International Trade as a Weapon

International trade has been a key driver of growth for the global economy throughout modern history and has been a key factor in (and result of) the development of a truly integrated global economy over the past three decades.  During the first 25 years or so of this integration of the global economy, international trade levels soared, easily outpacing the overall level of global economic growth from the late 1980s to the early part of this decade.  This surge in trade had many benefits for a variety of economies.  For wealthier countries, it allowed them to source goods and services from lower-cost locations, keeping inflationary pressures at bay.  For emerging markets, it led to the development of vast export-oriented manufacturing and service sectors that resulted in millions of citizens of these emerging markets being lifted out of poverty.  For a time, the expansion of international trade and the integration of the global economy was seen by most people as beneficial, and something that must be continued and protected.

Over time, an increasing number of people in many of the world’s most important economies began to view trade no longer as being beneficial, but rather as a threat to their well-being. In many developed economies, manufacturing industries were decimated by the dramatic transfer of manufacturing facilities from developed locations to emerging markets.  Meanwhile, for those developed economies that suffered from relatively low levels of competitiveness, economic growth has come to a virtual halt in recent years as they now face a much greater level of foreign competition, mainly from emerging markets.  These factors, and a change in market conditions, have resulted in international trade recording little or no growth over the past seven years.  In fact, since 2012, global trade has risen by an average of just 0.7% per year, its lowest level of growth since the Second World War.  Now, as many leading economies are threatening to erect new barriers to trade, the outlook for global trade is more uncertain than at any time in recent memory.

A perfect example of this backlash against international trade and the threat of rising trade barriers is the ongoing trade dispute between the world’s two largest economies, the United States and China. In the 1990s and early 2000s, it was the United States that paved the way for China to be integrated into the global economy.  Once China had favorable access to export markets such as the US, it quickly became the world’s dominant manufacturing center due to a combination of low production costs and the vast promise of its domestic market.  For a while, US consumers benefitted from the lower cost of goods produced in China, while China managed to record average economic growth of 10% over a period of 30 years, an unprecedented performance for such a large economy.  However, while China grew rich, many parts of its vast market remained protected, upsetting businesses in the US and elsewhere that sought the same access to the Chinese market that Chinese exporters had enjoyed in the US, Europe and other markets.  Eventually, as manufacturing jobs continued to leave the US for China and other emerging markets, there was a major backlash, culminating in the election of Donald Trump in 2016 on a platform of rebalancing the US’ trade relationship with China and other trade partners.  Over the past year, this trade dispute has taken center stage, with the US and China implementing tit-for-tat tariffs on one another’s exports.  The recent escalation of this trade dispute simply highlights the fundamental differences between the world’s two largest economies on the issue of trade, a dispute that is likely to continue for the foreseeable future.

The dramatic changes in the global economy in recent decades have resulted in a serious backlash against international trade.  As a result, many large markets are now turning to protectionist measures to shield their workers and businesses from foreign competition.  The world’s largest wealthy market, the United States, has been targeting nearly all of its main trading partners with some form of tariffs or other barriers over the past two years.  The European Union has also sought to erect barriers to foreign competition, although their efforts to do so have largely been focused on using regulatory means, with their efforts to weaken US-based tech giants as one of the best-known examples of this.  China too is increasingly using the attraction of its vast market as a barrier to trade and investment, threatening any country or business that dares to contravene Chinese policy in any number of areas with a loss of access to the Chinese market.  Even smaller economies that may have a greater reliance upon exports are finding it necessary to appease their citizens’ desire to protect local jobs and businesses as the backlash against global trade grows more intense.

With the recent escalation in the trade dispute between the United States and China, the threat of a global trade war is a serious concern and a major risk confronting the global economy. While no economy would emerge unscathed from a full-blown global trade war, some economies are more at risk than others, including some of the world’s largest economies.  For example, European economies such as Germany and Italy that derive much of their economic growth from exports would be hit particularly hard by any further restrictions to their access to export markets. Likewise, economies such as Canada and Mexico remain highly dependent upon their favorable access to the United States market, while US-based businesses would be severely impacted by any disruption in their supply chains that extend to those two countries.  Meanwhile, most of the world’s emerging markets remain dependent upon exports to generate a large share of their economic growth and to raise wealth levels.  Overall, the risks of a global trade war are considerable, and some economies would suffer dramatic misfortune should such a trade war break out.

Without a doubt, an escalation in global trade tensions would result in lower growth rates for the global economy as a whole, with some countries experiencing a greater slowdown than others. Already, the global economy is showing signs of slowing, albeit only slightly.  In fact, there are many worrying issues confronting the global economy, issues that a better-than-expected performance in early 2019 have done little to address.  As such, a continued run of declining levels of international trade, coupled with rising trade barriers in many key economies, would have major long-term implications for the health of the global economy.  Worse, a weakening of the trade relationships between the world’s most powerful countries could lead to higher levels of political tensions between these countries as they grow less dependent upon one another economically. Altogether, the expansion of global trade and the integration of the global economy are things that are worth protecting, and more people need to be made aware of their benefits in order to do so, before it is too late.