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Are globalism’s proponents the biggest threat to global trade?

November 09, 2016

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[Michael Stumo & Daniel Alpert | November 09, 2016 | The Hill]

Hillary Clinton’s and Donald Trump’s campaigns both featured opposition to recent trade deals, reflecting a reboot of the fictional view that all trade is win-win. Yet proponents of globalism continue to assert that "free trade" is an overwhelming good. Many wrongly resist exploring why the number of trade "losers" is increasing, contrary to the inherited wisdom.

In the overly-modeled, theoretical world of academic economics, treaties are arrived at by reasonable people in nations with roughly common situations and goals. In that world, free trade benefits include consumer access to lower cost goods and some services, export opportunities, efficiency gains, freely flowing investment, and geopolitical harmony. Negative impacts are temporary and exceeded by expected gains.

In the real global economy, however, national interests differ drastically, mostly because post-socialist/emerging economies and developed economies are in entirely different situations. This is where the wheels fall off the wagon of current trade policy.

Three particular problems have emerged in recent decades as emerging economies joined the global trading system:

1)    Trade agreements are far from comprehensive, due to practical concerns. Signatories do not have common agendas, yielding agreements covering only a subset of issues that can be agreed upon. Truly difficult issues are postponed or ignored.

2)    A global oversupply of labor, production and capital – relative to aggregate global demand – has arisen from the growth and persistent neo-mercantilism of emerging economies. The expected timing of those emerging economies' eventual pivot from export dependency to domestic consumption has been grossly underestimated.

3)    Fiscal austerity in developed countries has drastically limited government spending on jobs-producing domestic infrastructure. A more aggressive fiscal program would absorb domestic labor displaced by imbalanced trade and powerfully increase economic demand.

Incomplete trade agreements are the norm because they are achievable. The phrase "done is better than perfect" is persuasive, but often not true. Ignoring difficult issues has often resulted in “done is even worse than before.”

Consider the not-fully-comprehensive 1992 Treaty on European Union (Maastricht) that gave rise to the Eurozone. Though hailed at the time, many economists now regard it as having been premature. Many elements necessary for a truly viable union were kicked down the road, and ad hoc actions since the Eurocrisis show little chance of fixing the structural inadequacies.

The rush to a common currency ultimately resulted in Germany achieving the world's second largest trade surplus today—first a pre-Eurocrisis surplus caused by mercantilist policies to artificially limit wage growth and a system of massive vendor financing, and an even larger post-Eurocrisis surplus generated by the now-weakened Euro and increased German fiscal austerity.

Germany is able to achieve high employment levels and low inflation by relying upon foreign demand. How? The country benefits from a Euro devalued by the state of Southern Europe's economies, exonerating Germany from being accused of manipulating a currency they no longer directly control. Wunderbar!

Moving on to the low-wage emerging economies. Many economists expect that any developing industrial nation will eventually shift from reliance on export consumption to domestic consumption for growth. Yet that shift is still not occurring.

Today's emerging economies feature never-before-seen numbers of workers joining the global labor supply.  As big as China's impact has been on global markets, they still have, “on the bench,” 600 million non-urbanized people. India has 800 million. That population will net hundreds of millions who will join the urbanized global workforce for years to come.

Those countries’ governments must continue to find a way to add those workers to non-farm employment or face a destruction of social cohesion that would threaten their governments' hold on power. No talk of “fair trade” will ever trump this fact.

As a result, those economies will continue overproducing relative to their domestic consumption and over rely upon exogenous demand for the foreseeable future. Their governments will continue to use all possible tools to grow demand for their domestic labor, including industrial subsidies and currency restrictions when necessary. To expect otherwise is sheer folly.

U.S. workers are bearing the brunt of the global oversupply and more effective policy responses are needed to prevent surplus countries from distorting global commerce to the detriment of trade deficit countries like the U.S.

The third problem, fiscal austerity, can be addressed readily. The strong dollar and the global oversupply of capital can be turned from problems to solutions. A long-term, large-scale infrastructure program would create the demand needed to absorb underemployed U.S. labor, pull up wages, and rebuild or basic materials industries, with nearly free borrowing of the funds to do so. 

Current trade agreement provisions, however, actually prohibit the U.S. government, from preferring domestic goods and services suppliers in infrastructure projects. These provisions must be changed because the fiscal spending "leakage" to overseas suppliers will prevent many benefits of increased employment, demand and growth that we expect from infrastructure spending. Striking these prohibitions is vital, but will be no small feat because virtually all trade agreements have them. But it needs to happen.

Our trading partners would actually benefit from eliminating the “buy domestic” prohibitions. While they will not be able to dump their primary inputs (steel, etc.) on our shores, they would benefit enormously from increases in demand for their other goods arising from the increased purchasing power of more gainfully employed U.S. workers. 

Proponents of globalism need to become part of the trade reform solution, rather than part of the problem. Different rules are needed to broaden the benefits of trade and drastically minimize the harm. It is within our power to rewrite the rules, consensually if possible, unilaterally if necessary.

Mr. Alpert is the founding managing partner of Westwood Capital, LLC and a fellow in economics at The Century Foundation.  Mr. Stumo is the CEO of the Coalition for a Prosperous America.

 


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