Derailing the Global Trade Engine - Tariff Dangers

Here are the real dangers we face. Are we to repeat the mistakes of the '20's and `30's again? My fears are stronger than Steven's in this area, as the mood I sense is building fast to repeating history's greatest mistake. If we do, we had all better start thinking seriously about how to rebuild a fallen global economy - and I mean deep introspection. The entire international financial and trade architecture will have to be reformed and rebuilt anew - top to bottom. If we cross this burning bridge, we had better prepare.

Steven Roach
Cross-border trade flows are the glue of globalization. They are the means by which the world creates ever-virtuous circles of prosperity. The theory is simple: As poor countries enter the global supply chain, their increasingly prosperous workers eventually become consumers. Supply creates new demand, and the world is a net winner. While it’s hard to argue with this theory, today’s world is having an increasingly difficult time in putting this theory into practice. The global trade engine is at risk of being derailed.

That would come as a rough jolt to the world economy. Indeed, there can be no mistaking the increasingly important role global trade has played in driving world economic growth in recent years. By our estimates global trade in goods and services now amounts to 25% of world GDP, up dramatically from the 19% share just ten years ago and an 11% portion in 1970. Over the past 17 years, 1987 to 2003, surging global trade has accounted for fully 33% of the cumulative increase in world GDP. By contrast, over the 1974-86 period, trade accounted for about 17% of the cumulative increase in world GDP. In other words, since the late 1980s there has been a virtual doubling of the role that trade has played in driving the global GDP growth dynamic. There can be no greater testament to the power of globalization....

....The first is a new and powerful global labor arbitrage that has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world. Enabled by the Internet and the maturation of vast offshore outsourcing platforms in goods and services alike, labor has become more “fungible” than ever. In a world without pricing leverage, the unrelenting push for cost control gives a sudden urgency to this cross-border arbitrage. The outcome is a new and potentially lasting bias toward jobless recoveries in the high-wage developed world. That brings the second major force into play -- a political backlash against the trade liberalization that allows such cross-border job shifts to occur. It is the politics of this trend that disturb me the most as I peer into the future. ...Article Continued