CARS , FREE TRADE AND PROTECTION
March 2017
Graph (Attached)
Before 2008 world trade grew at a faster rate than world GDP. (roughly 5% as against 2.5% )
Since 2008 trade has struggled to keep pace with GDP.
The WTO says that 2016 has been the weakest year for growth of world trade since 2008 and it is the first in 15 years in which world trade grew more slowly than GDP
The WTO has ‘called on countries to heed the lessons of history and recommit to openness in trade ‘.
Whereas 2 economists will normally have at least three views on one subject, on free trade there is a huge degree of agreement. All seem to support the view that free trade or as much free trade as possible is good.
Economic Theory Strongly Supports Free Trade
Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than any other. If countries specialise in producing goods where they have a lower opportunity cost then there will be an increase in economic welfare.
Famous economists and organisations all agree about this. For example :-
Adam Smith
John Maynard Keynes
IMF
WTO
Quote from Adam Smith
In every country it always is and must be in the interest of the great body of people to buy whatever they want from those who can sell it cheapest.
Quote from George Magnus ( Oxford University China Centre )
Open trading relationships and economic integration with counties that are geographically close are important to sustain in todays complex supply chains. They are highly correlated with the drivers of long term economic growth.
The Automotive Industry.
A good example of free trade and its impact.
Warren Truck Assembly Plant
This plant outside Detroit has been building vehicles since 1938. It currently assembles the iconic Dodge Ram 1500 SUV.
According to the University of Washington annual index of vehicles driven in the US by value and origin the Dodge Ram 1500 is 59% US made. Parts are sourced from around the globe including Argentina, Mexico, Serbia and South Korea.
The Japanese Honda equivalent to the Dodge is 81% US made.
UK Car Market
1.7 m vehicles were produced in the UK in 2016. 79 % were exported but 59 % by value of these vehicles are imported.
86% of all vehicles sold in the UK are imported, mostly from Germany and France but increasingly from South Korea.
The industry is highly dependent on no or low tariff and non tariff barriers.
Supply chains are complex and factories typically rely on 4 hour component inventories.
China and Trade
China has had a huge impact on world trade in the past 20 years or so.China joined the WTO in 2000. By 2013 it had 20% of world manufactured exports. In 1991 it had 2%
China 2014 Exports $2.3t Imports $1.5t
US 2015 Exports $1.5t Imports $2.3t
According to the US Bureau of Labour Statistics between 2000 and 2012 China increased its manufacturing employment by 70m jobs.
The US has had a trade deficit every year since 1976.
Academic Studies of Globilisation and Employment
Studies in US ,UK ,Spain and Germany have all found that exposure to Chinese imports have had profound effects on employment and earnings in those sectors of the economy exposed to those exports .Long term unemployment has gone up and earnings growth has slowed or become negative. The social impacts have been significant.
Germany has been least affected of the developed countries because of an offsetting growth in exports to Eastern Europe.
The Rise of Protectionism
Since 2008 G20 countries have introduced 4000 individual measures of trade restraint affecting 40% of world trade.
Many of these measures are non tariff barriers such as:-
State Aid
Local Content Requirements
Environmental Protection
Intellectual Property Rights
Recent examples of trade protection issues are :-
EU tariffs on Chinese Steel
GM Crops
Chlorine Washed Chickens
The US Election Campaign and President Trump.
During the campaign Hilary Clinton withdrew her previous support for the Transpacific Trade Deal
Bernie Saunders said ‘many recent trade deals have been a disaster for American workers’.
Trump wants to renegotiate or withdraw from North America Free Trade Agreement
The Transatlantic Trade and Partnership deal looks dead because of objections from both sides of the Atlantic.Trump has said wants to make sure that future trade deals ‘win for America ‘.
The UK
The UK has a sizeable trade surplus with the US. The US accounts for 17% of UK goods and services exports .Exports last year were up nearly 20% on 2 years ago.
Conclusion
The Government has stated that it wants the UK to be a leader in free trade in the future.
It is too early to judge the economic impact of last years reduction in the value of the £ but the last thing we need is a US President whose policies result in lower global trade. Interestingly, the IMF is forecasting better growth in world trade in 2017 and 2018 than in the previous 2 years. However, they say the downside risks are high due to the growth of protectionist policies.
On a positive note Roberto Azervado, the boss of the WTO has just announced the implementation of a new trade agreement – The Trade Facilitation Agreement.
It has been called the biggest reform of global trade in a generation and it will streamline customs procedures. The WTO claim that it will reduce the costs of trade by 14.3% and boost world trade by £800b per annum.
110 counties have ratified the agreement and it took 15 years from start to implementation.
There is much discussion currently about how long trade deals take to implement. On the basis of recent experience around the world there needs to be a huge amount of goodwill and compromise from the EU if we are to get a trade deal negotiated in the 2 years from the Article 50 implementation date.