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Trade War in A Global Economy: On Globalization and Free Trade

International & European Institute
Apr 11, 2018 12:41 PM 3 min read

Editor’s Comment: Against the backdrop of the ongoing Trade Wars, it becomes more pertinent than ever to participate in a discussion on globalization and free trade. Below are experts from an interview with Jean-Marc Daniel, Associate Professor of Economics at ESCP around the ongoing discourse on anti-globalization, protectionism and rejection of free trade.


Despite the current upturn in world trade, the return of a protectionist rhetoric since 2008 threatens the future of free trade. How do you analyse the rejection of free trade, which manifests itself in the economic policy of certain states (United States, Great Britain)?


What is striking, and relatively new, is that the dominant power, namely the United States, is assuming the leadership of protectionism. The return to grace of protectionist theories is due to public opinion associating free trade with delocalization, then delocalization to deindustrialization, even if the loss of industrial jobs is due more to robotization than to delocalization. By the end of the 19th century, this kind of false equation applied to agriculture had already led to protectionism, a protectionism embodied in France by Jules Méline. 


Since the 2008 crisis, global economic recovery remains uncertain. Do you think free trade can save the economy?


2008 was a cyclical crisis similar to that of 1974/1975 or 1992/1993, even if each of these cyclical downturns has specific aggravating factors (oil shock in the 1970s, financial slackness in 2008). The problem is that, from cycle to cycle, each recovery is weaker than the previous one. Potential growth, i. e. growth independent of ups and downs, continues to decline. In France, we went from 5% in the 1960s to 1.3% today. This slowdown affects all developed countries, which have in common the fact that they are close to the so-called "technological frontier". 


But there are countries whose potential growth remains strong because they are in the catch-up phase. The free movement of capital allows them to access the most efficient technologies and the free movement of goods allows developed countries to find new markets: thus, global growth is doubly successful. 


From 1985 to 2014, the growth in world trade was higher than the growth in world economy. This is no longer the case, since the growth rate of world trade is now below the growth rate of the global economy. Is free trade less dynamic? 


The slowdown in world trade is due to three factors. First of all, its growth phase due to its liberalization is rather behind us. During this phase, each country specializes according to its comparative advantage. As a result, it abandons some productions, which increases its imports; at the same time, the outlets of the activities it keeps are increasing sharply. Once this process is completed, international trade reaches cruising speed. Secondly, world trade has a strong industrial and energy component. 

However, relative prices for this type of products are falling. Since 2014, the oil counter-shock has been spectacular. This leads to a mechanical decline in the weight of international trade in GDP. While statisticians do take into account the impact of these price distortions, their correction is not perfect. Finally, people are becoming receptive to discourses on "made in" and "economic patriotism". 


The trade surpluses of some countries (China, Germany) are often seen as an attack on the national interests of their trading partners. Do you think trade surpluses affect global economy?


One country’s deficit is another country’s surplus. Responsibilities for global imbalances are therefore shared. In economy, we demonstrate that an external surplus reflects an excess of savings and a deficit reflects an excess of consumption. The Japanese, the Germans, and for some time now the Chinese, have been accumulating surpluses on the United States, surpluses that they invest there by buying US public debt. For example, the American consumer lives on German or Asian labour, while the latter, whose average age is constantly increasing, hopes that he or she will retire and live off American taxes.  There is something unhealthy about both American recklessness and the illusions of aging countries.  


How do you see Europe's place in both world trade and the world economy? 


The EU 28 is the world's leading economic power. Moreover, it has a high educational level and a real dynamic of innovation. However, it has two weaknesses: on the one hand, its demographics, which is a common point with Japan, and a certain lack of coherence in economic policy-making on the other hand, which hampers its flagship project, the euro. 


This article was first published by the International & European Institute, ESCP Europe, and is republished with permission. Click here for the original article.