Exporters suffering through a long speech on the state of global trade suddenly come to life with the mention of one word: “Logic”. It’s sure to get a loud laugh, because most see little of it in the current context. Economic integration has been upended by talk of isolation, negotiation has been nixed by nationalism, a U-turn in thinking that has been fed by incendiary tweets, clever quips in speeches and shock talk in political debates and the subsequent online chat fests. To the average cross-border business person, it’s alarmingly chaotic; logic has very little to do with it.
Sadly, when it comes to broad discussions on international trade, illogic is nothing new. It has clouded every free trade discussion and negotiation, from the armchair analyst, to the media, to the halls of power. It reaches its apex in times of crisis, when policy options seem few. And with the alarming, decade-long groundswell of populism, politicians are liberally slinging out statements that clash with conventional wisdom. Far from being on the fringes, these movements are starting to form majorities. So, why is the anti- movement so popular?
Well, by all appearances, the current system is failing tens of millions in developed and developing markets alike. Post-recession growth has been insufficient to absorb vast swaths of the labour force, until very recently. Disenchanted, these displaced workers and those who love and care for them have big questions about the established economic and political order. At the limit, they distrust political parties, politicians, large corporations, the 1%, post-war economic and social institutions, and others. And of course, it is popular to target the enemy without—some other country that can be blamed for stealing our jobs and our technology, and selling it back to us for a song.
While there is some truth in these statements, the impression they give is the system is so broken that it needs to be dismantled, that we need to revert to more closed systems that leave us less vulnerable to external forces beyond our control. And now actual policies are being formed on this basis. Higher tariffs, greater non-tariff barriers, annulments of free trade pacts, dissolution of regional integration systems all seem part of the new approach to the growth dilemma. Brexit, the U.S.-China tariff spat, America’s withdrawal from the CPTPP, challenges to the WTO, growing disdain for multilateral free-trade deals all threaten the current foundations of modern trade.
It’s not as if those foundations were easily laid. Free trade was hotly debated, but after it was enacted and the benefits seen, it caught on like wildfire. No longer was it hard to convince regular folk about the benefits of gains from trade, comparative advantage, economies of scale and other complex economic notions. They are easy to accept when they appear to be working.
Here we come to the critical question: What’s the game plan? At the core of the acrimony is insufficient economic growth. If the plan is to reboot or augment growth, then policy-makers had better get it right. Undermining the current system and replacing it with something less effective would be fatal. Logically, that’s what undermining globalization would do. So far, what do we see? In the case of Brexit, the only thing that U.K. politicians agree on is that they don’t want a no-deal outcome. Seems they want to get the bugs out of the existing one. Same with NAFTA: the CUSMA agreement is for all intents and purposes a modernized deal. In the case of U.S.-China, tariffs are a means to the end of levelling the tilted trade table: again, strengthening trade.
If so, this is a radical conclusion. Against all the anti-globalization rhetoric used to win votes, in all these cases it seems clear that the ultimate outcome leaders are driving at is stronger globalization. Is that possible? Well, consider the alternative: a no-deal hard Brexit could cost the U.K. 8% of its GDP. U.S. tariffs on China could spark a recession. And a torn-up NAFTA would put millions of U.S. jobs at risk, to say nothing of Canada and Mexico. That’s not what the populists want; they want a system that works.
The bottom line?
There is method in the madness. There is a logic to current policy moves, but it’s being sold with illogic. Let’s all hope that there’s little lag in turning logic into legislation. If not, and illogic governs policy moves, we are all in for a nasty shock.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.