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.
#30
For more news, go to: www.Agri-Pulse.com