Introduction to Trade and Globalisation

Eamonn Butler

• Publisher: London Publishing Partnership
• Year: 2021
• ISBN:
  9780255368056
• Edition: 1

International trade has created a highly interdependent world. Everyday products – such as phones, trainers or cars – are designed, manufactured and assembled across several different countries, by countless different companies, both large and small, involving millions of people of all nationalities, creeds and cultures. We take much of this creativity and competition for granted. But it wouldn't be possible without the peaceful collaboration of millions of people around the planet – a much-overlooked aspect of globalisation. Yet some politicians – perhaps bound by electoral concerns – often take a narrower view, claiming globalisation leads to job losses, lower standards and threats to security. An introduction to Trade & Globalisation examines the tensions that inevitably arise alongside the many benefits of trade. Author Eamonn Butler looks at the rapid growth of international trade over the past 50 years, and how commerce and international politics have become increasingly entwined. He describes the fundamental and growing importance of trade and globalisation in modern life – whilst also seeking to understand the opposition to it. And, at the same time, he skilfully provides a straightforward, insightful and essential introduction to the principles, economics, and politics of international trade – one of the key developments of the modern era.

1. The nature of trade
   Trade is (and was) everywhere
   The growth and extent of world trade today is staggering. In 1979 trade accounted for just over a third (35.6 per cent) of world output. By 1999 it was just under half (46.5 per cent), and by 2019 it was well over half (58.2 per cent). In 1999, the total value of goods exported was under $6 trillion and the total value of services exported was little more than $1 trillion. Twenty years later, these totals were nearly $19 trillion and over $6 trillion, respectively (World Bank 2019). Despite inevitable temporary setbacks (financial crises, civil wars, international wars, trade wars, even pandemics), trade seems set to continue its long-term expansion. And with expanding trade has come globalisation – the interaction and integration between the world’s peoples, companies and economies, bringing rising prosperity and the spread of ideas, cultures and progress.
   Trade has always existed. There is evidence of it going back to the Stone Age, and of astonishing ancient trade networks that crossed and connected entire continents. For millennia it flourished as barter, the direct exchange of goods, before the use of money became more common and the Mediterranean economies took off.
   Specialisation and efficiency
   Yet the growth of trade was not always smooth. In the medieval era and right up to the eighteenth century, countries thought it better to amass gold and silver than use it to buy foreign goods. It took the great Scottish economist Adam Smith (1776) to demonstrate that both sides gained from trade. His ideas prompted the removal of trade barriers and the great nineteenth-century era of relatively free trade and rising affluence.
   Building on another of Smith’s insights, that specialisation massively improves our productivity, David ­Ricardo (1817) showed that countries should focus on what they do better – their comparative advantage – and trade their surplus with others. Through specialisation and trade, in fact, countries can overcome their geography and climate: a cold country can exchange its manufactures for winter fruit, a barren island can trade its minerals for grain.
   Concerns over winners and losers
   There is no progress without change, but change creates both winners and losers. While Smith is right that both sides must benefit from any single exchange – they would not agree to it otherwise – specialisation and improvements in productivity demand changes that can prove challenging. People in wealthier countries, for example, complain that cheaper foreign workers are taking their jobs, while poorer countries worry that traditional crafts are being driven out by mass produced imports. But it makes no sense for a country to manufacture goods at home when it can buy the same goods or better more cheaply from others. By specialising, every country improves its productivity and its long-term prospects. The competition brought by trade is the spur for this progress.
   Critics also fret that richer countries may dominate trade and leave others behind, that poorer workers are exploited in ‘sweatshop’ conditions or that cultures are being swamped because of trade. In reality, trade has delivered, particularly to the world’s poorest, history’s biggest and fastest rise in prosperity. The outsourcing of manufacturing tasks to cheaper countries has given the people of those countries new employment opportunities that are less arduous and dangerous than traditional occupations such as farming or mining, and it has allowed them to build richer lives. Trade has also made the world culturally richer than ever before, and it has spread ideas and innovation far and wide.
   Protectionism
   Nevertheless, although producers are far less numerous than consumers, the pressure from producers who are threatened by cheaper or better goods from abroad leads many countries to put up barriers against foreign competitors. Some countries may want to make themselves self-sufficient, resisting cheaper imports until their own industries grow large enough to compete. They may accuse others of ‘dumping’ cheap goods on them, undermining their own producers. They may object to imports from countries that do not share their own high employment or environmental standards. They may be worried that they are spending more on buying goods from other countries than those others spend on buying from them.
   Whatever the reason, countries often impose taxes (‘tariffs’) or limits (‘quotas’) or less obvious barriers in order to stem the flow of foreign imports. But there are costs to this. A large bureaucracy is needed to police the flow. And countries that impose trade barriers make their own populations worse off, because it makes imported goods, which their consumers want and their producers need, more expensive or even unobtainable. Local alternatives might not exist or might be poorer quality. Hence, economists today generally agree that, whatever the temporary benefits for a few producers, such ‘protectionism’ is a mistake.
   Efforts to reduce trade barriers
   Protectionism accelerated as a result of World War I, when trade barriers became a weapon to ruin the economies of enemy countries. It dragged on through the interwar years, contributing to the tensions that precipitated World War II. Soon after that, though, the Western powers in particular realised the damage that trade barriers caused and the benefits that reducing them could bring. They set up an international forum – the General Agreement on Tariffs and Trade (GATT) – to discuss ways to limit protectionism and promote easier, freer trade.
   Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.
   — Gregory Mankiw (2006)
   As more and more countries joined the talks, and new trade issues rose up the agenda (e.g. trade in services, including digital and telecoms, the question of whether each country’s professional standards should be accepted internationally, the protection of intellectual property), the GATT talks morphed into a formal international body, the World Trade Organization (WTO). Over the years, GATT and the WTO have greatly reduced the average tariffs on imports. Certainly, high tariffs remain, such as the EU’s tariffs on agricultural products; and trade wars still happen, as between China and the US during the Trump presidency. But where protectionism exists today it is mostly conducted through less obvious means – and as such is all the trickier to deal with.
   Transnational corporations
   A feature of expanding trade has been the growth of transnational corporations (TNCs). That is because supply or ‘value’ chains have become truly global.
   The iPhone, for example, is assembled in Taiwan. But the batteries are supplied by a South Korean firm which manufactures in 80 countries, including India and Brazil. The sound chips come from another 8 countries, including the UK, China and Singapore. The screens are made by a US company, with 107 locations in 24 countries. The gadgets that detect movement come from Germany, China, Japan and several other countries. The gyroscopes are Swiss. The cameras come from US and Japanese corporations with plants in Brazil, China, Indonesia, India and many other countries. The compasses are made by a Japanese firm with factories in France, the US, the UK and elsewhere. A further 27 components come from an equally bewildering range of countries (Krueger 2020: ch. 19).
   Managing global networks such as these requires businesses with global reach, working with partners and contractors of all sizes in many different countries. Some critics worry about the economic power that such corporations wield, and whether they can be effectively controlled by any government. Yet transnational operations have always existed, and many are merely loose international collaborations, and less powerful than is commonly supposed.
   Trade as a moral good
   Many people, then, are suspicious of trade and its effects on poorer countries and peoples, and some even condemn it as a moral evil. But trade has contributed massively to human prosperity, particularly for the very poorest. Since trade began to expand sizeably in the 1990s (when reforms in India, Eastern Europe, Latin America, Africa, East and South East Asia brought those regions more deeply into world trading networks), roughly a billion people have been taken out of $2-a-day poverty.
   Trade delivers non-economic benefits too. There is good evidence that it promotes international trust, cooperation and understanding. It is associated with political freedom, the rule of law, honesty, free speech and other liberal values. It even defuses nationalism and ethnic conflict, and promotes peace, fairness and equality. After all, people who want to reap the benefits of trade must learn to cooperate.
   And cooperate we do, on a scale unimaginable until now. Even the food we eat adopts the styles and ingredients of the many countries in this globalised world. Film, art and other elements of culture have become international. We have more appreciation of the diversity of other countries and their lifestyles. Companies have become transnational and talented expatriate workers travel and settle in places all over the globe.
   The future of trade
   As trade has expanded, it has raised new issues. One is a rising focus on security: the US and UK, for example, ban mobile providers from importing Huawei 5G equipment for fear it could be used to spy on their networks. Another is the spread of counterfeit and pirated goods, including clothes and shoes, electronics, perfumes, toys and medicines, which the Organisation for Economic Cooperation and Development estimates at over 3 per cent of world trade (OECD 2019). A growing part of trade is now services, such as banking, accountancy, legal services, healthcare and education, digital services and telecommunications, raising issues of their own as well as the general question of whether the qualifications of the relevant professionals (such as lawyers and accountants) should be accepted internationally. Another concern is the environment, with countries resisting imports with high carbon footprints or banning the importation of certain fertilisers and pesticides. And more generally, the growth of ‘emerging’ economies (such as Brazil, China, India, Indonesia, Mexico, ­Morocco,...