by Linda Yueh
Countries want to reduce trade barriers, and are increasingly seeking to do so via regional FTAs that are in addition to their WTO membership. Had President Trump not pulled the US out, the Trans-Pacific Partnership (TPP) would have been the world’s biggest free trade area, linking North America with Pacific Rim countries encompassing parts of Latin America and Asia. The US under the Obama administration had hoped to gain from this new trade agreement since 61 per cent of US goods exports and 75 per cent of US agricultural exports go to the Asia Pacific region. The European Union has also been pursuing an equally ambitious free trade agreement with America. The Transatlantic Trade and Investment Partnership (TTIP) would be a FTA that would link the US with the EU.
The pursuit of massive regional FTAs is a reaction to the World Trade Organization expansion stalling. It has been a long time since the last big WTO initiative, the Doha Round of 2001, where countries launched negotiations to open global markets up further. So, instead of trying to wrangle a deal with almost the entire world, regional trade agreements have sprung up and bilateral agreements have expanded, though it would be better for all countries to trade on the same terms with all others.
The problem with this approach is that if a country hasn’t signed up to the rules of the new free trade areas (or hasn’t even been invited to join), it’s excluded and can’t share the benefits. Being left out of TPP and the TTIP means China is striking its own deals. China is negotiating with ASEAN (Association of Southeast Asian Nations) and other Asian nations to form a regional free trade agreement, the Regional Comprehensive Economic Partnership (RCEP). China had also offered to set up a Free Trade Area of the Asia Pacific (FTAAP) as an alternative to the TPP.
These regional FTAs are not the best outcome relative to a multilateral agreement under the WTO, but perhaps they’re better than not having any new trade deals at all. The creation of sizeable free trade areas where domestic companies can gain economies of scale by selling to a much larger customer base than would otherwise be possible is one of the motivations, especially for smaller economies.
That’s why Southeast Asia is also pursuing an ambitious free trade area. The single market that ASEAN launched at the end of 2015, known as the ASEAN Economic Community (AEC), is comparable to the EU in terms of population. With over 600 million people, the AEC links the ten nations of Southeast Asia ranging from rich Singapore to poor Laos into a bloc aiming for the removal of tariffs and sharing common standards. The AEC intends to rival the EU and perhaps even eventually overtake it, based on the 5 per cent plus economic growth rate of ASEAN as compared to the 1–2 per cent growth of the EU. The AEC is also considering a single visa regime, akin to an Asian version of Europe’s Schengen Agreement.
ASEAN policymakers emphasize that the impetus behind the AEC is to compete with the sizeable markets of the EU and the US as well as neighbouring China and India. With twice the population of the United States and one that is similar to the scale of the EU, the AEC has the potential to become one of the largest economic entities in the world. If, like the EU, the AEC becomes a common reference point for the rest of the world and, like the US, a market that global businesses feel obliged to be in, then it will have succeeded. It seems that Southeast Asians certainly have that ambition.
The US is adding uncertainty by focusing on bilateral trade agreements, which is a significant change from its previous agenda of multilateral and regional free trade. For President Donald Trump, the reason is that he is putting ‘America First’. With the shift in the world’s biggest economy, the question of how to address the backlash against globalization will be even more important.
Trumpism
The rise of Donald Trump is perhaps the most striking example of how those who have lost out economically in the past few decades sought a political outlet to convey their frustrations. An exit poll of voters conducted by The New York Times revealed that his voters thought the economy was performing poorly and their families’ financial situation was worse as compared to those who voted for Democratic candidate Hillary Clinton.2 There are other causes of disaffection. But globalization is in Trump’s sights. This has worrying ramifications.
As discussed in the Joan Robinson chapter, median wages have been stagnant in America for forty years. The picture hasn’t improved with the 2009 Great Recession. Jobs occupied by those in the middle of the wage spectrum, earning roughly $13.83–21.13 per hour, made up about 60 per cent of those lost during the last recession, but just 27 per cent of those created in the recovery. And it’s not just in this recession. I recall attending a lecture by then President Bill Clinton who spoke about how many jobs had been created in the recovery after the early 1990s recession. A woman raised her hand and said, ‘Yes, Mr. President, I have three of those jobs and still can’t make ends meet.’
Economists attribute the stagnation of living standards to two main factors: globalization and ‘skill-biased technical change’. The latter refers to technological progress benefiting skilled workers. In the US and across the industrialized countries, innovations such as computerization and automation have complemented and enhanced the skills of professionals. But the same innovations have replaced jobs that used to be done by people in the middle of the skill spectrum. The growth of automation especially has dramatically changed manufacturing. The number of robots has been increasing and, although presently concentrated in sectors like automobile production, their use is spreading throughout the economy. Hence jobs at either end of the skill distribution are growing, while those in the middle are declining.
This is intertwined with globalization. As discussed in the Ricardo chapter, trade creates ‘losers’ when an economy imports what was previously made domestically. The ‘winners’ are those who work in the industries that are expanding because a country is specializing in that sector and exporting from it. As US imports of manufactured goods have increased, mid-skilled jobs in that sector have been disappearing. After growing from 13 million jobs in 1950 to peak at nearly 20 million in 1980, 2010 saw a drop to a historic low of about 11.5 million. A rebound since the recession has taken manufacturing employment up to around 12.3 million, although this is still lower than in 1950. It’s a similar pattern in the UK. Around 2.6 million people work in manufacturing, a figure that has halved since the late 1970s. Manufacturing accounts for 8 per cent of all jobs, down from a quarter in 1978.
This combination of factors has resulted in a lack of improvement in living standards for many Americans in the middle of the income distribution, and it’s a big part of the dissatisfaction with the status quo expressed in the last election.
I had my own experience of the rise of Trump when I presented a documentary for the BBC titled Linda for Congress. I went on the road to take the pulse of the electorate before the 2016 elections by embarking on a hypothetical campaign to run to become a United States congresswoman. We ‘hired’ a campaign manager, a pollster, a fundraiser, a speech writer, etc. – the whole set of political campaign staff. As an economist and broadcaster, I am familiar with politicians but it never occurred to me to want to become one.
In order to remain impartial, I ran as an Independent. That worsened my chances straight away because I didn’t have the support, financial and otherwise, or the voter base of the Democratic or Republican party. John Whitbeck, the head of the Republican Party in Virginia, said that he would ‘crush’ me if I ran against his guy.
Jokingly, I hope, because that’s where my hypothetical district was. We chose Virginia because it’s one of the handful of super-swing states in the US presidential election. It’s purple in complexion (a blend of Democrats and Republicans, so blue and red), and that was reflected in the fact that it had a Democratic governor but was represented by predominately Republican Congress members. We focused on the 5th District, since the incumbent was a Republican while the previous one had been a Democrat.
I travelled through the state to meet voters. I met a tobacco farmer in Keysville who ran a global business selling
his crops, including soybeans, to Russia, Vietnam and Brazil, among others. I met him in his impressive house on ten acres of land with its own lake and horses. As an exporter, he was supportive of open global markets, but he did not think that globalization worked for Americans. For instance, he told me that he was opposed to President Obama’s trade and immigration policies, which promoted greater openness. But, when I asked him about how he ran his farm, he told me that he wrote to his congressman to help get permission to employ his Mexican farmhands.
I experienced similar reactions at a Methodist church in Farmville and a Christmas Parade in Cumberland. The voters I met were a mix of Republicans and Democrats, among whom was a grandmother who was watching the parade on the back of a pick-up truck with her extended family. This housekeeper told me that it seemed wrong for a family of six to live on just $12 an hour. She, like most of the others I had met, were blue-collar workers whose livelihoods had been squeezed by globalization and technological change that has shrunk the number of mid-skilled, well-paid factory jobs.
And, like others, she was voting for Trump, though they were nice about my hypothetical campaign. What stuck with me was the support that Trump had, especially among those who believed that they had lost out in the past few decades. Now that Trump is president, his supporters want a bigger piece of the economic pie.
Helping the losers from globalization
The question is how best to do so. This challenge isn’t just for America but for any nation where the benefits of globalization have not been shared fairly.
The impressive growth of emerging economies in the past few decades has led to less inequality between nations as more poor countries ‘catch up’ to rich ones during an era where markets around the world have become increasingly connected through trade and investment. Globalization has helped emerging economies to grow well since they have been able to export to America and Europe while benefiting from Western investment.
So, because of the relatively faster growth of emerging economies, inequality has fallen across nations as the income gap has narrowed between developed and developing countries. Yet, global income inequality has stayed largely unchanged. That’s because within countries, inequality on average has either failed to improve significantly or, in some cases, even become worse.
Recall from the Alfred Marshall chapter how sharp the rise in inequality has been in America. Inequality in America has risen so much that the current era has been dubbed a Second Gilded Age. Although not always so stark, inequality is a problem for many nations, including Britain, where economic disparity has contributed to a backlash against globalization and even against capitalism itself. The term ‘inclusive growth’, which refers to economic growth that benefits everyone in a society, has been touted in the United Kingdom. It’s also been heard in America, which has suffered from a ‘squeezed’ middle class and stagnant wages.
Though the rise in income inequality can be partly traced to globalization, that does not suggest the remedy is to be found in trade policy alone. As detailed in the David Ricardo chapter, there are certainly distributional effects from trade – some groups will win, others will lose – even if the overall economy gains. But there are other factors at play too. It’s difficult to disentangle the effects on inequality stemming from trade from those that arise due to technological change that rewards the highly skilled more than those workers in the middle of the skill spectrum; the latter has a larger impact. Even though there are measures that can be included in trade agreements to ensure that appropriate standards for labour and environment protection are met, domestic policy measures such as redistribution and government spending on skills are more likely to be able to address directly growing inequality.
An example of a fiscal policy that can aid redistribution and economic growth is government-backed investment in both hard and soft infrastructure, as noted in the Keynes chapter. With low borrowing costs after the financial crisis, the US, British, European, Japanese and other governments don’t have to pay much to raise capital on bond markets, so it may be a good time to invest, as discussed in that chapter. Infrastructure investment could generate well-paid, middle-skilled jobs, since the sector spans manufacturing as well as the digital economy. Such targeted fiscal policy could raise incomes for certain segments of the population instead of general policies that redistribute income. Improving infrastructure and raising the income of the middle class who comprise the bulk of consumers are both likely to increase growth.
Helping the losers from globalization and addressing inequality should, then, be primarily a domestic rather than a trade issue for governments. Yet, the backlash against globalization focuses policymakers’ attention on trade agreements, which means that further opening up is under strain. But the burst of foreign direct investment that accompanied the rapid growth of international trade since the early 1990s was one of the reasons developing countries grew so well that a billion people were lifted out of extreme poverty and reduced the gap between them and rich nations.
What would our Great Economists make of all of this? Would they say globalization is in trouble?
Great Economists on the backlash against globalization
For Adam Smith and David Ricardo, pursuing free trade would be at the top of their priorities. During the era of the classical economists, which included the repeal of the Corn Laws, being an open economy helped the UK punch above its weight in the world. They would undoubtedly urge countries to focus on the benefits of globalization.
For Karl Marx, the election of Trump may be read as a populist revolt against the capitalists who have gained from globalization while the working classes have lost out. Joan Robinson, who latterly supported communist regimes in China and North Korea, may well share that sentiment. Their aims would include wanting to see a radical change in institutions, particularly around employment, to address inequities.
Consistent with his policies to reduce inequality, Alfred Marshall would urge using moderate redistribution in terms of taxes and transfers to help the losers from globalization. Given his later conversion to redistributive policies, he would probably agree that the focus should be on domestic and not mainly trade policies to address the distributional impact from globalization.
Irving Fisher would be watching for signs of major economies turning inward, which would add to the risk of repeating the 1930s. That’s when protectionist measures such as the Smoot–Hawley Act imposed high tariffs on imports into the United States, which worsened the Great Depression. Fisher would also be monitoring the impact of heightened economic uncertainty stemming from growing anti-globalization sentiment on international investors who buy government debt and determine the borrowing cost for all of us. The less well-off would be hit hardest as they are more likely to rely on loans to fund their homes, for instance.
For John Maynard Keynes, an active government which spent to help the losers from globalization would be an answer. He would advocate increasing public investment to create those middle-skilled jobs that have been hollowed out by the globalization process. He would certainly not shy away from deploying an array of domestic policies to address the backlash against globalization and boost economic growth at the same time.
His contemporary Joseph Schumpeter would concur with the need for all nations to maintain their global outlook. More open and competitive markets speed up the process of creative destruction, which is good for growth in the long run. He wrote during the depths of the Great Depression and subsequent world war, so unsurprisingly, he would value openness to the world and say that it was essential for strongly growing nations.
Friedrich Hayek and Milton Friedman would agree. They would advocate for free markets, in particular, ensuring that political events such as Trump’s America First policy and Brexit did not mean that the US and Britain turned inward and compromised the operation of markets. Hayek viewed globalization as enabling path-breaking nations to move ahead, which then allowed other countries to benefit from catch-up growt
h by imitating successful nations. They would applaud both the openness of many markets around the world and the greater interconnectedness of nations that followed.
Douglass North would urge an examination of where the current trade deals have failed to address the concerns of losers and reform them where appropriate. He may also embody the most pertinent views as to how to manage Brexit in particular. Britain leaving the EU presents a circumstance entirely different from that of a country seeking a trade agreement afresh. North’s work stresses how path dependence and history matter. For him, building on existing institutions would be vital to formulating a future relationship between the UK and the EU.
Robert Solow would stress that investment is key to stronger growth and better jobs. But international agreements on investments are few (the EU and China intend to agree one), so he would presumably support a push to set common standards on investment and liberalize or open up the services sector, for which rules and regulations are more important than tariffs.
Undoubtedly, most of the Great Economists would strongly advocate for a continuing process of liberalization and not a turn inward, given how important globalization has been for economic growth. The sentiment would be even stronger for their intellectual followers who have lived through the extraordinary period of globalization since the end of the Cold War in the early 1990s and incorporated such insights into their research. There are many who have benefited from the pioneering research of the Great Economists, but MIT’s Paul Samuelson stands out. His theories embody the synthesis of Keynesian and neoclassical ideas that characterize economics today. Samuelson helped develop the ‘neoclassical synthesis’ approach, which is the basic framework for modern macroeconomics, discussed in the Keynes chapter.