This is the second note in this series and it focuses on international trade. I look at its historical evolution and conclude that it is a multi-century secular trend that is both unstoppable and beneficial. Well negotiated win-win trade agreements are the path to global peace and prosperity. The modern world is defined more by supply chains and local (urban) communities than by national boundaries. (See: Parag Khanna, ”CONNECTOGRAPY Mapping the Future of Global Civilization”, Random House New York, 2016.) International trade plays a significant and increasing role in national economies of free societies.
Why trade?
Trade is most fundamentally based on the notion that not everyone everywhere is equally well suited to make everything that consumers need/desire. A long time ago all basic (tribal) communities were fully self-sufficient. Later, in the pre-industrial age, trades developed, and even though most households farmed and produced all the food they consumed, many items (e.g., clothing, tools) were supplied by specialized trades, and the practitioners of the trades secured most of their food from farming households. In the 19th century, railroads and industry concurrently developed; most people moved off the farms. In the USA, in 1800 about three-quarters of the working population were employed in farming, by 1900 about 40%, and by 2000 less than 2% were still so engaged. Manufacturing never became the dominant employer at the same level as agriculture had been; in the USA manufacturing’s share of employment peaked in the 1950s at less than 25%, by 2004 it was less than 10%, and its share of employment continues to shrink.
Global trade is relentlessly increasing. The trend is clear: trade is growing and exports now represent about 30% of the world-wide economic activity. While international trade grew almost continuously since the mid-1800s, interrupted by two World wars, it received significant triple-boost in the second half of the 1900s. These three boosters were the introduction of container shipping, advances in telecommunications and informatics, and the formation of the European Union and other trade alliances. Between 1960 and 2015 international trade’s share of the global economy more than doubled. (Sources: WTO and World Bank.)
The Evolution of Trade
Since for each exported item, there must be somewhere a matching imported item, the total economic impact of international trade on the global society is underestimated by the export figures. Furthermore, between trading entities, there is always eventually a Balance of Payments (BOP) that includes, in addition to exports and imports, incomes from investments, capital investments, and other financial transactions. Thus, apart from some timing adjustments, trade augmented by financial transfers always balances.
The evolution of US international trade balance in goods in the 20th century started with a positive trade balance and exports, as a fraction of the GDP, close to the global norm. In 1913 as WWI approached exports slowed down. After WWI came the Great Depression, resulting in a collapse of trade; then came WW II, and it took till about 1980 for trade to exceed its 1900 level as a fraction of the GDP. After 1980 US exports stayed reasonably constant as % of GDP, but imports started to rise. (Sources: unstats.un.org and US Census Bureau.)
What happened? A frequent popular claim is that it was cheap foreign labor that led to the import rise. Labor costs do play a role, but there is more to this story.
The Rise of Japanese Trade and Asian Manufacturing
Japan was the first major post-WWII exporter to the US. By about 1980 Japanese manufacturers captured major parts of the US automobile and consumer electronics markets. These two industries, till the middle of the 20th century, were totally dominated by American manufacturers. In automobiles Toyota developed the lean manufacturing system, resulting in significant quality improvements and cost reductions. In consumer electronics RCA dominated both the markets and the technologies; RCA invented much of the consumer electronics, including color TV, and owned virtually all the basic patents. RCA’s corporate strategy completely ignored exporting goods; it focused on global licensing of its patents and it single-handedly created the Japanese consumer electronics industry as its patent licensee. Subsequently RCA made several wrong bets in computers, video recordings, and TV displays; it was acquired first by GE in 1987, and subsequently, its consumer electronics operations were sold to Thomson, a French entity. For a while, some parts of Thomson’s global business thrived, but by the early-2000s in addition to Japan, the efforts invested into consumer electronics by the South Koreans and the Chinese resulted in a global shift, and Thomson went out of business. (Disclosure: the author worked as a researcher and inventor for RCA and later was the General Manager of a US operation of Thomson and a member of Thomson’s global management team.)
US International Trade
The US continues as a strong participant in international trade, though relative to its GDP, at a level significantly below the global average. As the US economy evolved into a service economy (see Figure 4 in Part 1 Manufacturing in this series), services gained an increasing share of US foreign trade. At the beginning of the 20th century it was insignificant; by the early 1960s service exports were about one-third of goods exports; by 2015 service exports are one-half of that of goods. While the service trade shows a positive balance, the negative balance of the goods trade pushes the overall trade balance to close to negative 3%. Since the current account is still negative, the BOP is achieved by foreigners’ interest in investing in America. (Source: US Census Bureau.)
There is a general notion that countries with high labor costs run negative trade balances. It is interesting to look at a comparison between Germany and the USA.
German living standards are very like those in the USA and so is the GDP per capita. Both countries enjoyed 1.9% GDP growth in 2016 and the unemployment rates for both were between 4 and 5% (in June 2016 US unemployment was reported as 4.9% and the German one 4.2%). The balance of trade in 2016 for Germany was +8% and for the USA -4%. Germany invests heavily into industrial training, has a highly-regulated employment structure, and a strong social safety net; its economy is referred to as a “social market economy”. The US economy is five-times larger, more entrepreneurial, has a higher degree of inequality. Germany is a net importer of services, while the USA is a net exporter. Germany’s current accounts balance is positive, that of the USA is negative. Thus, to maintain BOP, Germany is a net investor abroad, while foreigners invest in the USA.
Global international trade, the sum of all exports and imports of goods and services around the world, in 2015 was 58.3% of the global GDP. US exports and imports added up to 28% of the US GDP. Similarly, Germany’s total trade in 2015 was 86% of its GDP. Thus, US trade could grow a lot before reaching the global standard, let alone catching up with Germany. (Global and Germany data from the World Bank, http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?name_desc=false; US data from US Census Bureau.)
Is international trade good?
In the aggregate and in the long run it is good for all. It promotes peace and collaboration among partners, and adds to global prosperity. In the short term, and in specific locations (for example, in the US rust belt), it can cause unemployment and economic hardship. To most US consumers it has been highly beneficial.
For example, in 1950 the price of an old type (500 line NTSC) 21” RCA color TV was about $500, or close to $5,000 in inflation-adjusted 2014 dollars; in 2014 the price of a 55” 4k Ultra HDTV flat panel TV was about $1,300. Automobile prices in constant dollar terms about doubled over the same period, but in terms of quality, reliability, longevity, and features, cars much improved in the last half-century. In these terms, cars now bear no resemblance to cars in the 1950s.
Today China is investing heavily (billions of $$ equivalent) in robots. Their current 5-year plan includes the development of a variety of advanced manufacturing technologies. China is not betting on cheap labor to retain its manufacturing power. No country should base its manufacturing strategy in the 21st century on low-cost labor and/or protectionist measures; unskilled labor is irrelevant; well-managed technologies and supply chains do the work.
No comments:
Post a Comment