Commentary: We need to restore lost faith in global trade

Commentary: We need to restore lost faith in global trade

Policymakers in the developed world are beginning to see that the global trading system creates losers and is in need of a revamp, says one observer at the Financial Times.

A worker cuts steel plates inside the China Steel Corporation factory in Kaohsiung
A worker cuts steel plates inside the China Steel Corporation factory, in Kaohsiung, southern Taiwan August 26, 2016. (Photo: REUTERS/Tyrone Siu/File Photo)

LONDON: Like the protagonist in Herman Melville’s last novel, The Confidence Man, Donald Trump can embed a single, visceral truth in a welter of falsehoods.

So it is with the US president’s anti-free trade stance. He will often couch it in terms that are xenophobic, nationalistic or just factually wrong.

But when Mr Trump bashes China or the North American Free Trade Agreement, he is getting at something profound — many people simply do not believe in the system.

MANY LOSING FAITH IN TRADE

Only about one in three people in rich countries believe that trade increases wages. Meanwhile, those in emerging markets are even more dubious about trade’s impact on prices; a median of 18 per cent believe it lowers them.

Given the statistical links between freer trade and economic growth in the postwar period, how do you account for these views? They are explained by the fact that there are major losers in free trade.

Indeed, the two most consistent winners from the status quo system have been big companies, and big countries.

Consider the most recent annual report from the UN Conference on Trade and Development, entitled “Power, Platforms and the Free Trade Delusion”.

This likens the past 30 years of unfettered global capital flows and, more recently, the network effects of the digital economy, to the 19th-century system of colonial control in which great powers (be they sovereign or corporate) prospered at the expense of lesser ones.

The report found that, in the wake of the financial crisis, the largest 10 exporting companies in any given country accounted for, on average, 42 per cent of national exports. No wonder corporate profits are at record highs as average wages stagnate.

marina barrage
The Singapore skyline as seen from the Marina Barrage Green Roof. (File photo: Corey Sta Maria)

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CHEATING THE SYSTEM

Even more interesting is what Mr Trump and the Chinese have got right on trade. Looking at the manufacturing sector between 2000 and 2014, the domestic share of total value added and the domestic share of labour income within that declined in most countries, with the significant exception of China.

Not only did most rich countries suffer in relation to China, but poor countries that played by the letter of World Trade Organisation law did, too.

That is a problem, given that opening up to global trade was supposed to help these countries move up the value chain.

It turns out that the Chinese tactics of ringfencing strategic industries and limiting capital flows were necessary to guarantee significant and rapid development. “Cheating” the global system was, in effect, the smart move, at least for China.

China's economic growth has slowed as the country's leaders face a trade war with the US
China's economic growth has slowed as the country's leaders face a trade war with the US while also battling a debt mountain and pollution. (Photo: AFP/Johannes Eisele)

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A CONSENSUS EMERGING

Ironically, American politicians, policymakers and chief executives much more thoughtful than President Trump now complain about the unfair competitiveness of those Chinese state-owned businesses that for years they warned Beijing would be less competitive for being less open.

“For a long time, developing countries complained that [unfettered free trade] would hurt them,” says Richard Kozul-Wright, director of Unctad’s division on globalisation and development strategy.

Now, you are seeing rich countries say the same thing.

This bizarre alignment of opinion has many downsides, most notably the overall decline in expectations for trade and the rise of trade-related political risk.

U.S. President Donald Trump makes announcement at the White House in Washington
U.S. President Donald Trump in the Roosevelt Room of the White House in Washington, U.S., August 29, 2018. (Photo: REUTERS/Leah Millis)

But it may also have the unexpected upside of creating a consensus around the idea that we really do need a revamped global trading system that is more suitable to the reality of the post-Trump, post-rising-China, post-digital world.

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A NEW TRADE REGIME

What should that system look like? For a start, it should have a new framework for intellectual property. The shift from tangible to intangible assets (research and development, software, databases, designs, branding and so on) will simply exacerbate the problems outlined above.

It also overturns the usual economic rules of gravity. New ideas are in the air, from personal data ownership, to auctions of intellectual property to prevent rent-seeking, to a rethinking of the patent system.

In the short term, we need to figure out ways to reduce corporate concentration and increase economic diversity. Some regulators at the US Securities and Exchange Commission and the Federal Trade Commission are pushing for corporate concentration to be taken into account when competition rules are drawn.

Meanwhile, at a local level, development officials are doling out funding based on the basis of start-ups created rather than jobs created.

The private sector understands the problem, too. AOL co-founder Steve Case and investor JD Vance, who wrote Hillbilly Elegy, are leading a group of investors putting money into non-coastal start-ups (last year, 75 per cent of venture capital went to only three states). The Investing in Opportunity Act may speed up capital flows to the heartland — an implicit admission that the industrial policies long championed by developing companies have merit.

It is perhaps a sign of a genuine paradigm shift that even Business Round-
table, the lobbying group for big business, has admitted there are losers in free trade.

That is smart because, if the majority of people do not have trust in the system, it will break. And that is exactly what is happening now.

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Source: Financial Times/sl

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