This excerpt of “Export Now was adapted for The Globalist, and can be found online at: http://www.theglobalist.com/StoryId.aspx?StoryId=9345
Discussions of trade frequently lapse into jargon or take on a pessimistic tone. The gloom is understandable, as recent years have seen a series of challenging developments in trade policy. Headlines proclaim that the Doha Trade Round—the trade- negotiation round begun by the World Trade Organization (WTO) in 2001—is in trouble. The lapse of the U.S. president’s Trade Promotion Authority—effectively killing future trade negotiations—is cheered in Congress. Protectionist pressures mount in major economies such as the United States, the EU, and China. Trade liberalization seems to be on a slow path. Meanwhile, the number of formal trade actions and antidumping and countervailing duty cases hits record highs.
These recent developments highlight the central economic paradox of our era: although international trade has never been more important to the world economy, political support for trade seems to be at a historical weak point. To take one example, a recent poll shows that 68 percent of the U.S. public believes that “trade restrictions are necessary to protect domestic industries,” and only 24 percent support free trade. If trade is so good for us, why does it not enjoy broader support?
Trade’s High Benefits and Low Support
First, let us revisit the good news. Even in the midst of a painful global economic recession, trade continued to do very well. In 2009, global trade was near its historic peak, in both dollar terms and as a percentage of gross domestic product (GDP). Let’s look at some U.S figures as a reference point. U.S. merchandise exports totaled US$1,278 billion in 2010, up 21 percent from 2009.3 More companies than ever are competing and winning overseas. Every nine months the United States exports the equivalent of the entire economy of Brazil. The fourteen nations that have free trade agreements with the United States account for only 7 percent of all of its trading partners’ GDP, yet they take in 42 percent of U.S. exports. Merchandise trade as a share of global GDP has risen from nearly 9 percent in 1960 to 160 percent in 2009.5
These FTAs help in another way: they help drive inward investment. When a foreign company invests in the United States, or Australia, or Singapore, it attains access not only to those markets, but also to the market of all their FTA partners. The U.S. FTA market in aggregate is almost six hundred million people; the Australian FTA market is a bit larger, as it includes ASEAN; and the Singapore FTA market is almost two billion, as it includes China. Free trade agreements work. The world is in the middle of a sustained export boom. The success of trade is real.
But this also means that the world is in the middle of a sustained import boom as well, and there is a real basis for the criticism of trade policy. Particularly in a period of economic softness, there is a willingness to view trade as the enemy—as an agent of misery, not a spur to prosperity.
This disconnect between the benefits of trade and the support for it is perhaps due more to sociology than to economics. The rate of change in the modern economy outpaces most people’s comfort level, so people project their various economic concerns—job insecurity, a perceived decline in manufacturing base, a sense of economic vulnerability—against trade. So a domestic political discussion on trade sometimes escalates into a general expression of economic unease or descends to political criticism of the incumbent administration.
Accelerated Economic Change
Merely presenting the bare facts concerning the negatives of trade deficits or the benefits of free trade agreements does little to address the unease concerning trade. Economics alone cannot explain the discrepancy between the boon of trade and the lack of political support. Why has the pace of economic change accelerated in recent years? The answer can be found in three developments that have collectively created a seismic shift in the world economy over several decades: three billion new customers, the death of distance, and the overthrow of trade barriers.
The emergence of three billion new customers reflects the transformation of the world economy brought about over the past three decades as China, and later India, moved to market economies. Consistent with this trend, and somewhat prompted by it, has been a move to market rationalism in much of Latin America, as well as the integration of central Europe and much of the former Soviet Union into the world economy. This massive shift in economic behavior suggests not only three billion new customers, but also, perhaps, three billion new competitors—a more troubling, if inaccurate, prospect. In short, the economic population of this planet has effectively doubled in one generation.
The death of distance refers to the rapid decline of geography as a business constraint. Goods, people, and ideas move around the world rapidly and inexpensively. Business activities that once had to be undertaken at one locale can now be disaggregated and spread around the world. The advent of e-mail, the Internet, mobile phones, and webcams has led to a collapse in the cost of communication. The emergence of global express delivery, integrated logistics, containerized shipping, and discount air travel has led to a sharp reduction in transportation costs. Goods and ideas move around the world cheaper and faster than at any time in history. Many services, from accounting to design to customer relations, can be handled without regard to the location of the customer or the service provider. Mumbai is next door. Monterrey is your best customer. Shanghai sits next to you in class.
The elimination of tariffs refers to the cumulative impact of sixty years of reductions of trade barriers by the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) along with the benefits of the over six hundred free trade agreements currently in place..
In sum, this seismic shift means that unparalleled prosperity goes hand in hand with unparalleled anxiety. The world is spinning faster.
The Business Impact
The economics of trade tell us this is all good news. But the business side can present a more mixed picture.
First, every company needs to think about exporting. It is no longer safe to remain content in your home market. Sooner or later, you are likely to face threats from foreign entrants. You need to find a way to take the offensive and enter new markets.
Second, this means a shift from vertical skills to horizontal skills. Most businesses exist in the vertical. They have a small set of core competencies, and they devote their business life to successful execution of that skill set. Now you have to develop horizontal skills. How can you evaluate a market you have never visited? How can you sell to someone you have never met? How can you navigate government regulations in foreign countries?
Third, your business will need to develop a culture of flexibility and innovation. This does not mean that every day you will generate a new product, or that every new market will require a new approach. However, markets, customers, and opportunities differ, and a wise business knows how to take advantage of these differences.
Trade will create more winners than losers, but there are likely to be losers, including companies that cannot adjust to a more competitive environment, companies whose entire approach to trade is defensive, and companies that are unable to experiment. These companies run a higher risk of failure than their counterparts.
Every company has strengths and weaknesses, and because trade places these attributes in a broader market, we can say that trade brings into play a “magnification effect.” It magnifies your company’s strengths and weaknesses. If your company has a weak warehouse and distribution system selling in your domestic market, you can expect those weaknesses to be magnified when you start selling into foreign markets. On the other hand, if your company has a killer app tech product that dominates the sector in your home market, you could be well on your way to dominating that sector in new markets as well.
In this sense, the stratification that comes from trade is somewhat similar to the economic impact of the advent of a new technology. For example, not everyone benefits from the Internet, but it does confer economic benefits. High school graduates who cannot use the Internet will find themselves much less attractive to employers. The challenge of trade is similar to the challenge of a new technology: how can we shape the benefits to be as inclusive as possible? Trade and technology create many more winners than losers, but there is an asymmetry between good news and bad news. Factory closings tend to make the front page, but factory openings are more likely to be a note inside the business section. Additionally, human psychology ascribes importance to relative loss, apart from any absolute loss. So even if a group of workers receive real salary increases, they may have a sense of grievance if those increases have been outpaced by those of other workers.
A Trend or a Shift?
Interestingly, just as the political anxiety over trade seems to be peaking, the economic dislocation from trade may be abating. Astronomers tell us that a supernova burns the brightest as it moves toward collapse; we may have a similar sociopolitical phenomenon unfolding.
We must remember that the three major trends—three billion new customers, death of distance, and the end of tariffs—are perhaps more representative of a shift in the economic landscape than of an economic trend. In other words, once the economic adjustment to the improvements in logistics has been made, additional efficiencies are more marginal. Similarly, the early stages of China’s integration into the international economy cause more of a jolt than the latter stages. And once tariffs have been cut 90 percent, there is not likely to be as much economic dislocation from the remaining 10 percent.
Recent trade statistics point to a rough equivalence in the growth of imports and exports. In 2010, total imports into the United States were up 22.6 percent and total exports from the United States were up 21 percent. Admittedly, these imports are on a higher base, so the trade deficit itself continues to grow, but that rate of growth is tapering off. These numbers capture a world economy on the rebound after the 2008 financial turmoil, so the 2010 numbers probably outpace the longer- term trend. The point is that even though the three trends are somewhat permanent economic features, their effects are more similar to one-off phenomena.
It could take a generation of economic adjustment to fully understand these trends, but we are already seeing increasing economic anecdotes from China that the current high rates of economic growth are likely to attenuate. A growing body of literature discusses the decline in China’s competitiveness due to rising wage rates, congested infrastructure, and constraints in its finance and legal systems. To this are sometimes added costs of pollution, health care, demographic challenges of gender asymmetry and declining birth rates, as well as a changing tax policy. China’s economy should continue to perform strongly for the near term, and even if it slows down it should outperform the rate of growth in the United States. It should surprise no one over the next decade if the rate of growth in U.S. imports from China looks increasingly like the rate of growth in imports from other countries. In other words, as China’s economy matures, its trade patterns will look increasingly similar to the patterns of other countries. This is not the beginning of the end for China’s exports, which are driven by a mammoth and successful economy. But to paraphrase Churchill, it is, perhaps, the end of the beginning. The United States needs to stop devising trade policy by looking in the rearview mirror.