Trade spurs growth

 Economists pleading for free trade by the United States may find this a good time to pray to Jude, the patron saint of lost causes.  Of all economists, probably 99.9% believe in free trade. The other .1% work for the White House. Last week, President Donald Trump said he would slap tariffs on $200 billion of goods exported by the world’s largest economy, China.

To a non-White-House economist (like me), Trump is bucking history. As of the late 2000s, perhaps half of all world trade was tax-free. This may have stemmed from pacts in the Uruguay Round of the World Trade Organization to cut tariffs to zero when a trading partner did the same, according to the Australian economist Peter Lloyd. (A tariff is a tax on foreign products.) But the Uruguay Round was ‘way back in 1986-1994. The WTO has stalled in recent years. 

The American trade war-mongering especially threatens small open economies like Kazakhstan. It had a trade surplus with the US of $239 million in 2017, according to the office of the US Trade Representative: that is, it sold $239 million more of products to the US than it bought from it.  Kazakhstan’s exports were mainly oil, natural gas, iron and steel.  In the first half of 2018, Kazakhstan’s trade surplus with the rest of the world was $12.5 billion, according to the National Bank.  (A quick reminder: We sell exports to other countries, and we buy imports from them.) 

Why are Trumpists gung-ho on trade wars? Well, they seem to regard trade as retaliation.  They argue that the US has a trade deficit – i.e., it buys more from the rest of the world than it sells to it -- because other nations raise their tariffs higher than it does.  As the world’s second-largest customer, the US can eventually persuade other nations to lower their tariffs by raising its own. 

The Trumpists’ argument raises questions.  If they truly believe that trade is retaliation, why do they want to pull out of the World Trade Organization?  The WTO eliminates retaliation by requiring each member nation to cut its tariffs imposed on other members.  True, Trumpists detest international arbitration – they’d like to destroy the International Criminal Court, which pursues human rights allegations.  And the WTO does arbitrate trade disputes.  But the WTO doesn’t empower small nations much when they quarrel with the US. If the WTO finds against the US in a spat, then it permits the aggrieved to retaliate with trade restrictions. But a small nation can barely dent a large one’s trade.  “WTO law is weak because even though it provides a mechanism for redress, in practice this is not a viable option for many states,” write the scholars Johan Lindeque and Steven McGuire.  Small nations might try to settle disputes early because they don’t want to get shut out of the US market.   

The US is not particularly prone to WTO attacks by other nations. Of the 157 cases involving it up to February 2004, almost half (76) were brought by the US itself.

Indeed, the WTO is roundly criticized not for bias against the US but for its embodiment of US rules.  The vital traits of the WTO’s postwar parent, the General Agreement on Tariffs and Trade, were made in America: negotiate tariff cuts by several nations, rather than wait on each nation to cut tariffs on its own; let nations suspend trade concessions for a while, if need be; and let nations strike back against those “flouting” the trade rules, note Lindeque and McGuire.

The numbers look good

The Trumpists’ very logic undermines their case.  Trade wars lower world income, which in turn lowers world demand for imports from the US.  In contrast, freer trade raises world income and world demand for US products.  (By “freer trade,” I mean cuts in tariffs -- and in other barriers to trade, such as limits on how much nations can buy of a certain import like cars, or “quotas”.) Beginning in the mid-1980s, nations around the world cut tariffs until the financial crisis of 2008, noted Lloyd, of the University of Melbourne.

What’s the evidence for the proposition that trade spurs growth? The theoretical case is strong.  Free trade encourages each nation to produce what it can produce most cheaply, which raises the value of the men, machines and knowledge available. National income rises. So the nation will buy more from other countries, which raises their income. Global income will climb. Also, freer trade enlarges the supply of exports that are used in production, like robots, and thus cuts their price, encouraging firms to buy more inputs and produce more output. The rate of economic growth rises, at least for a while.

Enough theory. What’s the empirical evidence? Well, the immediate gains to free trade add only about one percentage point to a nation’s output, according to Lewer and Van den Berg.  But what should matter to policymakers are the long-run gains, which look hefty.  Over time, postwar world income per person has risen with free trade.

Admittedly, this fact by itself does not prove that trade spurs economic growth: perhaps growth spurs trade, since richer people buy more imports, rather than the other way around.  But holding other factors constant, a rise of one percentage point in the growth rate of exports relates to a rise of a fifth of a percentage point in the growth rate of output, concluded Lewer and Van den Berg from their 2003 survey of studies.  A fifth of a percentage point may sound trivial, but over time it adds up. Sustained over two decades, that annual rise of 1% in exports may boost annual output by more than 4%.  For rich economies, an increase in gross domestic product of 4% is a torrid pace.    

In recent decades, freer trade has created imports of inputs. This can raise the rate of acceleration in output by 1% per year, explained Estevadeordal and Taylor in 2008.

Summing up, Lloyd writes: “ ‘Free trade is best’ is the clarion call of international economists.” 

In contrast, Trumpist policy could return us to the 1930s world of Smoot-Hawley tariffs, which came to us courtesy of Congress.  In the early Thirties, US tariffs averaged a jaw-dropping 60%, raising international tensions that might have contributed to the world war. By the early 2000s, US tariffs had fallen to roughly 5%, according to Lloyd’s data.

The Trumpist view is too simple, anyway.  Trade deficits don’t depend only on foreign tariffs.  The domestic government also plays a role.  To cover the trade deficit, the US must borrow abroad.  But when its government spends more money than it takes in – thanks to the 2017 tax cut – it must also borrow more. This makes it harder to cover the trade deficit. But no one has ever accused the Trump Administration of excessive logic.  --Leon Taylor tayloralmaty@gmail.com

References

Antoni Estevadeordal and Alan Taylor. Is the Washington Consensus dead? Growth, openness, and the Great Liberalization, 1970s-2000s.  National Bureau of Economic Research Working Paper 14264.  2008.

Joshua Lewer and Hendrik Van den Berg. How large is international trade’s effect on economic growth? Journal of Economic Surveys 17(3): 363-396. 2003. 

Johan Lindeque and Steven McGuire. The United States and trade disputes in the World Trade Organization: Hegemony constrained or confirmed?  Management International Review 47(5): 725-744.  2007.

Peter Lloyd. Free trade and growth in the world economy.  University of Melbourne. Manuscript. About 2009. Online.

National Bank of Kazakhstan. 2018. Preliminary estimate of the balance of payments of Kazakhstan for the first half of 2018.  http://nationalbank.kz

Office of the United States Trade Representative.  2018.  Kazakhstan.  https://ustr.gov/countries-regions/south-central-asia/kazakhstan

Jim Tankersley and Keith Bradsher.  Trump hits China with tariffs on $200 billion in goods, escalating trade war.  The New York Times.  September 17, 2018.