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The case for Trump’s de-globalization

Globalization has produced less benefit than its supporters claimed, and at a higher cost
Donald Trump’s levies are not unprecedented – Ronald Reagan and George W. Bush took similar actions. REUTERS/Joshua Roberts

 By Martin Hutchinson

POUGHKEEPSIE (Reuters Breakingviews) - You wouldn’t know it from the chorus of critics of President Donald Trump’s tariffs on steel and aluminum imports, but there is a case for de-globalization. Trump’s levies are not unprecedented – Ronald Reagan and George W. Bush took similar actions. The naysayers fear the globalization project that began with the dismantling of the Soviet Union in 1991 is falling apart, and that this is by definition damaging. It’s not that simple.

The theoretical case for free trade, which is simple and clear-cut, was first expounded by Adam Smith and David Ricardo. By reducing barriers to the movement of goods and people, every product is produced in the location with the greatest comparative advantage, while workers move to where they are most valuable. Thereby, global output is optimized.

Like all economic models, it rests on assumptions not wholly valid in reality. It ignores the revenue generated by tariffs, so all else being equal a free-trade policy imposes additional costs on a country’s citizens from higher income taxes and other levies. It assumes a world in which the global production structure is stable, yet in the real world of fluctuating fiat currencies, comparative advantage is forever shifting so any one structure is only fleetingly optimal. And in life, people don’t move around so easily.

Most important, it assumes no government interference in trade. Countries are free to impose regulations and restrictions but harm their competitiveness and economic well-being by doing so. Just as tariffs are economically damaging in this system, so too are regulations limiting imports. After all, a prohibition against an import makes its price infinite, a far bigger distortion than the largest import duty.

The period of globalization from 1991 to 2016 turned out dramatically different from the appealing blueprint of Smith and Ricardo. For one thing, after the Uruguay Round of trade talks was signed in 1994, no further global free-trade deals were completed. Instead, the world indulged in an orgy of bilateral and regional treaties. Even in theory, a planet traversed by a cat’s cradle of arrangements each including only a subset of countries is not a free-trade world. Flows of goods and services are diverted in numerous ways and are nowhere near optimized.

Moreover, these bilateral and regional deals included strictures on labour standards, environmental activities and intellectual property. Such requirements tend to eliminate comparative advantage, not reap the benefits of it. Take patents and copyrights. Together with the proliferation of patented pharmaceutical products, there’s now a dense tangle of intellectual-property requirements. Via recent trade treaties in which the United States has been involved, the country’s arguably excessive IP protections have been extended to its trading partners.

For example, in the Trans-Pacific Partnership negotiations, abandoned last year by Trump, the benefits to the United States came in the form of US$79 billion of patent and copyright fees, while U.S. manufacturing suffered a loss of US$44 billion, according to Congressional Budget Office figures. Intellectual property deserves reasonable protection, but enforcing U.S. rules adds to trade friction rather than easing it.

Another way in which the recent globalization wave differed from the classical free-trade model was the proliferation of global regulations. Red tape in a single country hurts mostly that country’s economy; competition forces the removal of many of the most damaging impositions. Global regulation is a different matter. The benefits of free trade can be swamped by the heavy costs of global rules, applied without proper accountability.

Trade that requires a World Trade Organization to enforce it is not really free, and the existence of the World Bank, the International Monetary Fund, the Organisation for Economic Co-operation and Development and other international quangos counts against the economic rationale for globalization.

Globalization also raises new questions in the internet era. The economies of scale in collecting information have led to an aggregation of market power among a very few huge, mostly American, technology companies, which between them control personal data on a large percentage of the world’s inhabitants. National regulations may serve to break up this cartel. If the European Union, China, Japan and other countries impose balkanized rules, producing a so-called “splinternet,” the behemoths will operate at a disadvantage outside their home markets.

If the mainstream consensus on climate change – to take another case where Trump is the outlier – is to promote a global regulatory regime, for data privacy the mood may now be shifting the other way. If nothing else, these conflicting trends show the debate between globalists and protectionists is far more complex than such black-and-white designations suggest.

A world in which global institutions hold less sway and in which moderate tariff barriers return has several advantages. It will make global trade flows more stable, removing artificial short-term surges caused by currency volatility. It will prevent trade treaties that impose spurious intellectual-property and related costs on consumers. It will reduce costs of the global institutions themselves. Perhaps some goods will become more expensive – it’s hard to know, given the web of bilateral and multilateral deals at present – but offsetting that, tariffs will produce income for governments, narrowing budget deficits or allowing tax cuts elsewhere.

The economic recovery from the financial crisis a decade ago has surprised economists with its sluggishness. One factor may be that globalization has produced less benefit than its supporters claimed, and at a higher cost. While not ignoring the genuine gains available from careful application of the Smith-Ricardo model, the partial reversal of bureaucratic and politically driven globalization offers benefits, too.

Martin Hutchinson is a former investment banker, journalist and Breakingviews columnist who writes a weekly column on economics and finance, “The Bear’s Lair,” and contributes to various publications. Martin is the author of “Great Conservatives” (Academica Press, 2004) and, with Kevin Dowd, of “Alchemists of Loss” (Wiley, 2010).

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