Jinping’s bonding session with Trump at Mar-a-Lago in April. But that does not mean the two countries won’t lock horns in the future. Moreover, even without an all-out trade war, China could frustrate the Trump administration’s “America first” agenda, not least by letting its currency depreciate.
Chinese authorities have every incentive to do precisely that. Since June 2014, notes Cornell University’s Eswar Prasad, China has spent almost $1 trillion propping up the renminbi. If Trump gives it a reason to abandon market intervention, the value of the renminbi will fall, China’s trade competitiveness will increase, and America’s trade deficit vis-à-vis China will grow further. And, as Jin wryly notes, nothing makes Trump more “furious” than the fact that “China exports more to the United States than the US exports to China.”
But a China that has been unnecessarily provoked could do far more than hurt Trump’s pride. Harvard’s Kenneth Rogoff, for example, worries that “huge swaths of Asia,” including US allies and partners such as Taiwan and India, are already “vulnerable to Chinese aggression.” And, as Cornell’s Kaushik Basu points out, Trump’s isolationist foreign policy will only encourage China – as well as other emerging countries such as Mexico and India – to become more nationalistic and assertive.
That is the last thing an already messy, multipolar world needs. An American policy of isolationism in the 1920s and 1930s, Nouriel Roubini of New York University reminds us, “helped sow the seeds of World War II.” Today, a similar policy could embolden China to step up its territorial claims in Asia and the South China Sea, or precipitate a nuclear arms race between Iran, Saudi Arabia, Turkey, and Egypt. Even barring a geopolitical crisis, notes Nobel laureate economist Joseph Stiglitz, Trump’s presidency has already introduced uncertainty that will “discourage investment, especially cross-border investment,” and make businesses – many of which employ Americans – “think twice as they construct global supply chains.”
Still, a slightly more optimistic view holds that Trump’s presidency will prompt the rest of the world to forge new ties. For instance, Joakim Reiter and Guillermo Valles of UNCTAD see an opportunity for the “European Union and other emerging economies” to form “a North-South alliance of countries willing to defend and promote global trade.” Similarly, Columbia University’s Andrés Velasco, a former Chilean finance minister, has proposed reviving a George H.W. Bush-era plan for a free-trade bloc in the Americas, which need not include the US. And to the east, writes Richard Haass, the president of the Council on Foreign Relations, “China will promote various trade, infrastructure, and security mechanisms in Asia,” and “the 11 remaining members of the Trans-Pacific Partnership may launch their trade pact without the US.”
A Confederacy of Economic Dunces
Notwithstanding Trump’s ambient Sinophobia, many Project Syndicate commentators see in his trade policy a recipe that would unwittingly make China great and leave America much worse off. This is largely owing to Trump and his key advisers’ apparent economic illiteracy. Columbia University’s Jeffrey Sachs and Pascal Salin, a former president of the Mont Pèlerin Society, hold very different views on economic policymaking. But both identify the same flaw in Trump’s protectionist rhetoric; namely, a misunderstanding of what trade deficits actually mean. As Salin and Sachs both point out, Trump and his advisers routinely misattribute the US’s current-account imbalance to “bad” trade deals, when it is really a natural result of the US’s low saving rate.
Because Trump is following “gut feelings” instead of a “valid economic theory,” Salin worries that he could pursue policies that – like handouts to the sugar industry – will make it “harder for importers to buy what they need from exporters,” which “would be especially harmful for the US.” And, as Barry Eichengreen of the University of California, Berkeley, argued last year, even if policymakers wanted to put “upward pressure on US prices” to push back against deflation and an impending liquidity trap, there would be far better ways of going about it. “The obvious alternative to import tariffs,” Eichengreen writes, “is plain-vanilla fiscal policy – tax cuts and increases in public spending.”
Moreover, Trump has no chance of actually changing the US’s current account-balance. “There is no particular reason,” Sachs reminds us, to believe “that |an increase in US trade barriers would have any first-order effects on the US saving and investment rates, and therefore on the US current-account balance.” This may be for the best. If past US presidents had acted on the same kneejerk impulse to save “low-skill jobs,” the US economy today “might well have a larger, labor-intensive manufacturing sector,” Basu notes. “But it would also look a lot more like a developing economy.”
And Salin, for his part, cautions that actually eliminating the US trade deficit would mean sacrificing “the standard of living that countless Americans have come to enjoy.” In fact, according to Harvard’s Martin Feldstein, Americans could expect to see their real (inflation-adjusted) incomes “decline by about 5%.”
Given that Trump and his advisers have embraced what Sachs calls “an economic fallacy that first-year economics students learn to avoid,” it is not surprising that they have also proposed misguided economic policies beyond the realm of trade. For example, Roubini predicts that Trump’s “migration restrictions will likely reduce growth, by eroding the labor supply.” Likewise, J. Bradford Delong, also of the University of California, Berkeley, argues that Trump’s push for fiscal stimulus and tax cuts would undercut his own agenda by strengthening the dollar, making it harder for American manufacturers to compete abroad. And, as Emmanuel Farhi and Gita Gopinath of Harvard and Oleg Itskhoki of Princeton demonstrate, such policies would “erode America’s net foreign-asset position” and result in a net capital loss.
Sadly, today’s economic illiteracy is not confined to the US. Jim O’Neill, a former chairman of Goldman Sachs Asset Management, believes that Brexiteers in the United Kingdom are beholden to many of the same fallacies as the Trump administration. For starters, O’Neill observes, “Many UK policymakers – and all members of the ‘Leave’ campaign – are ignoring the likely costs of exiting the EU single market,” which, by default, will establish trade barriers between the UK and the EU.
Making matters worse, the current UK government’s post-Brexit strategy is fixated on hashing out “patriotic” trade deals with Anglophone countries such as Australia, Canada, and New Zealand, when it should be focusing on reaching agreements with China, India, Indonesia, and Nigeria. Like Trump and his obsession with the current-account balance, the Leave campaign seems to believe that it can solve all of Britain’s problems by simply “taking back control” of trade and immigration. But as O’Neill points out, the UK, with or without Brexit, would still have “persistently low productivity growth, weak education and skills-training programs, and geographic inequalities.”
Salvaging Internationalism
Despite their obvious flaws, Trump and the Brexiteers’ economic arguments have gained currency with many people across North America and Europe. To push back against populists’ dangerously misleading narrative, policymakers who still recognize the benefits of global free exchange will need to find a new way forward.
First and foremost, political, business, and civil-society leaders need to acknowledge that, as Ngaire Woods of the University of Oxford puts it, “those defending free trade have lost credibility with the people they hope to persuade.” This is no surprise for Gros, who believes that political elites have, for years now, overhyped the benefits of trade, and created “impossible expectations for trade liberalization.” Their biggest mistake, he argues, was to ignore the role of high commodity prices as a driver “of the extraordinary growth in trade in recent decades.” When commodity prices finally fell, global trade faltered.
Still, such claims by free-trade advocates are nothing new. In a forthcoming paper, I examine political leaders’ statements about trade agreements going back to the 1957 Treaty of Rome, and find that overhyping seems to be the norm. Rarely do leaders acknowledge the potential disruptive effects of economic openness, or implement policies to mitigate them. But, as Woods contends, avoiding hard truths is no longer an option. Elites will have to be far more forthright about the consequences of global economic integration, while “also addressing people’s deeper concerns,” such as the loss of dignity that comes with economic displacement. If reasonable leaders won’t tell the truth, they should not be surprised when nativist demagogues present their own “alternate facts.”
Moreover, policymakers need to back up truth-telling with concrete action. As former United Nations Assistant Director-General Jomo Kwame Sundaram and Vladimir Popov of the Russian Academy of Sciences show, countries that have benefitted the most from trade have done so by “providing adequate unemployment compensation and skills training, and promoting new, more remunerative employment opportunities.”
With respect to the US in particular, Rogoff proposes a progressive consumption tax to reduce inequality, as well as reforms to free up technological innovation and diffusion. Similarly, Salin recommends lower taxes and fewer regulations, in order to boost economic activity and growth. At any rate, one rule for twenty-first-century social policies, suggests Richard Baldwin of the Graduate Institute of International and Development Studies in Geneva, is that they should adhere to the principle of “protecting individual workers, not individual jobs.”
Globalization in the Twenty-First Century
That principle is all the more important today, when advances in automation and new digital and sentient technologies increasingly threaten individual jobs across many sectors. Nor is this a problem only for developed countries. Brahima Coulibaly of the Brookings Institution warns that “falling technology costs” could derail industrialization in much of Africa before it even gets started. And just as labor-replacing technologies are not strictly a concern for developed countries, they cannot be separated from globalization. As recent research by the Oxford economist Adrian Wood shows, the logic of economic globalization actively aids and abets automation.
As with trade agreements, governments have a responsibility to address the effects of new technologies. They will need to foster honest, dispassionate conversations about the risks and rewards of a hyper-digitized world, to determine how new technologies might be regulated and designed to yield the greatest public good. Beyond the design of individual technologies, observes Tyson, much will also depend “on the design of the policies surrounding them.”
Harvard’s Dani Rodrik is more skeptical. The time for compensating “globalization’s losers,” he argues, “has come and gone.” With or without domestic-level measures to mitigate the disruption from trade and technology, it may be time to “consider changing the rules of globalization itself,” to ensure parity and fairness across countries and sectors. In Rodrik’s view, global economic cooperation has been unbalanced, because finance and capital can move much more quickly across borders than goods, services, and especially labor. And, of course, national and supranational regulatory measures move the slowest of all.
Addressing these problems will require a credible system for cracking down on financial crime and tax havens; a global border-adjustment-tax regime for carbon emissions; an international compact on refugees; and a modernized Agreement on Trade-Related Aspects of Intellectual Property Rights. To that end, the Center for International Governance Innovation’s Oonagh Fitzgerald and Hector R. Torres of the International Monetary Fund call for the formation of a coalition of countries, led by middle powers, to reform the institutions of globalization in 2018, when Canada and Argentina will lead the G7 and the G20, respectively.
Demonstrating the value of multilateral cooperation will be crucial to salvaging globalization politically. One possible silver lining of Trump’s decision to withdraw the US from the 2015 Paris climate agreement is that it has prompted many other countries to reaffirm their commitment to fighting global warming. But, as I have previously argued, the international community also needs to maintain support for accords such as the World Trade Organization’s Information Technology Agreement, while exploring other similar opportunities for macroeconomic cooperation.
At the same time, the public should be reminded at every opportunity that there are no quick fixes in international affairs. Just as the backlash against globalization took a decade to spill over into national politics, it will take time for the pendulum to swing back the other way. As Basu argues, today’s “slow-motion economic crisis” certainly looks bleak; but it will eventually give way to a “Digital Revolution that promises to lift growth to new heights.”
Future conversations about trade will have to account for these coming changes, and for the ongoing conceptual transformation of trade itself. According to Tyson and Susan Lund of the McKinsey Global Institute, “cross-border digital flows” already “have a larger impact on global economic growth than traditional flows of traded goods.” That means the trade of the future will be in ideas, which is to say intellectual property; and this will set it apart from trade as it traditionally has been understood.
Intellectual property is characterized by high upfront costs and low reproduction costs. And because that implies a huge first-mover advantage, achieving national primacy could turn out to be the “Great Game” of the twenty-first century. Unfortunately for the US and the UK, Trump and Brexit are unlikely to put either country in a position to win it.
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Minxin Pei
doubts China’s government is willing to do what is needed to restore growth, describes the low-tech approaches taken by the country’s vast security apparatus, considers the Chinese social-credit system’s repressive potential, and more.
China’s authorities have powerful economic-policy levers at their disposal to achieve their 5% growth target this year and put the economy on a more sustainable long-term growth path. But several trends – from the shift toward state capitalism to population aging to the loss of goodwill between Chinese and Americans – could thwart China’s ambition to join the ranks of high-income countries by mid-century.
WATERLOO, CANADA – With ample prodding from US President Donald Trump and other populist demagogues, public angst about globalization has become one of the defining issues of our time. Indeed, out of all of globalization’s many manifestations, populists have singled out international trade agreements for special criticism. To hear Trump tell it, “horrible” trade deals are to blame for almost everything that is wrong in the world today.
To be sure, populist nationalism appears to have suffered a setback in recent months, losing badly in national elections this year in the Netherlands, France, and the United Kingdom. But globalization is not out of the woods yet. Public concerns about the impact of international economic integration have been building up for years, and will not simply dissipate as a result of a few elections or referenda.
Ongoing debates about globalization have naturally focused on individual free-trade agreements, and on bilateral trade arrangements such as those between the United States and China. But they have also addressed more abstract questions, such as what the future of globalization may hold, and, specifically, whether a new rules-based global consensus can be forged for the twenty-first century.
Project Syndicate commentators have been leading participants in these debates; and, although they tend to support political and economic openness in general, and free trade in particular, their views are hardly monolithic. Taken together, their differing perspectives provide a nuanced prognosis not just for international trade, but also for internationalism itself.
Sour Deals
One crucial indication of where global trade is heading came when Trump took office, and immediately withdrew the US from the 12-country Trans-Pacific Partnership (TPP). But another indication will come later this summer, notes Harvard’s Christopher Smart, a former special assistant to US President Barack Obama for international economics, trade, and investment, when the Trump administration’s strategy and objectives for renegotiating the North American Free Trade Agreement will finally “receive prime-time scrutiny.”
During his election campaign, Trump called NAFTA the “single worst trade deal” ever signed by the US. But it is worth recalling that when NAFTA came into force in 1994, it went far beyond the existing international-trade norms and practices at that time, and it significantly advanced the goals of economic liberalism. This was especially important for Mexico, whose membership in NAFTA signaled its intent to become a modern, developed economy. As Laura Tyson of the University of California, Berkeley, points out, “After NAFTA’s passage in 1994, trade between the US and Mexico grew rapidly,” such that, today, “the US and Mexico are not just trading goods with each other; they are producing goods with each other.”
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It isn’t evident that the Trump administration understands this fact, not least because standard trade figures tend to hide the full impact of cross-border value chains. According to one estimate that Tyson cites, “40% of the value added to the final goods that the US imports from Mexico come from the US; Mexico contributes 30-40% of that value; the remainder is provided by foreign suppliers.” When these value-chain dynamics are considered, the US trade deficit with Mexico actually falls by half.
And that doesn’t even account for the millions of US jobs that are directly connected to imports, notes Anne Krueger, a former World Bank chief economist. After all, “Foreign automobiles,” Krueger points out, “would not be sold [in the US] if the parts and mechanics for servicing them were unavailable.”
Were Trump to impose a higher tariff on Mexican imports, as he has repeatedly threatened to do, US exports of intermediate goods to Mexico and Mexican exports to the US would both decline. The result, suggests Daniel Gros of the Center for European Policy Studies in Brussels, would be a smaller market for US exports to Mexico, more expensive Mexican inputs in US production, and higher prices for US consumers. In fact, one area where US consumers will almost surely foot the bill, contends Smart’s Harvard colleague, Jeffrey Frankel, is in the sugar industry, which has long enjoyed “trade protection, in the form of import tariffs and quotas, to ensure that domestic sugar prices far exceed those in supplier countries like Australia, Brazil, the Dominican Republic, the Philippines, and Mexico.”
According to Frankel, these protectionist measures have cost US consumers “an estimated $3 billion per year,” while fueling environmental degradation and job losses in other sectors of the US economy. But despite this poor track record, Frankel expects Trump’s NAFTA renegotiation to “produce a sweet deal for the US sugar industry,” owing to “a small group of wealthy sugarcane growers, largely in Florida, who offer generous campaign contributions to the relevant politicians.” And, beyond exposing conflicts of interests – a prominent feature of Trump’s presidency – Smart also suspects that the NAFTA renegotiation will reveal “fundamental flaws in Trump’s thinking” on trade.
That’s too bad, because, as Frankel points out, the decades-old trade deal could stand to be updated. For example, NAFTA does not currently cover “e-commerce and data localization,” and it could do more to protect the environment and workers. Moreover, the US in particular would benefit from adjustments to the current investor-state dispute resolution system and stronger intellectual property (IP) protections.
A reconceived NAFTA could also be expanded. With more countries in the mix, Canada could agree to import more dairy products from the US, in exchange for easier access to Japanese markets for its pork, beef, and lumber exports. Of course, at that point, Frankel concedes, NAFTA would closely resemble the ill-fated TPP.
Likewise, Smart argues that if Trump had kept the TPP on track, he could have improved not just the US position in Asia, but also his own position in the NAFTA renegotiation. Indeed, Mexico was “more willing to engage in a conversation about modernizing NAFTA when the prize included US-backed access to Asian economies through the TPP.” Now that the “TPP is off the table, Mexican enthusiasm for a new NAFTA could dim.”
Be Careful What You Wish For
This points to the many unintended consequences that could stem from Trump’s approach to trade around the world. As Yale’s Stephen Roach warns, the stakes are especially high in the case of China. The US and China have long had what he calls “a highly reactive relationship” of economic codependency, whereby one wrong move could set off a destructive downward spiral. Keyu Jin of the London School of Economics provides one example: If Trump acts on his campaign threats against China, she says, “China could stop purchasing US aircraft, impose an embargo on US soybean products, and dump US Treasury securities and other financial assets.”
So far, a US-China trade war seems to have been avoided, owing to Chinese President Xi Jinping’s bonding session with Trump at Mar-a-Lago in April. But that does not mean the two countries won’t lock horns in the future. Moreover, even without an all-out trade war, China could frustrate the Trump administration’s “America first” agenda, not least by letting its currency depreciate.
Chinese authorities have every incentive to do precisely that. Since June 2014, notes Cornell University’s Eswar Prasad, China has spent almost $1 trillion propping up the renminbi. If Trump gives it a reason to abandon market intervention, the value of the renminbi will fall, China’s trade competitiveness will increase, and America’s trade deficit vis-à-vis China will grow further. And, as Jin wryly notes, nothing makes Trump more “furious” than the fact that “China exports more to the United States than the US exports to China.”
But a China that has been unnecessarily provoked could do far more than hurt Trump’s pride. Harvard’s Kenneth Rogoff, for example, worries that “huge swaths of Asia,” including US allies and partners such as Taiwan and India, are already “vulnerable to Chinese aggression.” And, as Cornell’s Kaushik Basu points out, Trump’s isolationist foreign policy will only encourage China – as well as other emerging countries such as Mexico and India – to become more nationalistic and assertive.
That is the last thing an already messy, multipolar world needs. An American policy of isolationism in the 1920s and 1930s, Nouriel Roubini of New York University reminds us, “helped sow the seeds of World War II.” Today, a similar policy could embolden China to step up its territorial claims in Asia and the South China Sea, or precipitate a nuclear arms race between Iran, Saudi Arabia, Turkey, and Egypt. Even barring a geopolitical crisis, notes Nobel laureate economist Joseph Stiglitz, Trump’s presidency has already introduced uncertainty that will “discourage investment, especially cross-border investment,” and make businesses – many of which employ Americans – “think twice as they construct global supply chains.”
Still, a slightly more optimistic view holds that Trump’s presidency will prompt the rest of the world to forge new ties. For instance, Joakim Reiter and Guillermo Valles of UNCTAD see an opportunity for the “European Union and other emerging economies” to form “a North-South alliance of countries willing to defend and promote global trade.” Similarly, Columbia University’s Andrés Velasco, a former Chilean finance minister, has proposed reviving a George H.W. Bush-era plan for a free-trade bloc in the Americas, which need not include the US. And to the east, writes Richard Haass, the president of the Council on Foreign Relations, “China will promote various trade, infrastructure, and security mechanisms in Asia,” and “the 11 remaining members of the Trans-Pacific Partnership may launch their trade pact without the US.”
A Confederacy of Economic Dunces
Notwithstanding Trump’s ambient Sinophobia, many Project Syndicate commentators see in his trade policy a recipe that would unwittingly make China great and leave America much worse off. This is largely owing to Trump and his key advisers’ apparent economic illiteracy. Columbia University’s Jeffrey Sachs and Pascal Salin, a former president of the Mont Pèlerin Society, hold very different views on economic policymaking. But both identify the same flaw in Trump’s protectionist rhetoric; namely, a misunderstanding of what trade deficits actually mean. As Salin and Sachs both point out, Trump and his advisers routinely misattribute the US’s current-account imbalance to “bad” trade deals, when it is really a natural result of the US’s low saving rate.
Because Trump is following “gut feelings” instead of a “valid economic theory,” Salin worries that he could pursue policies that – like handouts to the sugar industry – will make it “harder for importers to buy what they need from exporters,” which “would be especially harmful for the US.” And, as Barry Eichengreen of the University of California, Berkeley, argued last year, even if policymakers wanted to put “upward pressure on US prices” to push back against deflation and an impending liquidity trap, there would be far better ways of going about it. “The obvious alternative to import tariffs,” Eichengreen writes, “is plain-vanilla fiscal policy – tax cuts and increases in public spending.”
Moreover, Trump has no chance of actually changing the US’s current account-balance. “There is no particular reason,” Sachs reminds us, to believe “that |an increase in US trade barriers would have any first-order effects on the US saving and investment rates, and therefore on the US current-account balance.” This may be for the best. If past US presidents had acted on the same kneejerk impulse to save “low-skill jobs,” the US economy today “might well have a larger, labor-intensive manufacturing sector,” Basu notes. “But it would also look a lot more like a developing economy.”
And Salin, for his part, cautions that actually eliminating the US trade deficit would mean sacrificing “the standard of living that countless Americans have come to enjoy.” In fact, according to Harvard’s Martin Feldstein, Americans could expect to see their real (inflation-adjusted) incomes “decline by about 5%.”
Given that Trump and his advisers have embraced what Sachs calls “an economic fallacy that first-year economics students learn to avoid,” it is not surprising that they have also proposed misguided economic policies beyond the realm of trade. For example, Roubini predicts that Trump’s “migration restrictions will likely reduce growth, by eroding the labor supply.” Likewise, J. Bradford Delong, also of the University of California, Berkeley, argues that Trump’s push for fiscal stimulus and tax cuts would undercut his own agenda by strengthening the dollar, making it harder for American manufacturers to compete abroad. And, as Emmanuel Farhi and Gita Gopinath of Harvard and Oleg Itskhoki of Princeton demonstrate, such policies would “erode America’s net foreign-asset position” and result in a net capital loss.
Sadly, today’s economic illiteracy is not confined to the US. Jim O’Neill, a former chairman of Goldman Sachs Asset Management, believes that Brexiteers in the United Kingdom are beholden to many of the same fallacies as the Trump administration. For starters, O’Neill observes, “Many UK policymakers – and all members of the ‘Leave’ campaign – are ignoring the likely costs of exiting the EU single market,” which, by default, will establish trade barriers between the UK and the EU.
Making matters worse, the current UK government’s post-Brexit strategy is fixated on hashing out “patriotic” trade deals with Anglophone countries such as Australia, Canada, and New Zealand, when it should be focusing on reaching agreements with China, India, Indonesia, and Nigeria. Like Trump and his obsession with the current-account balance, the Leave campaign seems to believe that it can solve all of Britain’s problems by simply “taking back control” of trade and immigration. But as O’Neill points out, the UK, with or without Brexit, would still have “persistently low productivity growth, weak education and skills-training programs, and geographic inequalities.”
Salvaging Internationalism
Despite their obvious flaws, Trump and the Brexiteers’ economic arguments have gained currency with many people across North America and Europe. To push back against populists’ dangerously misleading narrative, policymakers who still recognize the benefits of global free exchange will need to find a new way forward.
First and foremost, political, business, and civil-society leaders need to acknowledge that, as Ngaire Woods of the University of Oxford puts it, “those defending free trade have lost credibility with the people they hope to persuade.” This is no surprise for Gros, who believes that political elites have, for years now, overhyped the benefits of trade, and created “impossible expectations for trade liberalization.” Their biggest mistake, he argues, was to ignore the role of high commodity prices as a driver “of the extraordinary growth in trade in recent decades.” When commodity prices finally fell, global trade faltered.
Still, such claims by free-trade advocates are nothing new. In a forthcoming paper, I examine political leaders’ statements about trade agreements going back to the 1957 Treaty of Rome, and find that overhyping seems to be the norm. Rarely do leaders acknowledge the potential disruptive effects of economic openness, or implement policies to mitigate them. But, as Woods contends, avoiding hard truths is no longer an option. Elites will have to be far more forthright about the consequences of global economic integration, while “also addressing people’s deeper concerns,” such as the loss of dignity that comes with economic displacement. If reasonable leaders won’t tell the truth, they should not be surprised when nativist demagogues present their own “alternate facts.”
Moreover, policymakers need to back up truth-telling with concrete action. As former United Nations Assistant Director-General Jomo Kwame Sundaram and Vladimir Popov of the Russian Academy of Sciences show, countries that have benefitted the most from trade have done so by “providing adequate unemployment compensation and skills training, and promoting new, more remunerative employment opportunities.”
With respect to the US in particular, Rogoff proposes a progressive consumption tax to reduce inequality, as well as reforms to free up technological innovation and diffusion. Similarly, Salin recommends lower taxes and fewer regulations, in order to boost economic activity and growth. At any rate, one rule for twenty-first-century social policies, suggests Richard Baldwin of the Graduate Institute of International and Development Studies in Geneva, is that they should adhere to the principle of “protecting individual workers, not individual jobs.”
Globalization in the Twenty-First Century
That principle is all the more important today, when advances in automation and new digital and sentient technologies increasingly threaten individual jobs across many sectors. Nor is this a problem only for developed countries. Brahima Coulibaly of the Brookings Institution warns that “falling technology costs” could derail industrialization in much of Africa before it even gets started. And just as labor-replacing technologies are not strictly a concern for developed countries, they cannot be separated from globalization. As recent research by the Oxford economist Adrian Wood shows, the logic of economic globalization actively aids and abets automation.
As with trade agreements, governments have a responsibility to address the effects of new technologies. They will need to foster honest, dispassionate conversations about the risks and rewards of a hyper-digitized world, to determine how new technologies might be regulated and designed to yield the greatest public good. Beyond the design of individual technologies, observes Tyson, much will also depend “on the design of the policies surrounding them.”
Harvard’s Dani Rodrik is more skeptical. The time for compensating “globalization’s losers,” he argues, “has come and gone.” With or without domestic-level measures to mitigate the disruption from trade and technology, it may be time to “consider changing the rules of globalization itself,” to ensure parity and fairness across countries and sectors. In Rodrik’s view, global economic cooperation has been unbalanced, because finance and capital can move much more quickly across borders than goods, services, and especially labor. And, of course, national and supranational regulatory measures move the slowest of all.
Addressing these problems will require a credible system for cracking down on financial crime and tax havens; a global border-adjustment-tax regime for carbon emissions; an international compact on refugees; and a modernized Agreement on Trade-Related Aspects of Intellectual Property Rights. To that end, the Center for International Governance Innovation’s Oonagh Fitzgerald and Hector R. Torres of the International Monetary Fund call for the formation of a coalition of countries, led by middle powers, to reform the institutions of globalization in 2018, when Canada and Argentina will lead the G7 and the G20, respectively.
Demonstrating the value of multilateral cooperation will be crucial to salvaging globalization politically. One possible silver lining of Trump’s decision to withdraw the US from the 2015 Paris climate agreement is that it has prompted many other countries to reaffirm their commitment to fighting global warming. But, as I have previously argued, the international community also needs to maintain support for accords such as the World Trade Organization’s Information Technology Agreement, while exploring other similar opportunities for macroeconomic cooperation.
At the same time, the public should be reminded at every opportunity that there are no quick fixes in international affairs. Just as the backlash against globalization took a decade to spill over into national politics, it will take time for the pendulum to swing back the other way. As Basu argues, today’s “slow-motion economic crisis” certainly looks bleak; but it will eventually give way to a “Digital Revolution that promises to lift growth to new heights.”
Future conversations about trade will have to account for these coming changes, and for the ongoing conceptual transformation of trade itself. According to Tyson and Susan Lund of the McKinsey Global Institute, “cross-border digital flows” already “have a larger impact on global economic growth than traditional flows of traded goods.” That means the trade of the future will be in ideas, which is to say intellectual property; and this will set it apart from trade as it traditionally has been understood.
Intellectual property is characterized by high upfront costs and low reproduction costs. And because that implies a huge first-mover advantage, achieving national primacy could turn out to be the “Great Game” of the twenty-first century. Unfortunately for the US and the UK, Trump and Brexit are unlikely to put either country in a position to win it.