Free Trade in the Age of Economic Discontent ; Comparative Advantage under Globalization
Free Trade in the Age of Economic Discontent; Comparative Advantage Under Globalization
Dr.
Michael Sakbani is a professor of economics and Finance at the Geneva campus of
Webster-Europe. He is a senior international consultant to the UN system,
European Union and Swiss banks. His career began at the State University of NY
at Stoney Brook, then the Federal Reserve Bank of New York followed by UNCTAD
where he was Director of the divisions of Economic Cooperation, Poverty
Alleviation, and UNCTAD`s Special Programs. Published over 120 professional
papers.
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Saturday, September 24, 2014
By
Dr.
Michael Sakbani
The
populist rhetoric on free trade
In the
2016 Presidential campaign of the US there seems to be a quasi transpartisan
rejection of the Free trade agreements such as the Atlantic and Pacific treaties
under negotiations as well as NAFTA. The Republican candidate, Mr. Trump, has
been railing against trade agreements which he claims benefit China and other
exporters and cause job losses in the US [1]. This is hardly in line with the traditional free
trade views of the Party and its establishment. Similarly, the Democratic
candidate Hillary Clinton is distancing herself from her previous views on free
trade and these agreements proper, as she comes under the combined pressure of
the Trade Unions and the observed populous rejection of such deals, especially
in the Mid-West, which is now labeled the Rustbelt of the country. Indeed,
the US economy has witnessed a hollowing out of industrial jobs in many
localities and drift of wages towards lower-paying service jobs[2].
Empirical
surveys by trade economists contest these impressions and show a net job
increase over the past two decades[3].
Moreover, most trade economists have documented empirical evidence on the positive impact of trade in the US on productivity. This obtains via an 18% increase in labor productivity, which accounts for about a quarter of total factor productivity [4], There is plausible evidence that trade helps to the spread of technical progress [5], An almost uncontested fact is that trade increases consumer welfare on account of the increased variety and availability of goods
and their lower prices[6].
There is also evidence on increased investment driven by inflows of Foreign
Direct Investment through strategic positioning of international firms [7] And
last, but not least, the taming of inflation in our times on account of the
lower prices of imports.
Why is it
then, that there is a populist rejection of free trade and a questioning of its
benefits?
The
classical setting of the law of Comparative Advantage
Economists
since David Ricardo`s work in 1817 have adhered to the law of Comparative
Advantage and its growth complement through investments in industries
with new jobs higher on the technical ladder than the ones they replace. This
implies four things: one, new advanced technology is accessible to all firms,
two, dismissed workers can take on higher -skill jobs created by the new technology,
three, factors of production are largely immobile and fourth, firms are likely
to choose to invest where jobs were lost. In our world today, these assumptions
are rather ambiguous.
To throw
into sharp relief these ambiguities, it is appropriate to place the world the economy in the context of globalization and the observed behavior of global
firms since 1990.
Technical
progress has since the late 1980`s been capital and knowledge-intensive.
Robotics have replaced man and rendered many manual jobs obsolete. Thus, labor-saving has been an important characteristic of recent technology.
The new technology requires, however, education and informatics
skills beyond the previously acquired education of many workers. We are consequently
witnessing an increased marginalization of lower-skilled workers in the global
economy. This is reinforced by the increased importance of services in
international trade and even its more exigent demands for skills. Trade in
services has rendered services quite mobile, a fact that classical economists
did not reckon with. In addition, the global firm has itself become mobile and
non-beholding to any specific state. Its preferred location is where its costs,
especially labor costs are less.
To be sure, there has been a net increase in jobs. But the evidence on net job growth cannot be taken on face
value. Created jobs are the result of the trend growth in the internal economy
as well as international trade. None of the econometric studies has
successfully disentangled this confluence and identified the causal independence in a satisfactory way.
Technology
in the global economy is not necessarily available to all firms as the theory implies. It is the giant global firms that usually
develop or own the technology. These firms having perfect mobility, will not
necessarily locate the new jobs in the same locations as the replaced jobs. It
is observed that global firms seek a maximum increase in their equity capital by
decreasing their costs any way they can. When
Jack Walsh left General Electric, he had an enviable record in increasing GE
equity value and was hailed as one of the great captains of industry. His $421 million package upon leaving was a testimony to the
behavior of global firms and their ethos. Mr. Walsh
accomplishment was in cutting tens of thousands of jobs and gutting middle
management as well as reducing expenditure on R &D to develop new products.
His successor came into a weakened firm with few new products in line and a lot
of business outside its core competence in various places.
In a competitive global economy, discharged laborers are not all employable because
of their prior educational and skill profiles. On the other hand, in particular, training older discharged workers and endowing them
with new skills is not always feasible and is costly; often it is cheaper to go
elsewhere. In addition, since the new capital and information-intensive
technologies are labor-saving, there is the demand for labor is cut down and it is likely that discharged laborers will face structural unemployment. We see
evidence of that in the decline of men`s participation in the labor- force. In other words, the closure of global firms inflicts often likelihood of creating structural
unemployment for those marginalized by globalization. Adding to that the
empirical observation that global big firms create relatively fewer jobs than
small and medium-size firms[8], the conclusion that employment has not improved
in the last decade has become obvious. Moreover, the increased importance of
global firms with their entrenched ethos and practices is making unemployment the
great economic problem of our times.
At the
time of Ricardo in the early 19th century, the world did not have
great differences in the standards of environmental protection and social
labor norms among industrial countries. Today, these standards are quite
heterogeneous. Thus, there is a bias in favor of poorer, cheaper countries with
lower standards, something that comparative advantage does not fully account
for. The search for cost advantages usually results in choosing new locations,
leaving behind pockets of industrial desolation in many countries with higher
labor and environmental standards.
These
phenomena observed under globalization necessitate extending social safety
network by the governments at the same time that their fiscal base is eroded by
the emigration of firms. Recently, it was reported that some major firms,
Apple, Starbucks and IKEA for example, have found tax-havens in Ireland and other places via
special tax-deals escaping paying taxes where their sales were. That means when
jobs are lost to comparative advantage, it makes a difference which country
lost jobs and which one gained jobs and what are the circumstances therein.
Countries with high social safety standards will fare better than those with
limited public aid and therefore the degree of public discontent will be lower.
The public expenditure on retraining and retooling discharged labor is only .01
percent of the GDP in the US, but it is 6 times higher in Germany.
Under
globalization these propositions renders firms non -neutral with respect to job
locations, which breaks the link between new technology and new investment in respect of
geographic location, a cardinal implication of the classical trade theory.
Towards a
critical evaluation of received wisdom
The
global firms, especially US firms, are the great gainers from free trade, their
profits and the bonuses of their executives are staggering [9].
These gains are contemporaneous with losses in many areas for many social
segments. This dichotomy is generating populous resentment and angst among wide
segments of society. The popularity of political figures like Mr. Trump in
the US, Madame Le Pen and her“ Fronte Nationale” in France, the rise of extreme rightists in Germany
and Austria together with the Brit-exit in the UK, are all manifestations of
economic and political marginalization of populist classes. Many feel left out
of the game. The result is to facilitate the rise in democracies of demagogic
nationalistic populism, thereby jeopardizing the gains from trade and finance
openness. To protect the economic gains of freer trade, the benefits must be
spread more widely and global firms must meet some standards of social
obligations.
There is
a need for the economic profession, the international institutions of economic
cooperation and business to revise the received trade theory, the prevailing
practices of global firms and the dispensed economic advice in the light of
these facts and to look carefully into the violations of the prerequisites of
free trade.
Several
things can be done.
With
interest rates at a historical low and inflation under control, fiscal policies
in many affected countries should embark on public investment and on
encouraging parallel private investment, in infrastructure and clean green
technology. The macroeconomic climate has profound implications on the labor
markets and on arresting the observed decline in the participation rates of
male workers in the labor force especially, in the US. One of the disturbing
factors in the slow recovery from the 2008 crisis has been the simultaneous
deflationary fiscal policies adopted by so many developed countries who are
trade partners. With monetary policies reaching their limits, the global
pattern of fiscal policies needs attention, it is an economic truth that nobody
will fare well if trade partners are all deflating at the same time.
Another fiscal
measure would be to invest in expenditure on rehabilitating the skills of
discharged workers at higher standards than is currently practices, especially
in the US and the UK.
Globalization
has resulted in increasing the dominance of big oligopolistic firms all across:
big banks, big service firms, big electronic firms, big informatics firms and
so on. The cash coffers of these firms are enormous and their impact is
unprecedented. Competition laws should breakup such concentration and increase
competition and this needs international cooperation under globalization.
Globalization
requires liberalization. The liberalization of financial markets and the
unfettered movement of capital and labor are an integral part of the globalization
scene. This liberalization has increased hot money movements and portfolio
short term capital movements. In 1997, we saw in the Asian crisis the example
of countries following the right macro policies tipping into crisis as a result
of the disruption and sudden outflows of such short term finance. These countries
were destabilized and went into a balance of payments and a currency crisis.
International cooperation to taxing such movements would be appropriate in order
to give a breathing space for the affected economies.
Finally,
there should be international cooperation on taxing transnationals in
accordance with the share of each country in total firm`s profits so that
globalization, which imposes fiscal burdens on states, does not become an
enabler of tax- evasion.
Such measures would go a long way towards
protecting openness and gains from trade under globalization.
| (Geneva, September 20, 2016) | |
Notes
G
[1] Donald
Trump has made international trade in general and that with China in particular
an essential part of his platform. For quotes and speeches, see On The
Issues, 2016.
[1] For an excellent summary of the
empirical evidence on US trade, see Office of the PresidentPresi9dent
of the USA, The Economic Benefits of US Trade, Washington DC,
2015.On job losses see The Economist, April 2, 2016.
2] The
Economist, April 2, 2016. See also Frankel & Romer, “Income Growth and Openness”, NBER,
1999. See also Office of the President, Op. Cit.
(2015) p. 23.
[3] Idem, Office of the
President, (2015), p.3.
[4] Idem, p.
4. See also, Bernard, A. Bradford, J. “Exporting and Productivity in the US”
Oxford Review of Economic Policy, 2004.
[5] Atkins,
Khandelwal and Osman, Exportin and the Performance of the Firm,
NBER, 2008, paper no. 20690. Broda, Christian Weinstein, “The Gains from
Variety”, The Quarterly Journal of Economics, 121no. 2, pp.
541-585.
[6] Office of the President, Op. Cit.., (2015).
[7] Various empirical studies.
posted by michel sakbani | 2:20 AM
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