The Retreat from Free Trade

Despite the numerous benefits of free trade, countries are increasingly reverting to protectionist policies that have long been absent from the recent decades of globalization. The post-World War II paradigm has been one of increasingly open cross-border flows of capital and labor, the proliferation of free trade agreements, as well as millions being lifted out of poverty from the prosperity brought by free trade. However, the recent rise in support of populist political parties, especially those which take a more insular view on free trade, risks unwinding some of the progress made by globalization.

The below infographic from the Wall Street Journal highlights three phases of modern globalization, with a distinct slowdown in global export growth since the Great Recession.

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Source: WSJ

There are signs of countries moving toward more protectionist trade stances. The reduction in average tariff rates has stalled in recent years, a greater percentage of products are becoming subject to temporary trade barriers, and a growing number of world-trade policies have been categorized by Global Trade Alert as “discriminatory”.

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Source: WSJ

Merchandise trade as a share of global GDP, after a multi-decade increase, has flatlined and is now beginning to decline. It’s worth examining why some countries are retreating from free trade, after the liberalization of trade in prior decades.

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Source: WSJ

“America has lost nearly one-third of its manufacturing jobs since Nafta and 50,000 factories since China joined the World Trade Organization,” according to the official Trump website. A key tenet of the Trump campaign was that the loss of American manufacturing jobs was due to low-cost foreign labor. It’s a simple catch-cry – that foreigners are stealing American jobs – but it resonated with the many Americans that had lost manufacturing jobs. There are numerous studies, however, that counter this cheap foreign worker theory, suggesting Trump’s campaign rhetoric around foreigners stealing American manufacturing jobs was mere hullaballoo.

Although much of the American deindustrialization and middle class woes have been blamed on increasing trade deficits due to free trade deals such as NAFTA, and unfairly subsidized foreign competition from countries such as China, studies have found that automation may be the main culprit. While the U.S. lost 5.6 million manufacturing jobs between 2000 and 2010, a study by the Center for Business and Economic Research at Ball State University found that 85% of those job losses are due to technological changes, primarily increased automation. The increase in productivity is reflected in an increase in real output despite a reduction in U.S. manufacturing employment.

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The difficulty with Trump’s promise of a manufacturing renaissance is that technological improvement means that incremental output requires less labor. In other words, the job intensity of American manufacturing is in irreversible decline. The MIT Technology Review wrote that in 1980 it took 25 jobs to generate $1 million in manufacturing output in America. It currently takes only 5 jobs to produce the same output.

There is a notable cost differential between labor and robots. A Boston Consulting Group study found that a spot welding worker in the U.S. industry costs $25 per hour, compared to just $8 per hour for a robot to do the same task. This cost gap between human workers and robots, one that is set to widen, has driven a decimation of U.S. manufacturing employment since it peaked in 1979.

With technology continuing to improve, industries that were previously thought of as unassailable by the forces of disruption may become ripe targets. Essentially any job that is monotonous and repetitive faces some threat of disruption from automation, with non-manufacturing jobs in industries such as retail, accounting and telemarketing being placed at risk. Of all the bold promises made by Trump, the evidence suggests that restoring lost American manufacturing jobs will be an enormously difficult, and perhaps even unfruitful, task.

DH6_4892_George_LowResGeorge Hadjia is a Research Analyst with Montgomery Global Investment Management.
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