[SCMP Column] Free Trade is Tough Sell

November 27, 2017

There’s a puzzle among Asia’s business leaders: if the net benefits of more trade and less protectionism are so clear, why are so many voters in countries like the US and the UK so virulently opposed to it? And what can best be done to reduce the anger and anxiety, and make sure the growth arising from strong international trade can continue?

Concern peaked among business leaders in the APEC Business Advisory Council (ABAC) on the surprise victory of Donald Trump in US elections last November. It was widely recognised that if he followed through on his “American First” economic nationalism, introducing protections for US domestic companies, and going out to fight with any country with a significant trade surplus with the US, great harm could be done to company costs and profits worldwide, jeopardising global growth and job creation just as we were beginning to emerge from the worst recession in 80 years.

So as ABAC leaders met at the beginning of this year to plan priorities for 2017, two tasks towered over all others: to test whether the long-held belief that openness to trade and investment really was well-founded; and to understand more clearly why so many disagreed, and what was needed to address these sceptic’s concerns.

They tasked a team from the Marshall School at the University of Southern California to address these questions across the 21 APEC economies, with instructions to report back in Danang during the APEC Leaders’ summit just a couple of weeks ago. Findings were predictable, but fascinating.

The first question was really very easy to answer: “No economy in modern times has sustained economic growth without harnessing the benefits of trade and technological advances”. Data from just about every reputable economic agency agrees that openness to trade and investment brings big net benefits.

But there is the rub: “net” benefits. As the Marshall School team noted: “The benefits of trade liberalisation can be diffuse, unequally distributed and can take time”, while there can in the meanwhile be “acute negative impacts on some individuals, groups and sectors.”

It does not help that in big economies like the US only 1 per cent of companies are actually involved in international trade. While the impact of this 1 per cent is huge in terms of lowering costs for local companies and Walmart shoppers, these impacts are indirect and unappreciated by most businesses, and most consumers. While economies like Hong Kong and Singapore have a much higher awareness of benefits, with 70 per cent or more of companies involved in trade one way or another, we are exceptions that prove the rule.

And while globalisation has been responsible for some job losses, trade in general terms has become the fall guy for two other much more powerful forces: the decade-long recession that has followed the US financial markets melt-down in 2007; and the industrial convulsions resulting from the technology revolution accelerating around us.

“APEC economies that have relied exclusively, or too heavily, on anticipated future economic growth to mitigate adverse impacts and create new opportunities for citizens, have seen an increase in the amount of discontent and number of disenfranchised citizens,” the Marshall School team reports.

“Discontent and frustration among different groups in different APEC economies are very real, and should not be minimised,” they note: “Frustration is largely directed at the ineffectiveness of domestic policies to handle the adverse impacts of technological change, trade liberalisation and globalisation.”

Matters have been made worse by the viral amplifying impact of social media, a clearly visible surge in inequality, and a loss of job security for many in our work forces.

The study blames businesses for being blind to the mounting inequalities, ignoring how many people have been excluded from the gains of recent years, and complacently believing it was up to government agencies to come to the aid of those being left behind.

Looking at APEC’s economies individually, the study identified five where high levels of inequality, low trust in government, inadequacy of adjustment policies, and poor communication on the changes effecting us, combined to create a high risk of increasingly rancorous attacks on globalisation and trade liberalisation – Indonesia, the Philippines, Mexico, Papua New Guinea, and predictably, the United States.

While Hong Kong was seen as a “low risk” economy, there was little room for complacency, with concern over the ineffectiveness of the government’s economic adjustment policies, eroding trust in government, and the worst income inequality among all of APEC’s 21 economies.

The messages from the study are clear. Governments have so far done a poor job in explaining the radical changes going on around us, with education systems that for the most part are not fit for purpose in preparing people for “future jobs”. They lack any capacity to deliver the kind of lifetime learning that we are going to need as technological change accelerates around us.

Businesses have been complacent in leaving government agencies to tackle these problems, and have been indifferent to the difficulties being faced by those struggling to adjust. If we in business are going to convince ordinary voters to support continued globalisation and openness to trade, we are going to have to focus much more keenly on fairness and inclusion. We must be much more directly engaged in structuring education and vocational training that makes sure the casualties of change can be quickly re-equipped to rejoin the workforce with confidence and security.

The report attacks governments that have focused exclusively on “safety nets”, which maybe protect labour force casualties from economic catastrophe, but do nothing to prepare them to recover. For that, governments need to focus on “springboards”: “Social protection safety net programmes are important, but are only a short term fix. Governments need to invest in innovative springboard programmes that prepare their citizens for jobs of tomorrow.”

The Marshall School conclusions may be predictable but they are important and welcome. And the depressing reality is that as we enter 2018 the sceptics on free trade remain as vocal and angry as ever. Trump’s administration remains strident on using protectionist measures to bring jobs home and cut bilateral trade deficits – no matter how naïve and destructive this will be both at home and abroad.

For those of us who believe in, and recognise the benefits of free and open trade, the work needed to convince the sceptics has barely begun.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own. 
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