Time for Reflection

As one year morphs into another, it is a good time to reflect on a changing trade landscape, but possibly wise to avoid the temptation to make predictions!

During 2018 we have seen a challenge to the post world war two consensus that promoted ‘free trade’ and globalisation. The term ‘mercantilism’ has been regularly used to describe policies designed to support export growth while protecting key domestic industries.  It has most notably been used to characterise the approach of President Trump to trade and his resultant challenges to existing trade agreements, the World Trade Organisation and US trade imbalances.

However, the seeds of this go further than a change in the US President.

Since the Financial crisis of 2007/2008, there has been growing disenchantment with accepted nostrums, including globalisation.  Unit 46 of Trade & Export Online highlights factors that have contributed to a step back from the previous onward march of the free trade agenda.

In the recent past, a variety of writers were drawing attention to the ‘East Asian model’, which saw government power used to promote a nation’s competitive advantage through tactical support of targeted sectors.  There are elements of this in the Chinese Economic Model, albeit this does not quite do justice to what is a more complex rebalancing.

So does evidence like this render the ‘textbook’ representation of trade irrelevant?

Unit 1 summarises Ricardo’s ‘Law of Comparative Advantage’.  Ricardo essentially argues that Nations specialise in the production of goods where they have a relative advantage with the resultant benefit of greater wealth creation.  If it were so simple, it begs the question of why this can so readily break down? Three potential reasons given in the unit are:

  1. Strategic reasons (President Trump is pursuing strategic intent)
  2. Transport costs (for which current evidence is less compelling)
  3. Artificial barriers to trade (which have been in the headlines frequently in 2018).

So, at one level, the received understanding still holds.  However, at another, more sophisticated explanations are required to explain current circumstances.  The world of trade is facing a significant challenge, which has roots in the continuing political consequences of a major economic crisis.  Additionally, powerful nations are exercising that power, sometimes robustly, in pursuit of a material rebalancing of their economies and trade relationships.

About the author

David Millett is a coach and trainer who works regularly for RWA. He has a long experience in trade issues with a background in banking, where he was Head Of Trade Product Management for the Royal Bank of Scotland, before becoming Head of Business Development for UK Export Finance’s short-term business. David is a Fellow of the Institute of Export and former Council Member for the International Chamber of Commerce UK and the British Exporters Association.

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