President Trump signs US withdrawal from TPP on 24 January 2017
President Trump’s decision to withdraw the US from the Trans-Pacific Partnership (TPP) trade deal fulfills promises he made during his pyrotechnic campaign to secure the White House.
It shows the tens of millions who voted for him that he’ll do what he said. Whether it makes economic sense seems to be a secondary consideration.
Economists love global free trade. It expresses a core value: people trading freely with others promote higher economic growth and income; increase efficiency and foster goodwill across borders.
Economists dislike anything that obstructs international free trade including permanent tariffs and non-tariff barriers; government action favouring national industries and manipulation of exchange rates.
The World Trade Organisation (WTO) — the Geneva-based body created 22 years ago this month to lower and, preferably, eliminate barriers to international trade in goods and services — is the most powerful international institution promoting free trade.
The great anomaly in the drive to lower trade barriers is the EU, history’s most effective anti-free trade body which reduces exports of goods of all kinds into the world’s largest economy.
The only reason the WTO doesn’t target it more is because the EU and other regional associations of trading nations are exempt from its rules. The EU is represented in the WTO, but not its member states.
This exemption has allowed the emergence of Asean and Nafta and is the main reason why the TPP has gained support.
They’re the rest of the world’s response to the EU.
Pulling out of the TPP isn’t about ending free trade. It’s about Trump’s desire to manipulate trade in America’s favour in a different way.
As the EU’s evolution has shown, regional trade bodies become increasingly influential over time as their members seek exemptions and special arrangements.
A powerful bureaucracy is required to ensure their rules are understood and enforced.
Managing trade flows in this way is not what champions of free trade want. They call for bureaucracies to be out of the business of regulating trade entirely.
This explains why many free market economists are in two minds about Trump’s plans for withdrawing from the TPP and re-negotiating Nafta. They believe both bodies are protectionist and invest power in the state.
What matters most for them is whether Trump’s new trade policies lead to lower barriers to trade in and with the US. And that is too early for anyone yet to know.
But there is a good reason why Trump’s trade agenda makes economic sense in principle.
The growth in the international trade in goods is slowing and may soon go into reverse.
The annual Unctad report released on 19 January showed that world trade grew by 1.5 per cent in 2015. That was less than the rate of world economic growth in the year. It’s the first time Unctad data has shown this happening.
Unctad said that it was worried and it didn’t understand what’s behind this development.
But there’s a simple explanation. Most services aren’t traded.
A growing proportion of every economy’s GDP is accounted for by services.
More than 80 per cent of UK employment and output is due to service industries and a growing proportion of those working in factories and farms aren’t creating value through their physical effort but through their ideas and education.
Most services aren’t internationally-traded. Consider your own lifestyles: how many send children to schools in the UK with teachers based in Germany or attend medical centres with doctors based in India? At your local burger bar, people cooking the food and serving it live locally. They don’t fly in every day from Bulgaria or Romania.
There are almost no services that require cross-border flows. The people providing them may have come from overseas. But they live where they work.
This is why the value and volume of internationally-traded goods will tend to decline as a proportion of total global output when economies are increasingly dominated by service output. In other words, the more an economy advances, the less it tends to trade in tangible goods.
That trend is being reinforced by automation. Trump’s call for US companies to invest in manufacturing at home will lead to increased production in America based on robotics. This will allow companies to remain competitive because they won’t need much labour at all.
Manufacturing is coming home, though it won’t directly create the jobs Trump wants. And as it does, America’s need for internationally-traded goods will decline.
A further factor is signs China is reaching the limit of its export-based economic growth strategy. Producing goods at or below cost for overseas buyers is making less sense, even in Beijing.
In Europe, the rise of renewable energy will reduce imports of hydrocarbon fuels.
Oil producing nations are increasing exports of high-value hydrocarbon goods produced at home.
There are myriad other examples of the ways the global economy is shifting away from the global trade in manufactured goods to the domestic creation of high-value services.
Trump’s America First trade agenda is, therefore, more firmly-based in economic realities than economists are ready to admit.
The era of long-distance trade in low-value tangible goods whether crude oil or underwear is coming to an end.
And as this happens, the need to regulate tangible good trade at a global, regional or even a national level will disappear too.
Trump’s killing globalisation for the wrong reasons, but it’s the right thing to do.