Limits to (Trade) Growth

Why is global trade under attack?

Public Domain. Source: NOAA

Global trade has generated an unprecedented level of prosperity. From Foxconn-built iPhones to Novo-Nordisk-designed insulin therapies to Airbus and Boeing and Embraer competing to build and sell airliners, global companies competing in a global marketplace produce an incredibly broad range of goods at reasonable prices.

Trade works because a larger market allows for more specialization, and more specialization enables people to be more productive. Workers can be more focused and more innovative. New ideas generate new products that can be replicated millions or even billions of times in a few years. Companies can go from just a few programmers to multi-billion dollar businesses in just a few years. So why is everyone suddenly suspicious of increased trade?

From Brexit to Trump to the Italian constitutional referendum, opponents of increased trade have used static analysis to make their case. When cheap goods enter a marketplace, domestic producers have to change the way they do things. Wages may fall. The same thing can happen when immigration increases. In the short run, immigrants use public services and may displace local workers.

Indeed, there was a close correlation between how exposed British regions were to Chinese imports and how they voted on Brexit. The less an area was impacted by imports, the less likely they were to vote to leave the European Union. And although correlation doesn’t equal causation, Italian economic growth essentially stopped when that country adopted the Euro in 1999. It has been in decline ever since. No wonder their citizens are suspicious of the elites.

Italy Real GDP since 1970, Source: Bloomberg, IMF. Log scale.

Political turmoil often follows a period of lackluster economic performance. People don’t want to become worse off, and they expect their leaders to have some solutions. Global trade is supposed to make us all better off. But when the facts don’t seem fit the theory’s rosy promises, it’s reasonable to want to try something else.

Douglas R. Tengdin, CFA

Chief Investment Officer

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