Global Trade is Shrinking, Should We Care?

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As anyone watching and, worse, listening to the U.S. presidential election will attest, global trade is not in favor at present.

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Nor is this trend just in the U.S. Europe very nearly failed to ratify a free trade deal with unthreatening Canada last month. A deal that had been seven years in the making scraped through after considerable arm wrestling with the minor regional government of Wallonia (a German-speaking region of Belgium) which had been holding it up.

Free Trade’s Have Nots

Voters in developed nations increasingly view themselves as the victims of trade with the developing world and the reaction is to embrace more isolationist policies.

Although the benefits of free trade have been disproportionately spread, there have certainly been benefits. Even if they have not been well managed by legislators. So, growing reports that growth is not just slowing but has been in reverse should be cause for concern, as much for why as for the consequences.

A recent  New York Times article says that the volume of global trade was flat in the first quarter of 2016, then fell by 0.8% in the second quarter, while in the U.S. the total value of American imports and exports fell by more than $200 billion last year.

Through the first nine months of 2016, trade fell by an additional $470 billion. This is the first time since World War II that trade with other nations has declined during a period of economic growth.

Sluggish global economic growth is both a cause and a result of the slowdown. In better times, prosperity increased trade and trade increased prosperity, the paper says. Now the wheel is turning in the opposite direction. Reduced consumption and investment are dragging on trade, which is slowing growth. Infrastructure investment by multinational corporations declined for the third straight year in 2015, the paper said citing U.N. data.

Globalization Takes a Beating

Developed nations though are backing away from globalization, the positions of the U.S. presidential candidates are not being taken in a vacuum.

TPP looks less and less promising, as does TTIP. Britain has voted to leave the E.U., more for cultural and immigration concerns than trade, but the ever-tighter embrace of Europe has clearly caused a backlash, and Europe has been fast to threaten all kinds of protectionist responses as a result. The World Trade Organization is quoted as saying, this July, that its members had put in place more than 2,100 new restrictions on trade since 2008.

Is this just a reaction to a loss of jobs and a stagnation in lower and middle class incomes as a result of imported wage deflation? The argument goes that it is more than that. Firms would still aggressively pursue globalization opportunities if it made sense for them to do so, but the reality is the low hanging fruit has been consumed.

China and much of Southeast Asia is moving away from being the sweatshop of the world, wages are rising and economies are being deliberately steered towards more consumption of domestically produced goods.

Automation is achieving in mature economies what globalization once did in lowering production costs, but without, regrettably, creating jobs or raising lower income wages. Global growth is driving progressively less global trade, and slowing trade is adding nothing to global growth.

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Presidential candidates, rather than pandering to populist sympathies, may in practice be beating on an open door. More globalization will add little to growth and it won’t do much for raising living standards, either. Our focus should be on smarter ways to invest and plan for the future. Globalization and trade, as the panacea for profit, may have had its day.

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