September 21, 2015
The Washington Post ran an editorial yesterday worrying about the end of globalization. It told readers:
“Freshly released data from the World Trade Organization and other economic forecasts show that the world is on course for its third consecutive year in which growth in global trade will be lower than overall economic growth, which is itself anemic, according to the Wall Street Journal. The last such three-year streak ended in 1985.”
There are several aspects to this that are striking. First, the comparison with the three years ending in 1985 is interesting since the U.S. economy grew very rapidly from 1982 to 1985. The economy had been in the middle of a steep recession in 1982. It had a sharp recovery over the next three years with growth averaging 5.4 percent. If the U.S. economy suffered from this period of weaker trade, it’s difficult to see how.
The second point is a simple question of logic and arithmetic. When trade barriers are removed we expect to see rapid growth in trade. Once most barriers have been removed, the rate of growth is likely to slow, since trade is already very large. It is unlikely that we will see rapid growth in trade between the 15 original members of the European Union, since most of the barriers to trade were removed more than twenty years ago.
The third point concerns relative prices. In the United States, trade has fallen very slightly as a share of GDP from 2011 to 2014 (from 17.7 percent to 17.67 percent) even though real exports and imports both grew far more rapidly than real GDP over this period. Exports grew by 9.9 percent, while imports grew 7.3 percent. By comparison, GDP grew 6.3 percent.
The explanation for this difference is that prices of traded items, most importantly oil, plummeted in this period. This drop in the relative price of items that are traded will lead to a drop in trade as a share of nominal GDP. It can also lead to a drop in real trade when countries that are heavily dependent on some products, for example oil exporters like Russia and Venezuela, have to cut back their imports. In any case, a fall in the price of traded items is not obviously bad and in fact the Post had previously celebrated the fall in the price of oil in its editorials.
Of course, the moral of the Post’s editorial is that we should approve the Trans-Pacific Partnership (TPP). The TPP actually will not do much to reduce trade barriers, since the barriers to trade among the countries in the pact are already low in almost all cases. However the TPP may boost prices of traded items, since one of the main thrusts of the deal is to increase patent and copyright protections.
Stronger protection can increase the prices of the protected items by several thousand percent above the free market price. This could mean that countries are spending much more on things like imported drugs. This would increase the share of trade in GDP, apparently an important goal to the Post, even if it acts as a drag on growth. (It’s probably worth mentioning that the drug companies are major advertisers for the Washington Post.)
Comments