No Break for Globalization

With rising unemployment, record foreclosure of homes and growing trade deficit the US economy is headed south and trade is increasingly seen as the main culprit. Eight out of 10 voters in troubled Ohio believe that international trade is taking away more jobs from the state than it creates. A nation-wide poll in November found 60 per cent of Americans agree that foreign trade was bad for the US economy, as it reduced demand for American-made goods and cost jobs at home. In 2000, only 36 per cent saw trade as a threat. This is bad news for a world that has come to count on the American market as the main engine of economic growth.

Bad economic news and the public’s fear of worse to come, fanned by politicians’ rhetoric, risk brewing up a perfect storm of protectionism. Democratic candidates are shamelessly exploiting the fearful mood of the electorate. While their Democratic colleagues in the US congress refuse to approve free trade agreements negotiated by the administration with Colombia, South Korea and Panama, candidate Barack Obama calls for renegotiating the 14-year-old North American Free Trade Agreement and Hillary Clinton wants a “time out” on free trade pacts.

Is trade the main reason for growing joblessness in the US, or, for that matter, anywhere else? The contentious question is as old as trade itself. Everyone agrees that without trade we would be growing our own food and weaving what we wear. Foreign trade grew to allow for skill specialisation and to exploit comparative advantages enjoyed by producers and countries. Importing better and cheaper goods has always affected inefficient producers and brought pains. Consumers won, economies grew, but inefficient industries lost. Is this what is happening in the US now?

Economist Robert Lawrence’s new study Blue-Collar Blues shows that a significant amount of what the US imports is no longer produced domestically and, as prices of these imports decline, consumers benefit without putting downward pressure on US wages or causing layoffs. There is no question that competitive trade has played a role in shrinking manufacturing jobs, but it is only a minor part of the structural changes taking place in the economy. Declining investment in manufacturing and productivity growth wrought by technological and management innovation played a much bigger role. In the 2001-2003 period, between 12 and 33 per cent of manufacturing jobs lost are estimated to have been due to trade. The data also lays to rest a myth about American jobs disappearing in droves to outsourcing in India or, in popular parlance, jobs being “Bangalored”. Yet, official data shows that of almost 1 million jobs

Lost in 2004, less than 10 per cent — only 73,217 to be precise — were due to outsourcing. Of those outsourced jobs, three in 10 were sent abroad and the rest went to other parts of the US. Lawrence concludes his study by noting that there is overwhelming evidence that the US has benefited from global engagements, which has helped raise US GDP by 10 per cent.

But perception is reality and the all-pervasive media stereoscopically magnifies the dark perception about trade. Election-time political rhetoric could do worse than just deepen this perception; it could lock politicians into self-fulfilling protectionist policies. Historically, the period between the two World Wars, when an anti-globalisation backlash produced a tariff war, holds serious warning. Driven by landed interests, protectionism rose in Europe to be followed by a beggar-thy-neighbour high tariff wall in the US. The desire to protect jobs by shutting down commerce led to the infamous Smoot-Hawley Act of 1930 and the Great Depression.

Alan Blinder, former presidential economic adviser, who raised the alarm in 2006 about a new Industrial Revolution embodied in outsourcing challenging America, is now worried about the growing anti-globalisation sentiment. He now calls for finding “ways to make Americans more comfortable with globalisation”. The new president, he says, would have to use the presidential bully pulpit — not to bully, but to explain why globalisation is both inevitable and more an opportunity than a threat.

Presidential hopefuls may find it politic to call for a time-out on trade agreements but the process of globalisation driven by billions of people’s desire to live better brooks no timeout. If forced shut, as in the 1930s, the results could be disastrous for all.