Altered global trade

Coming up with a winning strategy

I have been writing about evolving changes in global trade and about the need to realign Pakistan’s trade vision and home policies in light of the same, but a question that often comes my way is: What precisely is happening with global trade these days? Nobody really knows, but there is a lot of speculation that amidst a global environment where markets are slow and jobs hard to come by, postures by governments/leaders to protect home manufacturing are finding a lot of traction with respective populations. Even in the most developed economies — ones that until recently were hailed as champions of free trade — aspiring politicians are aggressively hammering on the evils of free trade and gaining significant political gains in return. Examples: Mr Sanders and Mr Trump in the on-going US primaries.

Elsewhere also the emanating story on global trade comes across as being not much different. Nations today have suddenly become very careful about whom they trade with and what they trade in. Gone are the days when they single-mindedly focused on expansion of trade or had blind faith to slip into the prescribed WTO straightjacket to become a part of the global trade order. Today they instead choose to do business only where visible gains can be felt tangibly — consciously moving away from the once unquestioned wisdom of multilateral functioning.

Modern day thinking being that while expanding global markets is a worthy goal, history offers lessons that only fair and ‘constructive trade’ is what nations should be seeking — ‘constructive’ referring to a realisation that only such trade is welcome that materially adds value to the home economy and ensures a gradual but clear development of its core national industries. As an example, between 1950 and 2008, global trade grew at three times that of growth rate of world’s economy, reflecting the post-war expansion and the eventual integration of China and the Soviet bloc. That all stopped with the global financial crisis, when worries about the banking system made crucial financing all but unobtainable. After a brief recovery, global trade in recent years has grown only at about the same rate as that of global growth, and it appears that this year it will in fact fall well behind even the rate of world economy’s growth. The Danish shipping conglomerate (largest in the world) A P Moeller-Maersk announced in January 2016 that it is suffering its worst business conditions since 2008, a contention supported by the decline in the price to charter dry-bulk carriers, now at an all-time low and down 75 percent in about six months.

So, has the protectionist moment finally arrived? Maybe, maybe not: There are other possible explanations as well, and one being that free-traders have repeatedly cried wolf about protectionist waves, which in reality never really materialised. However, more importantly, if protectionism truly is becoming an important political force, how should reasonable people – economists and trade experts – respond? To make sense of the debate over trade, there are three things one needs to know. The first is that we have gotten to where we are – a largely free trade world – through a generations-long process of international cooperation, going all the way back to GATT (Generalised Agreement on Tariffs and Trade) and subsequent lifting of quantitative quotas in 1995, and with strong institutionalised rules well in place to prevent backsliding.

The second is that protectionists almost always exaggerate the adverse effects of trade liberalisation. Globalisation is only one of several factors behind rising income inequality, and country to country or regional trade equations are, in turn, only one factor in globalisation. The third and perhaps the most relevant these days is that not all free-trade advocates have been paragons of intellectual honesty. In fact, the elite case for ever-freer trade, the one that the public generally hears, is largely a scam. What one hears, all too often, are claims that trade is an engine of growth and job creation and how new trade agreements will have big economic payoffs. Yet, what the models of international trade used by real experts (Paul Krugman, Joseph Stiglitz and others) say is that, in principle, agreements that lead to more trade neither create nor destroy jobs; that they usually make countries more efficient and richer, but that the numbers aren’t huge; and that they can easily produce losers as well as winners.

So what choices does this leave us with? To answer, one must understand that for the past several decades, Pakistan has had a bipartisan consensus that we should stick to our style of capitalism and somehow within this economic model create a welfare state, an outcome which has so far eluded us. There has almost always been a consensus that a nation of our size and as diverse as ours has to be decentralised with a vibrant nationalist beat to keep it gelled together. Again, this has clearly not happened. Pakistan’s governance history has invariably favoured individualism, self over state, lack of transparency or accountability and failed on establishing dirigisme, order and economic equality. Perhaps the only underlying fabric holding together the national social fibre has been the informal but vibrant private philanthropy culture and a variety of consumer spending patterns that may not fill up the government’s coffers but generate the much needed jobs in the economy.

However, this new generation that has grown up with a renewed sense of global awareness through exposure via media and information technology is now rejecting this consensus. In supporting Nawaz Sharif, they were not supporting someone who simply deserved sympathy on being unceremoniously booted out from his previous stint, but someone who they thought could reshape the Pakistani economic system. And this is exactly what this government needs to understand: If they fail their voters on this count, they fail politically.

International diplomacy aside, its real challenge remains at home where it is still to come up with a winning strategy that on one hand contends with growing protectionist tendencies in global trade while on the other hand successfully safeguards Pakistan’s market share in international trade by strengthening its own backyard. It requires no rocket science to establish that meaningful GDP growth – one that is equitable and generates employment – will remain elusive unless sustainable investment starts taking place in manufacturing industry at home. Going back to answer our original question: This call to national leadership to instead focus inwards, in essence, also depicts the very phenomenon gripping global trade today.