Public scepticism about the benefits of trade has been rising and this has fueled protectionist sentiment, especially in some advanced economies. For example, US President Trump in his inaugural address stated that ‘protection will lead to great prosperity and strength and his campaign promised to turn the tide on globalization. So far it is unclear how US trade policy will change. However, developments to date suggest that maintenance of the status quo is unlikely.
Some optimistic commentators argue there will be shifts in emphasis, such as favoring bilateral over plurilateral trade agreements and a more forceful pursuit of alleged rule violations within the established international trade system. Others fear transformational changes that risk unwinding the significant reductions in trade barriers achieved over the past 50 years. They note that while applied tariffs have declined considerably; they could easily be raised.
Regardless of the degree of change in the US stance on trade, the risk of new restrictive trade and investment policies spreading more widely is real. In the years since the Global Financial Crisis (GFC), the number of trade‑limiting measures implemented by G20 countries has more than quadrupled, and these new measures now cover about 5 per cent of world imports (WTO 2016). Recently, for the first time since the GFC, G20 countries backed away from a commitment to reject all forms of protectionism. And in the last few years, growth in the volume of world trade (which had quickly recovered from a GFC‑induced dip), has remained sluggish, with the combined share of exports and imports in global GDP falling for several years running.
The rise in support for protectionist policies reflects a distrust in globalization. Although many people in developed countries believe that trade is beneficial, they are also aware that it creates winners and losers. A view that trade has significant social costs and tends to increase inequality is widely shared in developed countries. However, increases in inequality primarily reflect other disruptions, notably technological innovations. Trade is invariably the scapegoat. Open markets have lowered prices — an outcome that is favourable to lower income households.
Trade does impose adjustment costs on an economy. Increased opportunities to export lead some firms to expand, while increased competition from imports drives other firms out of business or compels them to become more efficient. In the process, some new jobs are created, and some existing jobs are destroyed. The smoother this adjustment process, the greater the benefits from trade and the smaller the social costs. Government policies play an important role in this process, and in the way that the benefits of trade are distributed.
There have been other changes in the global trade environment in recent years. First, the number of bilateral and regional trade agreements has expanded rapidly and so has their scope. They now cover a vast array of policy areas, including competition policy, intellectual property rights protection, customs regulations, electronic‑commerce, standards and many more. Meanwhile, progress in broad multilateral negotiations (the Doha Round) is effectively at a standstill. On a more optimistic note, advances on sectoral agreements negotiated through the World Trade Organization system have gained some momentum.
A second, and perhaps the most significant, development in international trade is the growing importance of global supply (or value) chains, where services, components and raw materials are traded across countries multiple times, assembled and then dispatched to their final customers. Lower barriers to trade and investment, together with reductions in transport and communication costs and logistical innovations have contributed to an increasingly integrated world economy. While the internationalization and specialization of production according to comparative advantage has been advancing steadily for many years, only recently have new statistics allowed us to measure its importance. Development of these global supply chains has contributed to increased trade in services and foreign direct investment — notable for their relatively high propensity for employment.
Trump on Trade
Donald Trump’s presidential campaign and his electoral victory in 2016 foreshadowed a fundamental shift in the United States’ trade policy. His election on the back of a promise to ‘put America first’ and ‘bring back manufacturing jobs’ was coupled with promises of measures that would be a departure from US openness and leadership in the international trading system. For instance, in his inaugural address, Trump declared:
Every decision on trade … will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs … We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams. (Trump 2017d)
President Trump has stated that trade deficits cost American jobs, especially in the manufacturing sector, and are largely the result of the unfair trade practices of other countries (Trump 2017c).
Chinese and Mexican trade practices drew much criticism during Donald Trump’s presidential campaign, when he promised a 45 per cent tariff on Chinese imports and a 35 per cent tariff on at least some Mexican imports, as well as ‘tearing up’ or renegotiating the North American Free Trade Agreement.
He was also critical of the Trans‑Pacific Partnership, an agreement involving Australia and other Pacific rim countries, and he withdrew the United States from the agreement three days after his inauguration.