ME. Professor, I have been watching anti-trade and immigration sentiment in the presidential campaigns and Brexit vote with amazement. We appear to be blaming trade agreements for many problems that have nothing to do with trade.
BF. I agree. Those who forget the lessons of history are potentially destined to repeat the mistakes of the past. About 90 years ago, the U.S. economy was operating at full speed and labeled the “Roaring Twenties” in the post-World War I era. At this same time, Europe’s economy was recovering from the wartime devastation and started producing again. Global overproduction emerged. This was particularly true for those in agriculture. Back then, agriculture and the rural economy was a larger part of the general economy. The Smoot-Hawley Tariff Act was being debated in Congress during the Fall of 1929 when the stock markets crashed. Signed into law in 1930, Smoot-Hawley increased tariffs on a wide range of imported goods.
ME. OK, I remember reading about the “Smoot-Hawley Tariff Act.” The agricultural depression existed for most of the 1920s. In 1930, the U.S. was slipping into recession. Smoot-Hawley was signed and seen as a way to stimulate demand for domestic goods and employment. The Act increased tariffs on 890 imported goods. Other countries around the world retaliated to the U.S. import tariff increases by increasing their own tariffs on imports into their counties. This created a trade war. And by the end of 1934, world trade had plummeted some 66% from the 1929 level.
BLF. Unemployment rose in Europe, and around the world. In the U.S., it rose to 24 percent. More than 5,000 banks failed during the Great Depression. Thousands lost homes and farms because they couldn’t make mortgage payments due to low prices, lost jobs, and bank closings. Some economists argue that monetary policy decisions contributed to starting the Great Depression, however, most agree Smoot-Hawley made things worse. The domestic economy did not pull out of the Depression until the end of the 1930s when World War II demand picked the economy up.
ME. The Allied leaders were committed to not allowing a repeat of trade wars and isolationism to occur following World War II. The U.S. and its Allies provided leadership for setting up the United Nations, International Monetary Fund, General Agreement on Tariffs and Trade (GATT), and the World Bank to foster international communication, monetary and economic cooperation, interdependence and economic development. The prevailing view was that countries that communicate and rely on each other for trade and development were less likely to go to war.
BLF. Sounds simple but it is more difficult to accomplish. Since 1945, there have been eight rounds of GATT negotiations involving the major trading nations of the world all designed to reduce import tariffs and trade barriers. The eighth and last round of GATT negotiations culminated in establishment of the World Trade Organization (WTO) in 1995. WTO facilitates further development of global trade rules, oversight, and enforcement for the 164 member nations around the world. Since formation of the WTO, the emerging focus has shifted to bi-lateral and regional multi-lateral trade agreements to reduce trade barriers and foster trade.
ME. In theory, free trade based on comparative advantage maximizes global income and standards of living, but getting there can be a difficult. As trade barriers are removed, the benefits are spread broadly across consumers who see new products and lower prices on other goods and services. Low cost industries benefit from the opening up of new markets. But high cost industries are forced to adjust. High cost industries either become more efficient and competitive or they are forced to scale back operations. Moving toward freer trade tends to equalize prices and wages paid globally, which means higher-wage nations for unskilled labor come down to a global wage unless there are offsetting factors. The U.S. has historically stayed ahead of trade liberalization by investing in new technology and innovations, increasing productivity and developing a more highly skilled workforce. However, industries that don’t modernize face layoffs and higher unemployment.
BF. The bottom line is either a nation agrees to the rules of trade or they don’t. You cannot have it both ways. A nation that wants to export, must agree to imports. If there is no trade, then economic growth and incomes for the citizens are much more limited to resources and products that can be produced domestically within its borders. U.S. agriculture has the capacity to produce a lot more food and energy than we consume. People buy it internationally because it is cheaper than the alternatives. The emergence of mass markets also facilitates growth. In the United States, firms produce for one national set of product standards and market regulations instead of 50 states. The recent GMO labeling bill passed by Congress maintains the mass-market concept for the U.S. The European Union (EU) has a similar mass market. However with the Brexit vote, Europe may evolve into two sets of product and trade rules, which may add to the costs of trade in the region as Great Britain seeks full sovereignty, separate from the other EU members.
ME. Many Brexit voters were motivated by recent acts of terrorism and concerns over EU immigration policy. Immigration policy will now be directly linked to British sovereignty and control. So will trade policy. Globally, it remains to be seen how far the rhetoric will go in terms of increasing the costs of international trade. The real consequences may emerge in the form of trade barriers not removed and future trade relationships not developed, such as the Trans-Pacific Partnership (TPP) awaiting Congressional approval or the Transatlantic Trade and Investment Partnership (TTIP) with Europe that is currently being negotiated.
BF. You mentioned nothing about China and currency manipulation accusations. The last vestige of the gold standard was removed in 1970s. A certain level of exchange rate float is needed for discipline on trade imbalances. In 2008, multi-national coordination was required to avoid a global depression. However when a major trading nation unilaterally uses currency manipulation to gain more favorable terms of trade, the real problem lies within the purview of the International Monetary Fund and global clout of Monetary Policy institutions -- not Trade Agreements. Unfortunately, trade agreements often receive blame, but after the pluses and minuses are considered, they are tools for creating higher incomes and wealth around the world.
Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas State University.
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