International trade wars: A peril for globalization
Globalization has been variously defined as “the world is flat” (Thomas L. Friedman) or the world shrinking to a “global village” (Marshall McLuhan). It is true that humanity is today more closely integrated and aware of the ways of life in different continents and countries than at any point of time in its history. We live at a time when we can physically traverse the globe in a matter of hours and news from one part of the globe can reach us in mere seconds. Our lives are today more interconnected than ever.
Throughout history, as political boundaries were drawn and redrawn, one thing that continued unabated was trade. Overland and maritime trade were the primary media in which goods, ideas, and people travelled from one part of the world to the other. Humanity intuitively knew Gregory Mankiw’s fifth principle of economics that trade can make everyone better off. In fact, India was the center of world trade for many decades before it was colonized, and perhaps as a consequence of this large trade once accounted for almost 25% of the world’s GDP. Countries that have been the biggest economic powers have also been the biggest traders in the global arena (think of pre 19th century India, post-World War USA, Japan and the East Asian Tigers in 1950s and 1960s, and China more recently). The economies that were most engaged in trade were also the ones that enjoyed the highest living standards.
In the absence of international trade, economies would be forced to rely on domestic resources alone and no country in the world is self-sufficient in terms of resources. Domestic production of every known good and service is not only inefficient, (as import substitution measures in a lot of socialist countries have shown) but impossible. International trade is, therefore, a necessity and an efficiency multiplier, improving the quality of life globally, and weed out inefficiencies of domestic firms which now must be globally competitive in order to survive in the market. A rule-based international regime of trade starting with the GATT (General Agreement of Tariffs and Trade) post the second world war and eventually the WTO (World Trade Organization) has integrated humanity like never before. This has ushered in an era of unparalleled prosperity around the world. This rise in prosperity has mirrored the openness of economies, measured by their traded value as a percentage of GDP, which has gone up for the world as a whole from merely 25% in 1960 to 60% as of 2019.
A well-regulated market economy weeds out inefficiencies through a natural process of the “survival of the fittest”. Only the most efficient firms are expected to survive in such a market — which means fewer unnecessary costs or resource wastage and a focus on continuous improvement in operations and the optimal use of the factors of production. Whichever firms produce goods in the most efficient manner will be rewarded by the market. This same argument underlies international trade wherein firms are replaced by countries. Adam Smith, in his celebrated book “An Inquiry into the Nature and Causes of the Wealth of Nations”, published in 1776 talks of division of labor — a system where each individual is focused on one particular aspect of the production process thereby generating far higher output than when one individual handles the entire process of production end-to-end. International trade can be viewed as the division of labor among nation states! For example, a country with low cost labor takes up manufacturing of textiles, footwear etc., a strategy repeated time and again to boost exports by countries ranging from China to India to Vietnam and Bangladesh. Each country is endowed with its own unique set of natural and human resources leading to unique strategic advantages. In principle, international trade between countries optimally producing goods and services using its resource endowment should increase prosperity (measured in terms of goods and services available for consumption) for everyone around the globe. In reality as well, international trade has made life rich in terms of goods and services that maybe exported to or imported from any corner of the world. Globalization, seen as the free flow of goods, services and ideas, in essence has been as old as humanity and its acceleration over the post-World War II decades have only helped to enhance material prosperity around the globe.
Institutions and mechanisms like GATT, WTO, the Permanent Court of Arbitration and the like are therefore necessary to uphold international trade and thereby the material prosperity of all of humanity. Anything that detrimentally affects trade would also directly impact the amount and choice of goods and services available to people. Some countries do raise protectionist barriers in order to protect their domestic industry, especially in certain critical sectors such as say iron and steel — where for reasons of national security it may be considered imperative to have a strong domestic production of such goods. While it is true that all countries should strive to uphold free and fair international trade, it generally becomes the role of the big and powerful countries to see that this happens. Moreover, such countries have more at stake if global trade gets disrupted. Big economies like the United States of America, China, India, the European Union and Japan should therefore be flag-bearers of free and fair international trade. Protectionism may be a good strategy in the short-term and may perhaps be justified in certain sectors on the grounds of national security, but in the long run free and fair trade between countries is the ideal world forward. This is in the interest of all countries — big and small.
Unfortunately, in recent years, we see that the behavior of the large countries who benefit the most from international trade have been at loggerheads with each other. Case in point being the ugly trade wars between the two largest economies of the world — the United States of America and China. Both countries are racing with each other to slap tariff and other non-tariff barriers on one another. This has a crippling effect on global supply chains which are highly sensitive to even slight changes in taxation/tariff regimes. It causes uncertainty and dampens investor sentiment leading to lower global growth rates by virtue of poor investor sentiment. It turns the clock back on the progress and efficiencies that a globalized world has given us, not just in the supply chain of goods and services but also in ideas and culture. Countries that rely a lot on exports will no doubt be particularly hard-hit by protectionist policies across the globe, especially in the big consumer markets of the USA and Europe. But economics, since it is also the science of the unseen effects, tells us that this is not good news. In this case, the unseen effect will be the general increase price levels due to the higher cost of production and hence on a per capita basis there are lower amounts of goods and services available for consumption. Thus while protectionist barriers like a wall (against immigrants), hiked tariff announcements, and sanctions against particular countries and companies (Huawei) may be good political tools and may sometimes even be justified on grounds of national security and sovereignty, the average consumer might unknowingly be forfeiting some of his material welfare in the process.
To summarize, we live in interesting times — the world has never been so well integrated at any point in history and going by WTO data on global trade, while there have always been cycles of protectionism and openness, the fundamental direction of the human race has been towards greater globalization. Thus, it will not be too dare-devilish for one to predict that while the international trade wars are indeed a concerning development, globalization seems too entrenched to be reversed and the peril it is in today is likely to be short-lived.
