Locking down free trade

What then does President Trump mean when he speaks about the end of global trade? Perhaps we need to look at some of the arguments for and against free trade and globalization, and we must also include the benefits and costs that have arisen. Free trade and globalization have allowed companies to develop various segments of value chains around the world, taking advantage of countries’ comparative advantage. We have seen many cross-border supply chains develop that have lowered production costs, increased productivity, and improved competitiveness. This has benefited producers (higher profits and market share) as well as consumers with lower priced goods.

The advocates of free trade and globalization have argued that it increases the global level of output because free trade permits specialization among countries. Such specialization allows countries to dedicate their scarce resources to the production of the particular goods and services for which that country has a comparative advantage. The benefits of specialization, together with economies of scale, increase the global production possibility frontier. When there is an increase in the global production possibility frontier, it signals that the entire quantity of goods and services made is highest under free trade. Not only is the entire amount of goods and services higher, but the specific combination of goods and services actually made will produce the highest possible utility to consumers around the world. This in turn makes societies more prosperous.

The increase in GDP provides a larger national pie to share among citizens, at least this is the argument that was presented. In addition, it was argued that free trade relieves extreme poverty throughout the world. Bj?rn Lomborg’s Copenhagen Consensus on International Development Challenges was of the opinion that reducing subsidies and tariffs would improve the well-being of the global poor more than any agricultural, political, or environmental program. Freer trade policies lead to faster economic growth and less poverty and unemployment. Dierk Herzer, a German economist, found that trade openness in general has a positive longrun effect on health, as measured by life expectancy and infant mortality.

The criticisms of free trade include increases in the likelihood of offshore outsourcing of production, which shifts economic production abroad leading to job losses and wage stagnation. There are also the arguments that free trade has led to the growth of inequality, lowwage competition, flight of capital to low wage countries, and in combination with the fourth industrial revolution, was leading to the compression of the middle class in developed countries and the substitution of workers with robots.

This has led to Bill Gates advocating for a tax on robots that replace humans.

Other arguments state that free trade boosts consumption, not necessarily production, benefits only the wealthy within countries leading to greater levels of inequality, possibly increases the risk of economic bubbles that may affect entire nations and perhaps the world instead of just individuals, as well as it tends to create economies too dependent on narrow specialties.

How should we respond to the lack of clarity and indeed the fear that the USA is no longer advocating free trade and does not seem clear on a policy position? Certainly we need to get our house in order. Our statistical data gathering needs to be improved with up-to-date information on imports and exports, not mirror trade data. We need to get data on trade-in services as well.

In fact, the lack of progress and questions raised about the recommendations being put forward by members of the committee regarding the restructuring of the Central Statistical Office (CSO) raises real concerns. We need to have our universities conduct research on possible effects of changes to the international trade system, and counterfactual experiments on possible policy prescriptions based on different scenarios. There is the need for our Ministry of Finance and Ministry of Trade to be a part of this research exercise. Lastly, we need to assemble a team of negotiators to begin preparation for any eventuality. There should be a section in the Ministry of Trade that is preparing for another paradigm change in the world trading system; failure to act is not an option.