International trading ties are too often viewed as zero-sum relationships between ‘winners’ and other partners getting the short end of the stick.
In the United States, a sizeable trade deficit is often cited as proof of how much the country has been taken advantage of by its trading partners. But American companies have actually increased production in recent years, in part by accessing global supply chains to get the right products at the right price.
Take the North American Free Trade Agreement (NAFTA) as an example. While current political rhetoric decries the trade deal as an unambiguous ‘win’ for Mexico and a ‘loss’ for the United States, the reality is far more complex.
First, NAFTA has been a net ‘win’ for all three countries in terms of economic output. Since the agreement entered into force in 1994, trade between the US, Canada and Mexico has more than tripled to $1.2 trillion, supporting tens of millions of jobs. Per capita GDP has grown in all three countries since the agreement’s entry into force—by 39% in the US, 40% in Canada and 24% in Mexico. NAFTA created the world’s largest free trade area—covering 450 million people—and accounting for around a quarter of the global economy.
Second, trade agreements do not lend themselves to a win-loss binary analysis. Rather, a country will gain in certain sectors where it has a comparative advantage and see its output reduced in other sectors where it is less productive. The point of negotiations is for government leaders to balance these trade-offs and it goes without saying that governments would not engage and conclude these agreements if it was not understood that the net benefits would overcome the blows certain sectors of the economy may take.
It is important to note that many economic sectors that trade is blamed for decimating over the years are hit to a much more significant degree by automation and other technological changes. In the United States, for instance, more workers in the suffering retail sector have been laid off in the six months stretching from October 2016 to April 2017 than there are steel workers in the country. This is largely due to the ascendancy of e-commerce, which has averaged annual growth of $40 billion for the past three years.
Research also shows that foreign competition helps domestic companies gain in productivity. Recently, economists studying the impact of China joining the World Trade Organisation (WTO)—and thus winning greater access to US markets—allowed US firms to expand employment by 2% or more per year as they shifted to areas where they held a greater comparative advantage.
There is nothing in trade agreements or WTO membership that prevents governments from undertaking domestic policies that help workers in fading sectors of the economy from accessing retraining or maintaining a high quality of life. On the contrary, pro-trade international organisations like the World Bank and the Organisation for Economic Cooperation and Development regularly call on governments to redistribute some of the gains they reap from trade to assist those that may be negatively impact by foreign competition.
Most crucially, a binary win-loss view of trade would likely hurt exactly the kind of home-grown manufacturing companies that politicians claim to champion. This is because the reality of contemporary global commerce is that nearly every company depends on products that are made somewhere else, and any attempt to erect barriers can hurt domestic businesses as well as any foreign rivals.
When it is understood that complex products are rarely 100% sourced in one country, accounting for the ‘value added’ by each country in global value chains profoundly changes the picture of many trading relationships. For instance, 40% of Mexican imports to the US actually originate in the United States, meaning that cars finalised in Mexican factories will import automotive components from the US and elsewhere. Likewise, beer is Mexico’s number one agricultural export to the US but the drink’s two main ingrediants—hops and barley—are imported from the United States.
It would be dishonest to deny that some economic sectors can be disadvantaged when exposed to foreign competition but studies clearly show that economies enjoy net benefits from greater openness and that any protectionist would-be remedies end up doing more harm than good. In the end, it may be facile and politically advantageous to blame foreigners for any economic woes but this blame game rarely leads to positive policy outcomes and simplifies the far more nuanced reality of our global system.