'Fair and Free' Trade: The Demands of a New Era for Trade Liberalisation

Alasdair attended the OECD forum. He is in his fifth year of Economics and Law at Queensland University of Technology and is majoring in Applied Economics.

ABSTRACT

In recent years, a newfound political narrative challenging trade liberalisation has emerged. Driven largely by the disenfranchised middle-class, this narrative calls for a return to protectionism, or for greater substantive fairness in the outcomes of liberalisation. This paper analyses this trend, and examines whether the loss of confidence in ‘business-as-usual’ trade liberalisation is justified. An examination of political rhetoric and positions is firstly undertaken to assess the nature of the repudiation of liberalisation. The validity of this perspective is assessed with respect to trade theory and empirical evidence, and the findings show that these concerns are justified to an extent. In light of this, it is recommended that political rhetoric be updated to match the observed outcomes of liberalisation, and that policy actions should be focused on increasing the equity of engaging in trade, so as to address the issue without sacrificing its benefits.

Policy Recommendations

To restore confidence in trade liberalisation:

·       Political actors and institutions should adopt a more representative view of trade, and should not continue to maintain a position that trade is unambiguously beneficial. They should update their rhetoric in positions, statements and policies to accurately portray the reality of liberalisation.

·       Trade liberalisation should be accompanied by equitable policies to assist those disadvantaged by trade. Neither protectionism nor ‘business-as-usual’ trade policies can realise the Potential Pareto Improvement offered by liberalisation. Policies that equitably redistribute the gains from trade should therefore be utilised. In particular, restructuring assistance and educational policies could improve equity and efficiency over the long-run. In Australia, assistance should be given to displaced manufacturing workers and firms to integrate production resources into our growing education travel services economy.

I. A Crisis of Confidence for Globalisation

In their October 2016 World Economic Outlook, the International Monetary Fund disclosed that continued popular support for trade liberalisation, and the preservation of its economic benefits is dependent on addressing the concerns of ‘trade-affected’ workers (International Monetary Fund 2016). They stated that many studies indicate ‘significant and long-lasting adjustment costs for those whose employment prospects [have been] adversely affected by the structural changes associated with trade’, and that policymakers must be mindful of such costs when ‘deepening trade integration’ (International Monetary Fund 2016). These statements have undoubtable resonance in the context of the political movements of 2016-17, where a deep uncertainty over the future of trade liberalisation emerged. Politically, we witnessed the repudiation of ‘business-as-usual’ trade policy, and a surge in the popularity of politicians who advocated for ‘economic nationalism’ and a return to protectionism. Subsequently, many became cognisant of the apparent connection between middle-class dissatisfaction and the decline of globalist trade policy. Ultimately, these events signal a crisis of confidence for the globalist hegemony. Given the ramifications and political relevance of this crisis, a discussion of its origins and the validity of its underlying perspectives is necessary. This paper presents an attempt at such a discussion, providing a positive economic analysis of this phenomenon in order to inform an appropriate response on behalf of politicians, economists and the general public.

I(i). Recommendation

There is a disconnect between mainstream political rhetoric and policies and the realities of liberalisation. Theory and empirical evidence illustrate that the aggregate gains from trading come at a cost to certain sections of the economy. Economic dissatisfaction would therefore seem to stem from the failure of mainstream political parties to meaningfully address the impacts of trade. It is therefore recommended that political rhetoric be updated to reflect this reality: maintaining a position that trade is unambiguously beneficial is reductive and inappropriate, and will perpetuate the loss of confidence in liberalisation.

In terms of policy actions, trade seems to offer a Potential Pareto Improvement (PPI) for society. The calls for protectionism are therefore inappropriate: remedying a distributional impact by limiting trade would reduce the aggregate welfare of the economy, resulting in an inefficient, similarly inequitable outcome. Continuing ‘business-as-usual’ arrangements is also inappropriate, given the resultant political instability, and that they do not capture trade’s PPI. Political parties should therefore institute re-distributional policies, such as restructuring assistance and educational policies, as these offer a chance to correct inequity while investing in the stock of knowledge capital, thus contributing to long-run economic growth. In the Australian context, this assistance could be directed towards assisting displaced manufacturing workers and firms integrate into our educational travel services economy, a growing export industry that contributes to the stock of knowledge capital.

II. The Nature of Confidence: Expectations and Political Positions

As it relates to trade liberalisation, confidence describes the faith people have in trade liberalisation policies to fulfil their apparent purpose. Of course, this belief is dependent upon the positions and rhetoric adopted by those who pursue these policies, and the outcomes we observe for trade liberalisation worldwide. The stability of this confidence is presupposed on the harmony between these factors: a disconnect between them will challenge political and institutional confidence.

II(i). Expectations

The first avenue of inquiry is to determine what people expect trade liberalisation to do. To borrow from the Liberal National Party, the Department of Foreign Affairs and Trade and the Australian Labor Party official websites, it would seem that people have faith that trade liberalisation will increase efficiency, enhance competitiveness, increase standards of living and household income, create jobs, and benefit domestic businesses and consumers (Liberal National Party n.d.) (Australian Labor Party 2015) (Department of Foreign Affairs and Trade n.d.). Of these three groups, only the ALP acknowledges that trade may cause detriment on their official site: by exclusion, DFAT and the LNP would therefore seem to suggest that trade is unambiguously beneficial for Australia.

II(ii): Political positions

Until recently, this position was shared by many others worldwide. Though Australia’s politicians and institutions have yet to meaningfully address this movement, there appears to be a growing public acknowledgment of trade’s detriments. Calls for ‘fair’ free trade, or trade with more equitable outcomes for domestic workers have been commonplace amongst critics of free-trade for some time (e.g. see Bernie Sanders (OnTheIssues 2016)). However, The World Trade Organisation, the Organisation for Economic Cooperation and Development, the International Monetary Fund and the World Bank have acknowledged the concerns of those disadvantaged by trade in the media (OECD n.d.) (Elliott 2017). Notably, Hilary Clinton has shifted her position on free-trade, criticising the former ‘gold-standard’ TPP for failing to meet standards of fairness (Phillips 2017). On the other end of the political spectrum, there has been a surge in advocacy for increased protectionism (similarly to Le Pen’s ‘economic patriotism’ (Sandford 2017)) as a means of correcting the detriment. Interestingly, some of this latter group  have shifted to supporting ‘fair’ free trade policies recently (See Trump and Theresa May’s updated positions (Yu 2017) (Reuters 2017)). Cumulatively, these changes in position illustrate that the world is trending away from traditional globalist policy, and unqualified advocacy for trade liberalisation, albeit in a divided direction. Given this movement, it would appear that confidence has been lost in the ability of ‘business-as-usual’ trade liberalisation to deliver its benefits.

III. The Detriments of Liberalisation


III(i): Evidence

Theory and evidence justify the subversion of the entrenched liberalisation narrative. The change in welfare that results from liberalisation appears to be a key source for the loss of confidence. The literature supports this phenomenon. Thus, increasing trade liberalisation without supplementary measures will only further these divides. A portion of workers, firms and industries usually suffer a disproportionate disadvantage, due to the restructuring effect caused within the economy: work is both created and destroyed during liberalisation, and we see a reallocation of workers between industries and sectors (Thompson, Murray and Jomini 2012 p.115). Without appropriate measures, there is no guarantee that the welfare distribution or the number of firms and jobs will be preserved throughout the process.

In short, trade liberalisation is not necessarily economically neutral or Pareto-improving, an outcome empirically observed across the world and within Australia. Since the early 1990s, the labour share of income has trended downwards in advanced economies: though technological progress has been the key driver of this change, trade integration has been recognised as an important contributing factor (International Monetary Fund 2017). Additionally, one quarter of the decline in US manufacturing employment is attributable to import competition, which has raised unemployment, lowered labour-force participation and reduced wages in import-competing manufacturing industries (Autor, Dorn and Hanson 2013). Within Australia, aggregate employment has grown and structural unemployment has declined over the period of liberalisation (1984 to date); however, manufacturing employment declined by approximately 10% over the period, largely due to import growth and subsequent productivity increases (Thompson, Murray and Jomini 2012, 126).

Trade theory is fairly unambiguous on this point: trade creates aggregate gains at the expense of certain economic actors. Summarising the impacts of several theories, trade in each instance improves the aggregate welfare of the economy. However, trade based on comparative advantage hinders certain economic actors by reducing the real wage and income of the relatively scarce factor of production (Stolper and Samuelson 1941). This outcome can be avoided in certain circumstances where trade occurs based on non-comparative advantage between homogenous firms: however, failing to meet these conditions will see disadvantage arise (Krugman 1981). Lastly, non-comparative advantage trade between heterogeneous firms sees some firms and industries exit the market when trade liberalisation is established, due to the increase in competition (Melitz 2003).

IV. Policy Recommendations


IV(i). Implications for rhetoric

Restoring confidence in trade policy to deliver its expected outcomes necessitates rhetoric that accurately portrays such outcomes. There must be harmony between expectations and outcomes for confidence to be sustained: faith premised on an untenable position will eventually falter. Confidence based upon the position that trade is unambiguously beneficia is unsustainable, and political parties and institutions in Australia and around the world must amend their rhetoric accordingly. Failing to update positions would propagate the discrepancy between their positions and the theoretical and empirical outcomes of trade liberalisation, and would serve to further undermine the confidence in trade liberalisation and globalisation. The position that should be adopted by political parties in their statements, policies and official positions is therefore as follows: trade offers a PPI, and can improve the aggregate welfare of the economy. However, this welfare gain is not experienced universally throughout the economy: indeed, the benefit experienced by the majority of the economy comes at the expense of certain economic actors. Without supplementary measures, trade is therefore not unambiguously beneficial, damaging the welfare of certain economic actors.

IV(ii). ‘Business-as-usual’, protectionism or ‘fair’ free trade?

Trade liberalisation policies should also acknowledge this reality. ‘Business-as-usual’ trade policies that uphold the paradigm that ‘trade is good’ are inappropriate: without additional measures, these policies will disadvantage a portion of society in pursuit of increased welfare for some. They represent a failure to realise the PPI available under trade liberalisation, which has engendered a significant degree of political dissatisfaction and the repudiation of the historic position on trade. Maintaining these policies therefore represents an inappropriate course of action, politically speaking. Likewise, a return to protectionism is similarly inappropriate. Not only would this eliminate the welfare gains available under trade, it would reallocate welfare towards one group at the expense of the rest of society. A similar inequity is begotten and so, this becomes an indefensible position when subjected to scrutiny.

Arrangements based on redistributing equity post-liberalisation may therefore present the best option. Efficiently redistributing the gains of trade would address the equity concerns while retaining the aggregate output achieved by liberalisation. Compensation presents the most obvious option: however, due to the costs of redistribution, this will reduce aggregate welfare. Whether this is an appropriate trade-off is uncertain, as it depends on the efficiency of redistribution and the aggregate gains from trade in each particular circumstance. Additionally, this does not necessarily address the inherent restructuring issues caused by liberalisation, and those displaced will remain so without further measures.

Therefore, the most desirable option may arise in the form of restructuring and educational policies. Facilitating efficient restructuring and re-education eliminates inefficiency and redundancy in the economy, and represents an investment in the stock of knowledge capital. This latter benefit is an essential aspect of long-run economic growth: as knowledge capital is non-rivalrous in nature, and because it is not subject to diminishing marginal returns like physical capital, efficient investment facilitates long-run economic growth (Stiglitz 1999) (Rao 2010). Investment also creates a positive externality in the form of spill-over effects, and we tend to see economy-wide gains from investment in knowledge in a particular industry (Stiglitz 1999). Therefore, re-education for displaced workers is an equity-enhancing means of addressing the issues with trade liberalisation, that improves the future welfare of the economy. Subsequently, the recommended policy action is to re-educate displaced workers to facilitate employment in newly favoured industries post-liberalisation.

As Australian manufacturing is relatively inefficient in the international context, manufacturing wages and employment have declined over the period of liberalisation, while some service industries experienced significant gains (Thompson, Murray and Jomini 2012). As an example, Australia today has a relative advantage in the delivery of certain high-skilled services, such as educational travel services, an industry which has grown from $950 million in 1990-91 to $22 billion in 2017 (DFAT 2017) (Bingham and Brown 2007). Restructuring and educational policies should therefore attempt to reallocate displaced manufacturing resources towards more competitive, growing industries. One potential option is to help former car manufacturing employees re-skill and relocate to participate in our education services exports sector. Increasing expenditure on such initiatives (by taxing the educational travel services industry, which benefits from trade) would help share the gains of liberalisation with those disadvantaged. Additionally, it would represent an investment in one of our strongest export industries, as well in Australia’s educational quality. If done effectively, both short- and long-run gains may result due to investment in a key area of knowledge capital and export.

V. Conclusion


The specifics of such policies are dependent on the economic and political context, so this is not a universally applicable course of action. Additionally, this policy suggestion is only part of a solution to the issue, and further work is required to provide comprehensive practical advice. Technological progress, which will only exacerbate present issues, must also be addressed: trade-based solutions will do little to improve welfare if this is ignored. However, it is hoped that this recommendation, along with the suggestion to update political rhetoric and positions, and the arguments against ‘business-as-usual’ policies and increased protectionism, will provide a starting point in addressing the concerns of trade-affected actors. Reconciling expectations and outcomes and equitably sharing the gains of liberalisation will help restore confidence the integrity in trade. People have historically had confidence in the ability of liberalisation to deliver far-reaching economic benefits: whether they continue to do so may depend on whether a fairer, more inclusive paradigm for trade liberalisation is established.


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