Populism and Trade

The U.S. tackles the wrong culprit and spoils its world power status

By Jean-Luc Burlone

People are afraid because they have no jobs or because they do not understand what is happening around them. From the right or from the left, populism appeals to emotions. Fear, frustration and longing for the past are aroused when people’s way of life suffers from rapid changes set in motion by disrupting factors. International trade, technology and immigration are such factors that appear to have adversely affected labour markets for years. Jobs were lost and inequality rose.

Unfortunately, the situation of those most affected was neither sufficiently mitigated by social policies nor timely explained by education to maintain an efficient social cohesion. The democratic elite clearly lacked foresight. Hence, Britain and America woke up, stunned by the power of populism as people expressed their dissatisfaction through the voting process.

Populists’ ignorance of trade is extraordinary. They blame international trade for trade deficits and job loss, though it has very little to do with both. A country marks a trade deficit when it spends more than it earns because foreign investments fill the lack of domestic saving or investment. Unlike a business, a country deficit has a positive correlation with its economic growth and its employment level; when the deficit increases employment increases and vice versa. Though it may displace jobs, international trade does not create major unemployment.

Populists’ ignorance of trade is extraordinary. They blame international trade for trade deficits and job loss, though it has very little to do with both.

But technology clearly does. A recent study by the Centre for Business and Economic Research at Ball State University estimates that more than 85% (5.6 million) of manufacturing jobs in the United States were lost between 2000 and 2010 due to technology (mainly automation). That said, the Peterson Institute for International Economics recognizes that international trade has a small negative effect on wages and represents 10% of the total increase in inequality between 2000 to 2008.

The undisputed truth is that global trade has increased the GDP of trading countries and the welfare of their people by reducing substantially the cost of goods and services for all. Even more important, trade has fostered the emergence of a middle class in developing countries. China has extracted from poverty 400 million Chinese and counting.

Alike, according to the Mexico Institute at the Woodrow Wilson Centre for Scholars, the Mexican middle class rose to over 14.6 million households (47% of total Mexican households) and was set to rise further, reaching 18.4 million by 2030. Notwithstanding the reduction of poverty – a noble achievement in itself – the emergence of a middle class creates a new consumer market that devotes close to half of its disposable income to discretionary goods and services. A gift to developed countries with an aging population that need foreign middle class people to fuel their economy.

‘The undisputed truth is that global trade has increased the GDP of trading countries and the welfare of their people by reducing substantially the cost of goods and services for all.’

International trade agreements aim to level the playing field for all its signatories. The decried TPP, the latest and most demanding agreement, had actually eliminated 18,000 tariffs and hundreds of non-tariff barriers. Labour, environmental and wildlife protection, free internet, free associations, property rights, transparent governance, etc, were on the table for all twelve countries to agree upon. Interestingly, TPP had renegotiated NAFTA. With TPP, a car maker in the United States could have reached 90 million Vietnamese without tariffs. Without TPP, Vietnam will slap a 70% tax on American cars. Any sensible car maker, looking to reach a Vietnamese market growing at 6% per year, will now build a plant and hire workers in Vietnam rather than in the United States.

Besides its economic feat, the TPP was a key element of American rebalancing strategy in South East Asia, others being diplomacy and military. To meet American demands, large Asian countries, such as Vietnam and Japan, amended their legislation and undertook politically sensitive reforms. They expected the Unites States to be involved in the region and saw the trade agreement as the economic means to curb China’s predominance. The United States’ withdrawal will have profound and lasting effects. It is worth mentioning that an estimated three billion people will form a middle class in the Pacific region by 2030. Donald Trump’s intention to care for the ‘forgotten’ is sincere and laudable but his inconsiderate actions towards international trade is counter productive. It will hurt the very same people he pledged to help.

‘… large Asian countries, such as Vietnam and Japan… saw the trade agreement as the economic means to curb China’s predominance. The United States’ withdrawal will have profound and lasting effects.’

China has social tensions for similar reasons. Chinese workers blame globalisation, technology and migration from the countryside (2.8 million) for rising inequalities and lost jobs. The structural shift from a manufacturing to a service economy has enticed some garment manufacturers to move to cheaper locations in Asia, while efforts of steel and mining state-owned-enterprises to reduce overcapacity are threatening millions of jobs. All in all, it adds to job insecurity and uneasiness among millions of blue-collar workers.

The China Labour Bulletin has on record an unprecedented 2,271 demonstrations by angry workers from all industries in the first eleven months of 2016. Without a free press and free elections to vent their frustration, angry workers are of concern to their leaders but not a threat that may topple them. Hence, Xi Jinping can stand tall on the world stage, forward his trade policies in Asia and South America and seat his own people at the Politburo Standing Committee amid the National Communist Congress. His authority asserted, he will strive to expand China’s influence. Xi Jinping is already replacing the jilted TPP by the Regional Comprehensive Economic Partnership (RCEP) that encompasses trading activities of sixteen Asian countries. A thoughtless gesture from America… a soft takeover by China.

An unavoidable question arises as the United States politics turn inward: What role will the US play in the international system in the future? And its corollary: How will the superpower role be transferred to China?

Read Jean-Luc Burlone’s article Populism and Technology.

Image: Roscoe Myrick via StockPholio.net