Trump's trade attack is off track

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The attack being mounted by Donald Trump on free trade is steadily dismantling much of the post-war architecture of international agreements that has supposedly led to mutually beneficial outcomes for most of the countries involved.

Harley Davidson logoTrouble is, the disruption that Trump is mainly responding to is caused by globalisation, not free trade. The two are very different.

To give some idea of how they tend to get confused, about half of the so called trade deficit between China and America is actually American companies shipping products back up their own supply chains from their Chinese operations. For example, one of America's largest listed companies, Apple, has large manufacturing operations in China. When that product is shipped to America, it shows up as 'trade', but it is not.

The way globalisation works became clear to this writer when it was revealed by the chief executive of a large Swedish home appliances company. After pouring coffee for some nondescript visiting Australian journalists — something no Australian chief executive would ever do — he proceeded to explain how the company chooses to place its operations around the world.

It was an extremely complex matrix that took into account exchange rates, labour costs, the level of industrial harmony, the quality of supporting infrastructure, energy costs, geographical location, tax, legal regimes and other factors (we journalists were not allowed to note it down). Choices were made about where to place almost all the operations. The only thing that was not negotiable was that head office would remain in Sweden.

Such calculations are being made by all the world's largest corporations, the biggest of which are comparable in size to smaller nations. It has very little to do with trade policy or international trade law.

In the case of some of the large Asian car companies, for example, excess capacity is located around different countries in the region to create redundancy. When exchange rates move or other conditions change, the company simply reconfigures its operations.

 

"The participants have no interest in the nation — indeed they are brilliant at avoiding tax, which would mean giving something back to the countries in which they operate."

 

The Asian financial crisis in 1998, for example, was triggered by a weakening of the yen against the US dollar. The Japanese companies responded by closing their operations in Thailand because it was no longer cheap. 'Globalisiation is off with the yen 120 against the US dollar,' as one Japanese business person commented to me. It caused Thailand to experience severe economic stress, triggering a string of other economic collapses.

As ever, there is little attempt by mainstream economics to accommodate what actually is happening; they still cling to the idea of comparative advantage, nations exploiting their own natural advantages to increase transactions between them. Not only is this a tautology, it does not say anything meaningful about globalisation, which is driven by individual corporations' pursuit of competitive advantage, not comparative advantage.

The aim, as the cliche goes, is for the large corporations to find the 'cheapest hands and the smartest minds'. That means picking off workers in different countries, with little interest in how overall nations fare.

The contradiction in Trump's strategy was writ large when the iconic motor cycle maker Harley Davidson said it would locate some of its production in Europe to get around the move towards protectionism — a move that elicited threats from the US President.

That is how globalisation works. Just shift parts of your company to outplay whatever countries do to get more control over its destiny. The participants have no interest in the nation — indeed they are brilliant at avoiding tax, which would mean giving something back to the countries in which they operate.

There is, of course, still a large amount of conventional trade. Australia depends heavily on coal and iron ore exports. Australian agriculture is conventional trade, and is harmed by protectionism. There is also a strong argument for allowing open trade, not for the reasons given by mainstream economists, but because it tends to expose a country to the latest innovations in the world.

What happens when you fail to do that can be seen in South America, where heavy protectionism held the economies back from modernising. Conversely, China's strategy of inviting Western investment in has allowed the country to modernise with extreme speed. China was not using a mercantile strategy, of trading to success like Japan and Korea. It was sucking in the West's intellectual property so it could modernise more rapidly. The country is catching up fast.

Trump's destruction of the architecture of international trade agreements and reversion to protectionism will expose the complexity of globalisation, but is unlikely to have the effect he is aiming at, which is to bring investment capital, and jobs, back to his country. Capital is extremely mobile, jobs are mobile and production is mobile. There will be no going back, and America will rely instead on its massive budget deficits, which it can get away with because it has the world's reserve currency, and on having biggest stock market.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English Literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Topic tags: David James, Donald Trump, globalisation, free trade

 

 

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I went to CBHS Lewisham with a David James, was David a Lewisham boy?
Chris J. Develin | 19 July 2018


Why is it that our 'free-trade' fundamentalists in the Coalition don't understand this distinction between free trade and globalisation? The post-war industrialisation of the Australian economy was of a similar nature. Big multinationals invested in Australia simply because it was the most profitable way to meet the then protected Australian market. The Australian subsidiaries were never intended to be competitive in a world market and were usually forbidden even to try to export. When protection was removed, the multinationals pulled out.
Ginger Meggs | 23 July 2018


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