Inside Out | The world of trade has moved on and Trump’s tariffs are targeting yesterday’s challenges, not today’s
- As China consumes more of what it produces, the importance of exports is on the wane
- Beijing exports just 9 per cent of its total output today compared with 17 per cent in 2007, according to a McKinsey Global Institute report
Once upon a time, trade was simple. Poor people in poor countries produced food and raw materials cheaply, and sold them to the rich western economies concentrated in Europe and the United States, who transformed them into finished products that were used or consumed by their own rich populations.
A few luxury consumer goods trickled back to the elites in the poor countries, but most exports back to poor countries were capital equipment needed to extract raw materials.
It was called comparative advantage, and most in the West assumed it was the natural order of things. Supply chains were short and simple. Raw materials were bundled onto a ship in Country A and delivered to manufacturers in Country B. Clever consumer goods produced in Country B were then either consumed by affluent consumers nearby, or bundled back onto ships as finished goods to be sold to elites in Country A.
But then, back in the 1970s, something changed. Improvements in transport and communications enabled western manufacturers to keep their prices down by shifting labour-intensive, low-paying work to poor countries. It meant more complicated supply chains, but it kept consumers in the rich markets happy. China was in the thick of this, and was key to providing the developing world’s “deflationary gift” to western consumers.
This shift was at the heart of “globalisation”, and was the driver of an extraordinary couple of decades of massive trade growth. Walmart made millions of American consumers happy, and millions of jobs were created in the poor world – in particular, China. Most of these were horribly low-paying, but they seeded local consumer economies that have since grown steadily.
Also sown were the seeds of western anxiety about loss of jobs, from which you can draw a straight line to US President Donald Trump, his “Make American Great Again” tariff war with China and the mercantilist trade negotiations planned in Washington this week.