President Trump blames countries with large current account surpluses for stealing jobs from the United States. For this reason, he wants to negotiate new, more favourable trade agreements with the country’s largest debtors. This also influences the trade with China.
Economists usually favour free trade, the specialisation of economies in their most productive industries, and mutual bartering, because these have been shown to increase the total economy without causing the share of any particular country to become poorer. In reality, the benefits of free trade within a particular economy are often distributed very unevenly.
Citizens with little education and skills are the losers: the general decrease in prices and the slower inflation, caused by globalisation, do not usually compensate an individual for the loss of a job during that individual’s entire lifetime if the individual has no possibility of finding employment again. In our era of globalisation, finding new employment requires that the individual learn new skills or even a new profession. It would be smart of societies to support this. If the exchange of services were not as regulated as are goods, we might have an even larger number of people disappointed with globalisation, and the proponents of protectionism might be even more numerous than in the current wave.
Is it therefore possible to cancel globalisation? Can we change our direction without seriously harming world economy? Well, we have tried.
We can find an analogue to the issues above from the 1930s when the industrial countries were suffering from the Great Depression and resorted to the policy of beggar-thy-neighbour, which means they repeatedly devalued their currencies and set barriers to trade in an attempt to improve their own economies at the cost of all others.
The self-interest of one country triggered counter-measures by others, resulting in a cascade of devaluations, import duties, export subsidies, trade quotas and other barriers. World trade decreased and the depression did not give way to new prosperity because these measures did not cause the overall demand to grow. It is no coincidence that common institutions such as the IMF, GATT and WTO were established after the Second World War to see that the world would not again be driven to such short-sighted and, in the end, destructive policies.
It is worrying that President Trump has already declared that his trade policy will bypass the WTO.
Will Mr. Trump succeed in bringing jobs back? Not likely. He probably will not resort to directly threatening large individual countries with trade policy measures. His means can be expected to be more discreet. For example, he may question whether or not Japan and Europe are paying enough for their guarantee of safety against China and Russia.
With its global economical and political hegemonic powers, China is the United States’ largest competitor. China is unlikely to be intimidated by Mr. Trump, because if China voluntarily accepted trade measures by the U. S., unfavourable to China, the Chinese leaders would appear weak. The United States will have to battle the issue in some other way. One possible way is to limit, on grounds of national security, the right of Chinese companies such as Huawei and ZTE to sell telecommunications systems in the territory of the United States.
However, in the long run, such barriers to trade may be like fighting against windmills, because Chinese enterprises are rising fast in the industrial value chain and establishing new technologies. In fact, the danger might be that Mr. Trump would cause a new wave of outsourcing which would transfer high-tech skills and high-value-added work from the United States to China.
It is difficult to believe that Mr. Trump would succeed in persuading large economies to bend under his will. For small countries, however, the situation may be different, and they may have to become the payers of Mr. Trump’s election pledges, accepting weaker terms and conditions for their trade with the United States in their bilateral negotiations with the United States. It would show common sense to remember the lessons of history. The trade war in the 1930s was not finally won by any party, and its consequences for the world economy were tragic.
Chief Economist, Handelsbanken Finland