Neither overselling nor scare tactics help international trade

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It occurred to me that supporters of globalization and socialism seem to use the same line and manner of argumentation, in that both overpromise on the benefits their adhered to systems allegedly bring. But doing so led to negative consequences.

For socialism, the same need not be discussed at length: the failed economies, the poverty of peoples, ruined lives.

For globalization (and international trade), the negative consequence is much more devastating: a mistrust of a system that could lift the lives of millions out of poverty, create dynamic societies, and better integrate the world.

Most of us drilled in the world of international trade know the basics:

That global trade increased by 150% between 2000 and 2014 (representing an upsurge of $4.8 trillion to $12.2 trillion); ASEAN caused, within less than a decade, to cut poverty from 14% to less than 3%; we know poorer countries that traded saw per individual incomes rise 3.6% higher than closed economies; and that a 1995 study by Jeffrey Sachs and Andrew Warner found that poor countries with more open trade grew six times faster than those resorting to protectionism.

The problem, as Daniel Ikenson (“Trade on Trial, Again”; June 2016) points out, is that “the case for free trade is not obvious. The benefits of trade are dispersed and accrue over time, while the adjustment costs tend to be concentrated and immediate. To synthesize Schumpeter and Bastiat, the ‘destruction’ caused by trade is ‘seen,’ while the ‘creation’ of its benefits goes ‘unseen.’”

This is not helped by international trade advocates, with their aforementioned penchant of magnifying trade’s benefits while ignoring the quite foreseeable downsides. Of the latter, one is inequality:

“There is growing evidence challenging the theoretical prediction that international trade positively impacts income distribution. x x x The impact of increased trade or trade liberalization on within-country inequalities is mixed (ADB Institute, International Trade and Inequality, February 2017).”

The point is that trade is not the panacea that global or local government bureaucrats and academics make it out to be. That, as the ADB Institute realized, inequalities there will be and that “governments need to implement appropriate policies to deal with the inequalities,” such as measures addressing “labor market conditions, inflow of capital, and policy reforms.”

Unfortunately, these bureaucrats and academics choose instead to double down on the “pro-globalization you’re smart; you’re pro-country sovereignty, you’re dumb” rhetoric.

They also dabbled in that long cherished socialist tactic of fear-mongering: turn away from trade and globalization, and the social and development costs will be devastating.

Which goes to show that a PhD diluted by the global cocktail circuit is worth less than McDonald’s coupon.

The first point I’ve addressed in previous articles: there is no inconsistency with the desire of strengthening country sovereignty (including bolstering one’s national borders) with globalization and trade. In fact, the former should actually help in advancing the latter.

As Paul Carrese and Michael Doran wrote: “Only political institutions rooted in national identity permit the civic engagement required for a thriving society.” And thriving societies are what make for a healthy multilateral trading system.

As to the second point, the problem is inconsistency (another similarity with socialistic argumentation): many of the poor did not benefit from international trade because the local government policies were not in place to allow all people to benefit from it.

Another argument goes like this: what hurt people’s employment and incomes is not international trade or the opening of the economy but rather the increasing dominance of technology in our economic lives.

But both arguments make no sense. Or, rather, begs the question further: because if either or both internal government policies or technology are that which prevented people from fully benefiting from trade, then retreating from trade itself won’t significantly matter.

Yet we know that protectionism will have a profound effect on the poorest. Research by Fajgelbaum and Khandelwal (2015) show that closing off trade will cause the richest 10% to suffer a 28% reduction of purchasing power, while the bottom 10% a 63% loss.

The point here is not to bombard people, specially the poor, with false dichotomies. There is much to be said for protecting and strengthening local institutions. There is nothing wrong or contradictory with encouraging people to care for “country first,” yet exhorting them to actively engage with the global trading system.

The foregoing is important as it then leads to this undeniable fact: international trade is about free competition and correcting imbalances to trade.

International trade is not a welfare institution.

Countries simply need to level up, not be dependent on others, and increase their competitiveness.

Where welfare and self-entitlement programs damage economies and lead to poverty at the national level, so should countries realize that the same consequences face them at the international level.

Making countries believe that they can remain inept domestically because global trade will lift them out of their hole will simply not help.

 

Jemy Gatdula is a Senior Fellow of the Philippine Council for Foreign Relations and a Philippine Judicial Academy law lecturer for constitutional philosophy and jurisprudence.

jemygatdula@yahoo.com

www.jemygatdula.blogspot.com

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Twitter @jemygatdula



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