What would
the world look like if it continued free trade and excluded America due to
Protectionism?
The world would look fine but the United States will not.
Americans are not unmindful of these facts. A recent Gallup poll found that 58%
see trade as opportunity for job creation and only 34% see it as a job killer.
However, research in policy making indicates that the more local workers
compete with imports, the lower the number of votes will be cast for incumbent
politicians—as the recent presidential election shows. If America is to go on
gaining from trade, it must ensure it compensates those who lose out in the
process. You can oppose protectionism, or you can oppose redistribution but it
is getting harder to do on either side of the political spectrum.
In 2001 China joined the World Trade Organization (WTO).
Although this did not have any effect on tariffs, for the rest of the world a
tidal wave of Chinese imports followed. In the United States, Chinese imports
surged from 1% of GDP in 2000 to 2.7% by 2015. The best explanation for this
sudden influx is that China’s WTO membership provided investors with the
assurance that America could no longer impose higher tariffs on China at will.
In any case, low prices of imports were a bonanza for
American consumers. Excluding food and energy, prices of goods have fallen
almost every year. It has been reported that clothes now cost the same as they
did in 1986 and furnishing for a house cost as much as they did 35 years ago.
At the same time, trade created new markets for American
firms. In 1993 America sold nearly $10 billion-worth of cars and parts to
Mexico, at today’s prices thanks to NAFTA. By 2013 that had risen to $70
billion. Many American firms have become tightly integrated across the southern
border, with low-skilled work done in Mexico and more complex tasks done across
the border. Statistical trade records show that exports to China grew by almost
200% between 2005 and 2014, with agriculture, aerospace and car industries
leading the way. Some workers have benefited from rising exports jobs, because
firms that export pay more estimated at a wage-premium of 18%.
Economic theory predicts that trade, will devalue the pay of
those workers whose skills are relatively abundant overseas. In 1995 Paul
Krugman, an American economist, estimated that trade with poor countries
explained only a tenth of the growth in the skilled-worker in the 1980’s while
he and others found that technological change was more to blame than higher skills
or education premiums.
But by 2008 Mr Krugman had a change of heart, cautioning
that the steep volume of trade with China and other poor countries was probably
increasing inequality. In 2013 an updated estimate of his model showed that
trade with poor countries depressed unskilled workers’ wages by 10% in 2011, up
from 2.7% in 1979.
For instance there are fewer than 30% car making jobs in
America which has led to the false impression that America’s car industry has
outsourced most of its work force when in reality advances in manufacturing
technology such as robotics and automation are making the difference even if
China or NAFTA disappeared tomorrow, far fewer jobs would return to America’s
shores than have already left.
Today’s trade agreements are very different from NAFTA or
other agreements which have brought down tariffs, because most tariffs have
already been abolished. The United
States was going to be a prime beneficiary of TPP with only minor adjustments
to its charter as its biggest provisions concern protection for intellectual
property, liberalizing trade in services and enforcing stricter labor and
environmental standards. In addition, TPP includes restrictions on state-owned
enterprises. China will be welcomed into the agreement only if it curtails
subsidies to its para-state enterprises.
Europe presents another opportunity as the forthcoming
Transatlantic Trade and Investment Partnership will harmonize regulatory
standards across the Atlantic in industries such as pharmaceuticals, telecoms
and transport. Removing all such “non-tariff barriers” could raise America’s
GDP by up to 3%, according to many studies. The world has still to contend with
how to regulate global flows of data, here the United States, as the world’s
technology hub, has a huge stake in participating and it would be a lose for
all sides if the United States decides to pull out of international trade and
become isolated with an “America First” slogan from the Trump doctrine.
