MACROSCOPE
Inside Out
by

Brexit vote shows that benefits of free trade are not self evident

The business community has a responsibility to help protect the liberal trading environment built up over four decades

PUBLISHED : Sunday, 10 July, 2016, 3:36pm
UPDATED : Sunday, 10 July, 2016, 9:33pm

As the awful dawn of June 24 broke, and the world woke up to the dreadful discovery that Britain’s people had by a small margin voted to leave the European Union, post mortem commentators rounded on businesses for having been complacent, and for underestimating the danger of a “Leave” vote.

I fear the same is occurring around globalisation and four decades of commitment to trade liberalisation. We have for so long taken for granted as self-evident the benefits arising from globalisation and liberal trade that there is in business a complacent disbelief that governments could revert to protection, to cut their markets off from the benefits that have arisen from access to cheaper goods, more choice, more efficient services, stronger competition, access to economies of scale and bigger markets.

But just as British voters have sleep-walked into what is likely to be a decade of dislocation and hardship as a result of xenophobia, distrust of elites of all kinds, and willful manipulation by politicians willing to feed them on lies and half-truths, so the danger is real that similar voters worldwide could do the same on trade liberalisation and globalisation.

The reality is that the benefits of globalisation and free trade are not self-evident. And for those of us who believed they are, Brexit has provided an important wake-up call. We can no longer take support for ongoing liberalisation for granted. We need to rebuild the case from the ground up, and take no assumptions for granted.

The economic reality is that the steady liberalisation and globalisation since the mid-1960s has brought huge benefits to all of us. In a world still hostage to the protections in place in 1950, we – our families and our neighbours – would today be significantly poorer.

The absence of competitive stimulus for innovation would have meant many products we take for granted today would simply never have been developed. The goods in our shops would be more expensive. And the choices we face would be significantly more limited.

Our freedom to travel on cheap holidays to all corners of the world would also be fiercely limited. Our opportunities to work in stimulating careers worldwide – like I have been able to settle here in Hong Kong for the past three decades – would have been small to non-existent.

All of this is obvious to many readers, but for many voters worldwide this truth is no longer obvious. And even for those who acknowledge the obvious, the waters are being so muddied by populist politicians who are perfectly happy to tell lies, and mouth half truths, that confidence in the advantages brought by liberal trade is being undermined.

As Time magazine recently reported: “Western elites are going to have to acknowledge something that most on the political right and many on the left have refused to say aloud: free trade doesn’t benefit everyone, all the time. There are winners and losers; the real question is how to properly protect the latter.”

At present, the chief mischief-maker is clearly Donald Trump as he wages an improbable war to win the US Presidency in four months time. His comments are calculated to inflame and mislead: “We are being taken to the cleaners by our trading partners… We are killing ourselves with trade pacts that are no good for us and no good for our workers.. This is not free trade. It is stupid trade: China dumps everything that it has over here. No tax. No anything. And we can’t get into China.”

Such comments are of course no more than bandwagon bluster common in political campaigns, and amount to textbook hypocrisy. But he is winning traction, and his prejudices are likely to influence US trade policymaking whoever wins the presidential campaign in November.

Meanwhile, what Simon Evenett at the University of St. Gallen, calls “murky protectionism” has begun to take hold. According to his highly-regarded Global Trade Alert which tracks new protectionist measures, we saw over 500 such measures worldwide in 2015, up from 350 in 2008. He says these measures affect 5 per cent of global trade, and are costing us US$423 billion a year in lost GDP, and about 9 million jobs. Evenett reports a cumulative total of over 5,000 trade-blocking measures enacted since October 2008, and the WTO endorses Evenett’s calculations.

These “murky measures” range from anti dumping actions, countervailing duties and safeguards against import surges, to import and export restrictions, to restrictions like domestic content requirements, and to subsidies or supports to flagging local sectors. These would be weapons of choice to “fair traders” like Donald Trump, and are likely to surge in 2017 no matter who becomes president.

Making things worse, in the recession since 2008 trade has stagnated and actually fallen since 2014. From trade growth averaging 16 per cent a year between 2003 and 2008, it has slowed to annual growth of just 1.5 per cent since 2010. Confidence in the benefits of free trade has been rocked. As manufacturing demand has fallen inside China, so raw material exporters worldwide have suffered sharp declines. At the same time China has begun to “domesticate” more high-value-added parts of global supply chains, so shortening the chains and reducing export opportunities for component makers along these supply chains.

Sadly this “crisis of trade confidence” is occurring exactly when the digital revolution is for the first time enabling start-up entrepreneurs and small enterprises to win access across internet platforms like Taobao and Amazon to global opportunities that historically have been closed to them. For the first time, it is not just large multinational corporations who stand to benefit from liberal global trade.

Brexit and Donald Trump together warn us that ill-informed voters have the potential to force political changes that could immiserate us all. If we are to protect the liberal world trading environment built over the past four decades, we in business have a responsibility to make sure this does not happen. We must make the case in favour of liberal trade more forcefully and more effectively. Complacency is not an option.

David Dodwell is Executive Director the the Hong Kong-APEC Trade Policy Group