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The nuances of Global Trade

If we take a brief observation of the light pollution in the earth at night times, it is impossible not to notice that much of the light is near the ocean. Building cities around ports is not a coincidence, but rather a result of economic force: Global trade. The world has been connected for thousands of years as a result of trade routes created by our ancestors. The premise is simple: if certain goods are efficiently produced elsewhere, it can be obtained through trade. Global trade is not limited to maritime trade, remember the Silk Road? But much of the world is segregated by Oceans, and the desire to trade goods around the world is evidenced by the Age of Discovery which spanned between 15th and 17th century. It is defined as the extensive overseas exploration to discover sea routes and spurred the emergence of Global trade.

Photo by NASA

In 1944, several liberal economists gathered in Bretton Woods to discuss matters of trade. The idea of Liberalism in international relations emerged from the rubble of WWII. The idea is to create a world where economic interdependence becomes a catalyst for peace. Thus, the idea of General Agreement on Trade and Tariff (GATT) was born. The main goal of the agreement is to eliminate barriers to trade such as tariffs and trade quotas.

In 1995, the World Trade Organization (WTO) replaced GATT as the governing institution of international trade. Since 1947, it is increasingly evident that governments can also restrict trade by creating non-tariff barriers. WTO focused on these barriers such as quotas, embargo, and levies to create a highly efficient global market.

When GATT was signed in 1947, global GDP grew by 7% each year. The agreement significantly helped with the post-war recovery in Europe. This also put global trade, paired with maritime and air travel technology created by the war, on steroids. According to a paper written by Gao Shangquan, the increasing economic globalization is an “irreversible trend for the economic development in the whole world at the turn of the millennium. In the developing world, trade has delivered high growth and technological progress. According to the World Bank, since 1990 trade has helped to halve the number of people living in extreme poverty. But these gains, while impressive, are not necessarily permanent.

For many people, GDP growth does not mean a thing, thus Vanesa Jordá and José María Sarabia of the University of Cantabria in Spain published an article and summarised their studies of the distribution of well-being over the last wave of globalization between 1980 and 2011. The researchers used the UN Human Development Index as an indicator of quality of life. The Index also takes into account non-income dimensions such as education and health. Income inequality reduced by 10% on average in 130 countries with varying results in different countries. Disparities in education decreased by 64%, which is highly significant in today’s economy. They concluded - “The benefits of globalization have increased a number of aspects of well-being in most countries. However, these advantages have not reached a group of countries which are not able to overcome the human development barriers in health and income. They are being trapped in a low pole which shows little sign of their catching up or converging to the general trend”.

Globalization not only impacts economics, it also has weight in geopolitics. Under the theory of Neoliberalism, the problem of anarchy in international relations can be solved by creating conditions for mutual cooperation such as Trade Relations. Robert Keohane and Joseph Nye formulated the theory of “Complex interdependence”. Relationships among nations is analysed through game theory where gains are viewed as absolute and not relative, where mutual gain is the preference among players. Thus, actors that are mutually dependent with each other, such as global trade, will preserve the status quo. Global trade can also be used as a geopolitical tool to influence the status quo. The West, through their economic clout, could punish political actors through sanctions, essentially cutting off the target’s trade with the wider world. In 1993, after President Jorge Serrano dissolved Congress and said he would rule by decree, the United States and European nations threatened sanctions. The business community, scared of the economic effects, helped force Serrano out of power and installed a new president, Ramiro de Leon Carpio.

The law of unintended consequences...

Global trade is not without its challenges: colonization, wars, spread of disease, among others. The impact of those can still be felt today: the fear of NCoV, racism, and instability in some regions. One can argue that the colonial powers viewed global trade as a zero-sum game, where they get all the gains at the expense of the colonies. We can attribute global trade to the rise of slavery, and the African migration to the Western world.

In any scenario, we do not expect the actors to have equal gains in global trade. International institutions were created to level the playing field and create rule-based order in the conduct of actors. But there are other significant factors in domestic affairs that skews the impact of international trade. Countries with poor infrastructure such as roads, telecommunications network, and sea routes tend to lose in the competitive global economy. These countries are also, not coincidentally, ridden with corruption. Countries with anti competitive trade policies tend to fail in a competitive global economy. Industries controlled by cartels or monopolies tend to lose in global trades.

Another frequently overlooked consequence of international trade is the ripple effect of exogenous shocks. In 2008, Lehman Brothers filed for bankruptcy as an impact of the real estate bubble burst in the USA on what we now call the Global Financial Crisis. The global economy went into recession which we can only attribute to the interconnectedness of the global financing system. The ripple effect was felt all around the world, with its political impact still resonating today. What the world witnessed is a shock from one part of the world that suddenly had a severe impact at the other end. We are also witnessing a similar shock in the global spread of Covid19. Our highly connected world made global pandemics possible. Now, all continents have this virus except Antarctica, merely 2 months after the spread of virus in Wuhan was verified.

Photo by Kyle Ryan

According to Anabel González, Former trade minister of Costa Rica, Trade thrives in an open environment of willing participants acting in good faith and governed by clear rules. Short of this, the forces of globalization can turn cooperation into conflict. She prescribed that countries should:

  1. dismantle protectionist measures they have in place

  2. come together to update the international rules governing trade to account for changing economic conditions, and effectively implement negotiated agreements.

  3. should work together with international institutions to eliminate barriers that increase trade costs.

  4. support developing countries’ efforts to integrate themselves further into the global economy.

People coming from middle class and poor backgrounds tend to see the negative impact of increased competition. They do not see the positive effect of improved efficiencies in the machinery of the economy. They do not see the positive impact of competitive pressure in the market as a whole. Human mind tends to simplify any scenario and blame global trade. This is also partly a result of human’s loss aversion (a concept from prospect theory) where humans tend to prefer avoiding losses than acquiring equivalent gains. This dissatisfaction on global trade essentially became a political weapon of tyrants, hyper nationalists, and far right politicians.

What should we take away from this? We need to have a better understanding of the machinery of a globalised economy before we prescribe policies or criticise an existing one. At a macroeconomic level, liberalisation of industries creates long-term growth, improves lives, and (could potentially) create conditions for peace. We should not blame the globalised economy for not distributing the gains evenly. We should be looking at the economic institutions in which a state is founded. In the words of Acemoglu and Robinson, “Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.”

I am a strong believer of realism, and the concept of global trade is essentially a utopian concept conceived not through a cold analysis, but from purpose and fantasies of liberal economists in 1944. It is basic in any physical science that concepts arise from observation of reality. But global trade is one of those concepts where purpose meets realisation, and the envisioned fantasy became the reality we’re living in.

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