Praveen Singh has a very thought provoking piece on trade in ‘The India Forum’.
He points out that trade theory suppresses the variations and complexities of real life to produce an unsustainable myth of ‘Trade is Good’. Such theories have produced global inequalities and tensions, apart from ecological damage.
Most economics concepts like market, trade etc. are introduced using simplified models of two people exchanging two commodities, or two countries producing and exchanging two commodities, or production requiring only labour and capital. These models are easy to understand and they appeal very much. Complex econometric models are also used to back up claims of the benefits of trade. However, they suffer from the same difficulties that result when important parameters are not factored into the understanding of an issue. In many cases, parameters that might not carry importance today turn out to be very essential and break the theory. In such cases of breakdown of theory, it is people with least resources that are affected the most. When manufacturing was outsourced from the US to China, middle class American jobs vanished. Under proper circumstances, people who get laid off might be retrained and re-employed.
This idea has difficulties like the kind of alternate employment that is possible, whether the previously enjoyed quality of life is still available to workers after re-employment, whether they can absorb the new thoughts and knowledge, the time it would take before equilibrium is restored, the cost of suffering in the interregnum, whether there is a structured mechanism to take care of such transition etc. In most cases, these displaced people are left to fend for themselves and suffer loss of income and dignity.
Trade theory might have temporarily given us ‘cheaper goods’, but it is the terms of this trade which are also clearly the reason for the US-China conflict today, which is fast sucking other countries into a potentially dangerous global conflagration.
Competitive-advantage based production and trade does not guarantee that all nations or all people impacted involved in this kind of a regime would necessarily gain from it. For many nations, the costs could far outweigh the benefits. This impact of trade is discussed:
In this light, the case of trade in economic theory is particularly contextual today. Trade theory tells us that everybody gains by trading more. The reality on the ground, however, is very different. A liberalized regime of lower import tariffs and of easy mobility of capital over the last four decades has led to manufacturing being concentrated in lower wage countries. The rich countries have lost jobs by the millions, especially of less skilled workers. The dream of working hard and moving into the middle class of society has consequently sputtered and died in these countries. It is the corresponding frustrations and misery of large sections of people in these countries that has led to the rise of Donald Trump and other such politicians. These politicians have tapped on to the real frustrations and misery of people, and touted ‘others’, often immigrants or vulnerable minorities, as the cause of the problem. Riding on this emotional frenzy, they have come to power. Trade theory might have temporarily given us ‘cheaper goods’, but it is the terms of this trade which are also clearly the reason for the US-China conflict today, which is fast sucking other countries into a potentially dangerous global conflagration.
When we are able to buy goods from another person/entity at lower cost than if we were to produce the same, it makes a perfect case for trade. This is the ‘absolute advantage’ aspect. This can be extrapolated to countries too.
The justification for trade has been taken further under the ‘comparative advantage’ theory. It is explained:
Even if England produces both wine and cloth cheaper than Portugal, if the ratio of per unit cost of production of these two products in each country is different, there is room for each country to specialise in the production of that good which it produces comparatively cheaper. It can then trade that good for the other. The theory tells us that as a result of this specialisation, the same resources would end up cumulatively producing more wine and cloth in the two countries. In other words, the total production of the two countries would go up. This is the famous ‘comparative advantage’ theory of David Ricardo, which the Nobel laureate Paul Samuelson, the author of the well-known and ubiquitous economics textbook, once claimed as the most elegant and non-intuitive result in economic theory.
The textbooks also tell us that while additional output would be produced, how it would be shared amongst the two countries depends on the bargaining power of the two countries, but that both would be better off after trade. Understandably so: if either country were to be worse off than before, it could just go back to its original (autarkic) production pattern.
Though several relevant aspects are not accounted for in this theory, the proposition of ‘comparative advantage’ makes the case for trade almost omnipresent. Some important aspects neglected include the ecological cost and externalisation of production, the impact of people who are displaced as a result of cheaper foreign goods entering the country, the iniquitous sharing of wealth created out of trading, consigning some countries to be producers of cheap raw materials (a kind of colonisation) etc.
It appears that some countries are advantaged due to trade. Or the rich in some countries benefit.
The real source of competitive advantage of nations, especially for developing countries like India vying for foreign capital, is now based on lower labour costs, poor environmental legislation, lower taxation and other such subsidies. Further, manufacturing keeps moving to the country which provides the lowest cost of production at the cost of its citizens and environment. This is a race to the bottom for poor countries.
This appears to be situation where disturbances in society are very likely and existing orders and theories would be overthrown.
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