The Trouble With Trade

If you’re an American over age 50 or so, think about the word imported as people used it in our youth. It connoted one of two things: either something super-expensive you couldn’t afford, or something cheap you didn’t want. No one wanted a Japanese car in the 1970s. They were unreliable and uncomfortable. Everyone wanted GM and Ford for their American quality workmanship. I loved my 1966 yellow Mustang and lusted for a Corvette. Later I had a screaming muscle car (a Mercury Cougar). A Datsun? A Honda? For whatever reason? Remember, I was buying gasoline for $0.35/gallon in 1969.

Now, of course, Japanese vehicles are every bit as good as what Detroit makes. I actually bought one and like it better than the very similar American car that I had before it. Japanese manufacturers have even moved some production here. Meanwhile Detroit imports some parts from outside the US. So which cars are really “American” now? It’s getting harder to say.

In one sense, this is “free trade” delivering exactly what it is supposed to: better quality at better prices. The theory was that these lower prices, along with new and higher-paying job opportunities, would compensate for jobs lost to cross-border competition.

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Has it worked out that way? For some people, yes. Think about your college friends from 30 years ago. Most of them are doing all right, aren’t they? It’s easy to forget they were your college friends. The education they got plus the network they gained in the process gave them a leg up. Whether or not a degree was actually required for a position, these advantages moved them to the front of the line. But there are a whole lot of people who didn’t go to college and don’t have those credentials or contacts. Many of them are struggling.

There’s no doubt globalization worked. NAFTA has been trashed by the current political process as an example of a bad deal. But net-net, the data clearly demonstrates that NAFTA has been a great benefit to the United States and to our two partners. The problem is, the benefits of NAFTA were unevenly distributed. There is no doubt it didn’t work for everyone. This isn’t an either/or issue. I’m second to no one in defending free trade – but I also see the reality, which is that globalization has had a dark side.

I will argue in a few paragraphs that the dark side of globalization, at least in terms of US (or other developed-country) employment income, is getting ready to brighten. That might be good news, but other forces are at work that will perpetuate the income divide.

Second Thoughts on Free Trade
I’m not the only ardent free trader who is having second thoughts. Stephen Roach, formerly chief economist at Morgan Stanley, has a new Project Syndicate article called “The Globalization Disconnect.” I recommend you read the whole thing, as he goes into some background that I will skip here. I want to go straight to the main point. Here’s Roach:

Recent trends in global trade are also flashing warning signs. According to the International Monetary Fund, annual growth in the volume of world trade has averaged just 3% over the 2009–2016 period – half the 6% rate from 1980 to 2008. This trend reflects not only the Great Recession, but also an unusually anemic recovery. With world trade shifting to a decidedly lower trajectory, political resistance to globalization has only intensified.

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as America’s infamous Smoot-Hawley Tariff Act of 1930.

But the stakes may be greater if today’s more powerful globalization were to meet a similar fate. In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services.

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.