Tuesday, January 24, 2017

Abandoning Trade Will Make the Poor Poorer

By Michael Schuman
The Bloomberg View
January 24, 2017

Without question, the most exciting economic story of the past half century has been the dramatic, and probably unprecedented, decline in global poverty. In a recent study, the World Bank estimated that in 2015, just over 700 million people remained trapped in desperate poverty, or 9.6 percent of the world’s population. Those sound like big numbers until you compare them to 1990, when nearly two billion people languished in poverty -- a staggering 37 percent of the global populace. Such progress has raised the real possibility that extreme poverty can be eradicated in the not-too-distant future.

That prospect could now be in jeopardy. After the Brexit vote and election of Donald Trump, a more virulent economic nationalism has begun to spread through several Western capitals; as one of his first acts, Trump formally withdrew U.S. support for the Trans-Pacific Partnership trade pact. If taken to its logical extreme, this vision could give rise to policies that set back the world's war on poverty, with potentially dire consequences for rich and poor alike.

Any serious rollback of global trade would threaten precisely the same economic forces that have created great gains in wealth in the emerging world. Economic history since World War II has proven that the best way for countries to move from poverty to prosperity is to join the global trading system. Poor countries simply don’t possess the capital and spending power to develop industry and boost welfare on their own. Only by tapping into demand in the U.S. and other wealthy nations can these countries foster the jobs and growth necessary to increase incomes.

That’s why exports lifted China, South Korea and other fast-growing Asian Tigers out of poverty. Now more countries, from India to Ethiopia, are striving to replicate their success by linking themselves more tightly to flows of international trade and investment.

Their hopes depend on the survival of free trade. Ultimately, the U.S. and other advanced economies deserve much of the credit for the recent gains in global welfare. By opening their markets to imports from poor nations, the world’s richest nations created jobs in the world’s poorest -- jobs that saved millions from lives of misery. Wider trade liberalization would further aid efforts to rescue the millions who remain impoverished. A 2015 study by the World Trade Organization and the World Bank concluded that “a sustained effort to deepen economic integration and further lower trade costs is essential for ending poverty.”

Ironically, however, the very success we’ve had eliminating poverty has put further progress at risk. By drawing the world’s poorest countries into the global supply chain for smartphones, blue jeans and other goods, international trade stiffened competition between the low-wage workers of the developing world and the high-cost workers of the developed world for the same jobs. It is a contest that some in the U.S., Europe and Japan have lost, as assembly lines shifted to cheaper emerging economies. The result is widespread anger in many rich countries towards free trade. All those jobs that lifted poor Chinese and Mexicans from poverty, their citizens believe, have been “stolen” from them by “unfair” trade.

Trump successfully appealed to this anger during the campaign, railing against free trade, claiming pacts like TPP and the North American Free Trade Agreement are disasters for American workers and vowing to protect them from the evils of foreign competition. We don't yet know what more he’ll try to do, or how high he may or may not raise protectionist barriers. The business community continues to press Trump to keep vital trade flowing.

But he has already threatened to slap a 45 percent tariff on Chinese imports, and warned companies like Carrier and Toyota he’d impose a hefty border tax on anything they manufacture in Mexican factories for sale in the U.S. Such steps could quickly degenerate into a global trade war. Officials in both China and Mexico have said they’d retaliate if Trump imposed barriers to their exports.

Such policies would cut off the world’s poorest people from the jobs they need to escape poverty. And a trade war between major economies would also dampen overall global growth, dealing another blow to the needy. International Monetary Fund Managing Director Christine Lagarde warned last year that sluggish growth in the emerging world was already taking a toll on the poor. Incomes in the developing world are converging with those in advanced countries at less than two-thirds the pace the IMF had forecast a decade ago.

Some readers are probably thinking: Too bad. In a dog-eat-dog world, the U.S. has to worry about its own, not some destitute families in Bangladesh or Nigeria. That thinking is short-sighted. Alleviating poverty is not just a moral imperative but an economic one. With societies across the developed world aging and many, from Japan to Italy, struggling to grow at all, U.S. companies and the Americans they employ will be able to sell more airplanes, cars and insurance policies only if more poor in the emerging world join the global middle class.

And even if you could care less about other countries’ poor, what about your own? A study by the National Foundation for American Policy figured that the types of tariffs Trump has threatened to impose on goods from China and Mexico would cost the poorest 10 percent of U.S. households as much as 18 percent of their after-tax income, or some $4,670 over five years. That’s an extra burden none of us can afford.


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