By Nitin Bajaj and Alex Horner

In an attempt to explain policy paralysis across legislative houses of the world, the most commonplace explanation is the massively rising support for populism. Trump, alongside his European counterparts Marine Le Pen, Nigel Farage, Geert Wilders, and Norbert Hofer, continues to flabbergast the ‘rational’ globalists. At the same time, they are shattering all established norms of party competition in the rich world. Subsequently, the question that is gradually amassing steam is whether the economics continues to be a central force defining politics. In the backdrop of these circumstances and patterns of interest, we aim to discuss the opposition to what is, arguably, President Obama’s most important foreign policy initiative over the course of his seven years in office.

The murky world of politics

Trans-Pacific Partnership (TPP), a vital aspect of America’s Asia pivot, is a 12-country free trade pact signed in February 2016. Even though finalised, the trade pact still needs to be passed by US Congress before it becomes law. In August this year, President Obama hinted that the administration would soon send out draft legislation to the Congress. On Capitol Hill, an accord is in short supply, to say the least.

No one clearly understands the dynamics underlying today’s fractious political environment.

It has more than ever defied many established norms of political propriety and ideological coherence.  Trump, the standard bearer of the Republican Party, is clearer on the issue of trade than any other. But the Republican Party has always supported trade. Consider for a fact that in 1993, the then-Democratic House majority leader, Dick Gephardt, along with 59% of the elected Democrats, vociferously opposed North American Free Trade Agreement or NAFTA. At the same time, 72% of Republicans voted for it to make it into law.

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The surge in votes of populist parties can be explained not as a purely economic phenomenon, but in large part, as a reaction against progressive cultural change | Photo Courtesy: Charlie Frye via Flickr

Our understanding is that this overwhelming pattern is populism writ large. But all of that, as explained by many, cannot just be explained by economic insecurity. A new economic research paper brought forward by Ronald Inglehart and Pippa Norris of Harvard’s Kennedy School proposes a new cultural backlash theory to explain the trend of populism. According to Inglehart and Norris, “..the surge in votes of populist parties can be explained not as a purely economic phenomenon, but in large part, as a reaction against progressive cultural change.”

Time to embrace trade

People’s anxieties about open economies are manifested in politician’s trade-reluctant rhetoric. There’s no denying that trade deals, as Hillary Clinton herself put it in the 1990s, “are [sometimes] handshakes between investors that leave workers behind.”

Yet, globalisation isn’t a hoodwinking mechanism. It helps entities beyond just corporations. As channels of trade opened and liberalised over the years following Second World War, export-led growth and inflows of foreign investment lowered prices of goods, lifted wages around the world, and amplified overall economic growth and productivity. This, in turn, emancipated millions of poor around the world. From 1990 to 2010, about a billion people were lifted out of poverty.  For instance, China pulled 640 million people from extreme poverty from 1981 to 2010. Global trade has contributed in more ways than one to this improvement. Due to trade, standards of living have risen in developed and developing countries alike.

Extensive research studies have shown that the worst-off – deep down the economic ladder – benefit far more from trade than the rich.

To the extent, there is truth in the fact that trade puts more emphasis on consumers than workers. But it’d be foolhardy to leave it at that. Extensive research studies have shown that the worst-off – deep down the economic ladder – benefit far more from trade than the rich. Trade backlash and anti-trade policies plainly penetrate in to an average American working-class man’s life. For instance, the Peterson Institute for International Economics estimates that, when in 2009, the Obama administration slapped anti-dumping tariffs on Chinese-made tires, the annual cost to American consumers was about $1.1 billion.

The downsides of globalisation

Policy makers need to answer how they can make the globalization work for the working Americans. As is widely accepted now and put forth in a new paper by Peter Petri and Michael Plummer, TPP will increase real incomes significantly. It is estimated to increase to $131 billion annually by 2030. At the same time, it’ll expand US exports by $357 billion annually. 

Since 1994, when NAFTA was signed, US trade deficit has ballooned from a mere $100 billion to a ginormous $500 billion.

Yet, there’s need to take those numbers with a pinch of salt. A juxtaposition with past gains raises some scepticism. Since 1994, when NAFTA was signed, US trade deficit has ballooned from a mere $100 billion to a ginormous $500 billion. US manufacturing jobs have fallen by about 5 million. By one estimate, between 1998 and 2013, 5.3 million factory jobs were lost in the US. Of course many factors play in to the job churn. 

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By one estimate, between 1998 and 2013, 5.3 million factory jobs were lost in the US | Photo Courtesy: .brianday via Flickr

The role of globalisation and import substitution from China cannot be ignored. Economists David Autor, David Dorn, and Gordon Hanson claim that “increase in Chinese imports was responsible for between a quarter and a half of the factory jobs that have been lost since 2001”. They also conclude that Chinese imports eliminated nearly one million American manufacturing jobs between 1999 and 2011. Even though millions were uplifted as the Chinese exports increased from $266 billion in 2001 to $2.3 trillion in 2014, many Americans were left searching their piece of the pie. As many working class folks, along with the American rust belt, lost their jobs and realised that prosperity is something that happens to others, markets were found helpless in bolstering social welfare.

What lies ahead

With free trade deals, as some jobs are lost, other – more productive and innovative ones – are created. The country as a whole benefits from more trade. However, there are always those who are caught in the cycle of unemployment. America only spends 0.1% of its GDP on policies to retain workers and help them find new jobs. This paltry figure is something that Hillary Clinton can justifiably call “deplorable”.

America needs a major policy framework to prevent the ensuing economic inequality and social deprivation that follows every free trade pact.

To the rational economist and the students of history, globalization remains an open and shut case. Closed economies have never helped anyone for long. They prevent competition, new technology, management know-how, and jobs of tomorrow from coming in. Simply put, they stagnate productivity and growth.

To the peddlers of protectionism, much in demand this political season, the populace needs solutions to the existing problems. They do not require more problems. Encouraging an isolationist vision is a dead end. What is required from our politicians, now more than ever, is a granular detail of how they are going to make globalisation and free trade deals work.


Nitin Bajaj works as an Economist for EY, and Alex Horner works as a Tax Advisor for EY. The views expressed are their own and do not represent the views of any organization.

Featured Image Credits: J2MC via Flickr

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Posted by The Indian Economist