Trade is great, but it creates losers

Tirumala KV Moin Afaque | Updated on January 11, 2018

iPhone eps

To deal with the anti-globalisation backlash, the gains from trade should be used to provide a safety net for dislocated workers

We have seen the events of the last one year — the rise of Donald Trump, Brexit, and so on — carried on the waves of an anti-globalisation backlash. Prior to that, the same developed countries had been pitching for more open and free trade.

Between 1990 and 2014, goods trade volume increased more than five times, from $3.5 trillion to $19 trillion. Service trade has grown just as spectacularly in this period.

Trade-led globalisation has produced many winners, but there were losers as well who were never adequately compensated. These losing groups now constitute the force behind the anti-globalisation backlash. For example, consider the Trump support base of the working class from the rust belt, angry in the wake of the industrial decline in their region, or the groups against immigration who supported Brexit fearing they would lose their jobs to immigrants from the EU.

Who wins?

Economic theories of comparative advantage, factor endowment or economies of scale all indicate that trade is welfare-enhancing and there are gains to be made from specialisation and exchange. Without disagreement with the theories, while trade may be welfare enhancing overall, there might be individual groups that may be losing out. So it is just as vital to know the winners and losers in this international trade game. This brings us to the question: Who gains from trade?

The trade account balance is one way of looking at the country’s gains from trade but it is inexact. With falling costs of freight transportation there is increased interconnectedness of production networks across different countries such that a given product is not manufactured in one country. For instance, while iPhones are assembled in China, the major value addition in the iPhone comes from Germany, South Korea, the US and Taiwan. ( see table)

Yet the final value of the iPhones shows up as a trade surplus for China. To quote Pascal Lamy the previous DG of the WTO, “attributing commercial value to the last country of origin perverts the economic dimension of international trade”.

Secondly, data for other income flows matter. Payments for intangibles such as trademarks, patents, copyrights, industrial designs, etc are required to answer the question of who gains from trade.

Thirdly, ownership matters. Globalisation is not just a fragmentation of production systems but also a fragmentation of ownership. Foxconn, the company that assembles iPhones in China, is a Taiwanese firm. Part of the export remittance received and recorded against mainland China would be repatriated to Taiwan.

So, earnings from exports should be taken up in a national accounts sense to reflect the compensation for labour, capital, non-financial assets such as real estate, machinery, and natural resources. Transfer by way of repatriation of profits from the local export-oriented subsidiary to the parent MNC, and payments for the use of foreign intellectual properties should be taken into account.

When we put all these factors together we can finally get a sense of who gains from trade. WTO and OECD are already working on calculating the trade estimates in such a manner. The joint OECD-WTO note entitled, ‘Trade in Value-Added: Concepts, Methodologies and Challenges’, is an effort in that direction.

Trump’s tirade

President Donald Trump’s trade policy guns are currently pointed at China and the Nafta countries. Trump blames China for his country’s trade deficit. While the exchange rate pegs of China could be blamed for this, the story is not complete. The US has a capital account surplus which rose 9.6 per cent in January 2017. Given its well-developed financial markets the US is a favourable investment destination. Foreigners including Chinese are investing in the US to build more factories and offices there. What this means is that the jobs lost by the working class rust-belters are being gained by differently skilled groups in the US itself.

In India’s case, Trump’s anti-H1-B visa stand has put the Indian IT service export industry in a bind. However, many of these IT firms now under stress are owned by Americans. Some top IT companies in India such as Cognizant, HP, IBM, Syntel, Dell, Oracle, SAP, Cisco, Microsoft and Intel are subsidiaries of US firms. Some others such as Capgemini, Lenovo and Samsung are owned by non-US but non-Indian MNCs. The question here then is how much these US MNCs gain from the H1-B visas. Global trade systems are already in place and a reversal now would be too costly and painful. The causes for trade and exchange are the differences in technology, resources, demand and the economies of scale. With trade the industrial landscape changes, rendering some skills and technology outdated and uncompetitive.

Redistribution outlook

What is required is a re-distribution of the gains from trade to offset the losers. Some ideas for redistribution include giving trade adjustment grants to the dislocated workers, and offering reskilling programmes or technological upgradation schemes funded through gains from trade.

The problem of compensation is not settled, though. Estimating who lost and who gained and by how much is not an exact science. Besides, the winners would be supportive of compensation before the policies are to be implemented but would not be eager to follow up once the policies are in place.

However, if job creation is the Government’s agenda, it needs to take the value-added approach and use it to estimate the ‘job content’ of trade. The focus can then be to incentivise products with high job content and localisation. This is true for both Trump and India.

The writers are from the Indian Trade Service. The views are personal

Published on May 18, 2017

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