Trade wrongly blamed

No matter which way the presidential election in the United States goes and no matter who succeeds President Barack Obama in theWhite House, there will be profound consequences for the global economy from the way the contest is being fought. This will be the case in particular forAsia and within that continent, for the South Asian region. East Asian “miracle economies” in the 1980s and 1990s achieved high rates of economic growth by relying on exports to market their large surpluses of low-wage manufactures.The markets were mostly in the United States and Western Europe. China benefited the most but with a significant increase in wages in the country,production activities are moving to other Asian states. In a recent issue, thenews magazine The Economist called Vietnam the next East Asian “tiger economy.” South Asia, with its large pool of cheap labour, is next in line to benefit from international trade. But that'll be the case only if the markets in the more developed economies remain open.

Some politicians and analysts in the West blame globalisation for the relatively poor economic situation of large segments of their populations. They believe international trade causes job losses as many industrial activities were relocated to China and other emerging nations. Jobs were also lost to the arrival of millions of migrants into their countries. Many came illegally. However, facts don’t necessarily support this line of reasoning. A good part of the blame needs to be assigned to technological change.

That technological advance is the cause for rising unemployment and depressed incomes in the United States’ and European“rust belts” is best illustrated by the case of the steel industry. Since 1973,steel employment in the US has dropped 76 per cent, from 610,700 to 147,000.The change in this industry alone has resulted in the loss of almost half-a-million jobs. This has also happened in other developed nations. For instance, Tata Steel has announced its intention to close the largest steel plant it owns inBritain.

Despite plummeting employment in steel, US production is roughly where it’s been for decades, between 90 million and 120million a year. Imports were assigned the blame for loss of employment in the industry but they have remained between 20 to 25 per cent of domestic consumption. The main reason for the loss of jobs is the move by the industry from large, fully integrated mills that dot the landscape in American states such as Ohio and Pennsylvania to mini-mills. The share of the latter has increased from 15 per cent to 63 per cent. The large, vertically integrated mills processed iron ore to make steel by first converting the raw material to pig iron and then to steel. The mini-mills skip the first, relatively more labour-intensive part of the process, using arc-furnaces to make steel from scrap. A study by Allan Collard-Wexler and Jan DeLoecker reaches an important conclusion: if there were no foreign trade in steel, most of the jobs would have been lost,anyway.

This is not to say that the rise of China and the sharp increase of steel production in that country have not contributed to the problems now faced by the steel belts in the United States and Western Europe.That has not happened through increased imports but by the lowering of world price. Since 2005, global steel-making capacity has increased by 75 per cent,with China accounting for 78 per cent of the gain. China now represents 50 per cent of the world production, up from 31 per cent in 2005. However, economic slowdown in that country has reduced domestic demand and the Chinese have placed a lot of their surplus output in the international markets.

Looking at these trends, Robert J. Samuelson of   The Washington Post reached the correct conclusion in a recent article: “We are being fed a largely false narrative on globalisation,” he wrote. “All dynamic economies experience constant disruptions from technologies, shifting consumer tastes and inevitable business cycles. Some instabilities come from abroad; most – for the United States –originate at home. What matters is the country’s ability to offset the losses with new jobs and opportunities. That is the ultimate test.”

Having catered to the angry lower-income white electorate, it is not surprising that Donald Trump, the Republican candidate for the presidency, announced what  The New York Times, in an editorial, called a “scary economic blueprint.” In addition to significant tax cuts for the rich, the plan had strong isolationist orientation. Trump pledged to kill the Trans-Pacific Partnership, an agreement President Obama negotiated with 11 countries on both sides of the ocean. He also claimed that he can bring back millions of manufacturing jobs to the United States by slapping retaliatory tariffs against China for “manipulating its currency,offering illegal subsidies to its exporters and stealing intellectual property from American companies.”
But such actions would do nothing to recreate jobs that have been replaced by automation and companies could move to other countries. Mr Trump’s earlier pledge to put a 45 per cent tariff on allChinese goods would almost certainly start a trade war that would harm American industries that export goods to China. But the problems of the “rust belt” have also pulled Hillary Clinton away from liberal to protectionist economics. The world is likely to pay a heavy price for the United States’ 2016 presidential elections. South Asia, on the verge of joining the club of major trading nations, will lose out if the protectionists in the United States gain political ground.  

Published in The Express Tribune, August 15^th, 2016.

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