Global: Derailing the Global Trade Engine
Stephen Roach (New York) Nov 24, 2003
Cross-border trade flows are the glue of globalization. They are the means by which the world creates ever-virtuous circles of prosperity. The theory is simple: As poor countries enter the global supply chain, their increasingly prosperous workers eventually become consumers. Supply creates new demand, and the world is a net winner. While it’s hard to argue with this theory, today’s world is having an increasingly difficult time in putting this theory into practice. The global trade engine is at risk of being derailed.
That would come as a rough jolt to the world economy. Indeed, there can be no mistaking the increasingly important role global trade has played in driving world economic growth in recent years. By our estimates global trade in goods and services now amounts to 25% of world GDP, up dramatically from the 19% share just ten years ago and an 11% portion in 1970. Over the past 17 years, 1987 to 2003, surging global trade has accounted for fully 33% of the cumulative increase in world GDP. By contrast, over the 1974-86 period, trade accounted for about 17% of the cumulative increase in world GDP. In other words, since the late 1980s there has been a virtual doubling of the role that trade has played in driving the global GDP growth dynamic. There can be no greater testament to the power of globalization.
Yet there are worrisome signs that the trade dynamic is now going the other way. After surging by a record 13% in 2000, global trade has entered one of its worst slumps in modern experience -- average gains of just 2% over the 2001-03 period. That’s the weakest performance since the early 1980s and only a third of what we estimate to be a 6.5% long-term trend in global trade growth. Coming in the context of one of the mildest global recessions in recent history, this shortfall is all the more disconcerting. It suggests that there may be new forces coming into play that transcend the normal pressures of the business cycle.
What worries me most is that the recent shortfall in global trade may be a warning shot of even tougher times ahead. Two key forces are at work:
The first is a new and powerful global labor arbitrage that has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world. Enabled by the Internet and the maturation of vast offshore outsourcing platforms in goods and services alike, labor has become more “fungible” than ever. In a world without pricing leverage, the unrelenting push for cost control gives a sudden urgency to this cross-border arbitrage. The outcome is a new and potentially lasting bias toward jobless recoveries in the high-wage developed world. That brings the second major force into play -- a political backlash against the trade liberalization that allows such cross-border job shifts to occur. It is the politics of this trend that disturb me the most as I peer into the future.
Insecure and scared workers tend take out their fears and frustrations on incumbent politicians. To the extent that the IT-enabled global labor arbitrage represents a new and lasting threat to job security in the developed world, this political backlash is understandable -- albeit deplorable. This backlash has now taken on a life of its own -- giving rise to what I believe is a “perfect storm” in global trade policy. This storm is an outgrowth of five major setbacks on the global trade front -- the first and most worrisome being the breakdown in the WTO ministerial negotiations last September in Cancun, Mexico. Tensions between poor developing countries and the wealthy industrial world came out in the open on such long-standing issues of agricultural subsidies, competitiveness and investment rules, and financial market transparency. This failure is on a par with the WTO fiasco in Seattle in 1999 and all but rules out successful completion of the so-called Doha Round of multilateral trade liberalization originally slated for 2004.
The second is the mounting risk of a global trade war over steel. Motivated largely by domestic political considerations, the Bush administration raised tariffs on selected steel imports by up to 30% in March 2002, drawing justification from the WTO's so-called Safeguard Agreement. The WTO has since found these measures to be illegal and has given the United States until December 15 to rescind them. The European Union has warned of the imposition of $2.2 billion in retaliatory measures should that not occur. Others, including most recently, Japan and Norway, have announced that they will follow suit.
Third, China bashing has taken an ominous turn for the worse. The Japanese fired the first rhetorical salvos in this trade battle well over a year ago, accusing China of exporting deflation and hollowing out the Japanese economy. America has taken the blame game to a new level. The Bush administration has just imposed quotas on imports of selected Chinese textile products, and legislation has been introduced in both houses of the Congress that would impose huge tariffs on all Chinese imports into the US -- 27.5% in the case of the Senate version and most likely even a higher tax in the House version. The most worrisome aspect of these legislative threats is the broad bipartisan and ideological support they enjoy in the Congress. Moreover, there is no effective political counterweight to America’s onslaught of China bashing. The White House has put its protectionist cards on the table by actions on steel and Chinese textiles. Nor have trade-intensive US multinationals spoken up -- hardly surprising in this post-Enron climate of political vindictiveness.
Fourth, trans-Atlantic trade tensions between the United States and Europe seem to have taken on a life of their own. It’s not just steel. It’s also disputes over genetically modified beef and other food products, agricultural subsidies, and a broad array of services. Particularly contentious is America’s Foreign Sales Corporation tax law (FSC), some $4-5 billion annually of export tax subsidies. The WTO has also ruled the FSC arrangements illegal, granting the EU up to $4 billion in remedial damages if these measures are not lifted by the start of 2004. Cross-border US-European trade currently amounts to some US$400 billion annually, hardly a trivial mater. With Europe and the US both facing intensified structural pressures on the job front, one of the pillars of the world trading system is at risk of crumbling.
Fifth, a darkening outlook for multilateral trade breakthroughs is being compounded by deteriorating prospects for less ambitious bilateral and regional agreements. The just-concluded negotiations in Miami for the Free Trade Association of the Americas are a case in point. The meetings adjourned with nothing of great substance accomplished other than an agreement to meet again next year. The same snail-like progress has been evident with respect to the US-Central America Free Trade Agreement, as well as one with Australia. In a jobless recovery that is now moving into the full force of the election cycle, the US Congress seems to have little appetite for either the large or the small milestones on the road to trade liberalization.
We all know the dark lessons of protectionism. The odds of falling into that abyss remain low, in my view. But support at the other end of the spectrum -- accelerated trade liberalization -- is slipping rapidly. The lasting impacts of the global labor arbitrage are striking worrisome chords in the body politic of the rich, developed world. That poses a serious challenge to the trade-led strain of global growth that has been such a powerful force is shaping the global economy since the late 1980s.
Fear lurks in all of history’s darkest corners. Gibbons put it best in the Decline and Fall of the Roman Empire: “There exists in human nature a strong propensity to depreciate the advantages, and to magnify the evils, of the present times.” To me, this encapsulates the resistance to globalization. As these pressures mount, we can only hope -- perhaps demand -- that opportunistic politicians come to their senses. America’s role in sparking the backlash to trade liberalization is particularly disconcerting. As the world’s unquestioned economic and military superpower, the United States is in real danger of squandering its leadership in the arena of globalization. Perhaps I’m pushing Gibbons too hard on this point, but to me this dark side of America has some striking similarities with his description of Rome at its pinnacle, “…when the uniform government of the Romans, introduced a slow and secret poison into the vitals of the empire. The minds of men were gradually reduced to the same level, the fire of genius was extinguished, and even the military spirit evaporated.” |
