Whenever I think of trade, I am reminded of Ricardo and his theory of comparative advantage. However his times were different and trade was still very much localized. His theory did not factor in the other associated drivers of trade, constraints of markets, prices in local markets and logistics costs as key differentiators.
I lived in Switzerland for some time and I understood that trade with Switzerland was so difficult and the quality standard of almost everything was so high it was impossible to compete with them on anything. On top of that one of the officials told me that the people would be willing to pay more if it was made in Switzerland. Such is the story of trade in the most developed country of the world.
The post crisis decline is notable today and trade as a percentage of GDP, which has been steadily growing is now in its downtrend. Whether this is the defining moment or is it largely a cyclical response, only time will tell. The secular stagnation hypothesis on the other hand is gaining ground and so is the hype around a China slowdown. The emerging market growth, other than India looks not that strong and the global trade value chains seem to be reeling under all these pressures.
But the fundamentals are not suddenly on a shaky ground. Trade grew higher than income for many decades, in fact it was trade that drove GDP for emerging economies starting with China to all East Europeans and Latin American countries. The East –West trade in EU, export led growth from China and the facilitation by WTO has seen much of the trade story to move from one success to the next.
The role of global value chains cannot be ignored. I always take the classic example of Apple iPhones or Walmart sourcing from 150 countries and largely distributing in United States and also outside.
Trade is so much a source of demand, which may have reached its limit in local markets and trade allows prices to remain steady in local markets. It is also a source of knowledge transfer. Much of the resource allocation of the world is orchestrated by global flows and has done so much to raise the per capita income of people.
But the slowdown is now largely visible and it is no more a small affair, in trade terms the slowdown looks more like a confirmed recession. Those of us who are in logistics know that the freight rates or the Baltic dry Index or the index for containerized trade are all looking south. Trade suddenly seems no more a driver of growth.
The last crisis saw the balance sheet repair activities to be done for almost three years and banks got recapitalized. But this slowed down the investment demand and subsequently consumption demand.
But the income elasticity of trade to go through a major correction would need some path breaking changes in government regulation or shift in incentive structure or major changes in trade barriers (both trade and non-trade), which we have not seen so far.
The governments have always relied on either taxes or subsidies to spur trade while ensuring domestic industry is not affected. And by and large we have not seen much of a change from that.
Manufactured goods as a percentage of trade has touched 80% and here is the crucial question that if prices are a signal of underlying demand, any postponement would impact trade, such is the case for most commodities. Manufacturing to services industry shift is already happening fast.
We cannot ignore the China re-balancing question. Nor can we ignore the rising penchant for local production source, especially with the advent of 3D, this will only rise.
The power of the SMEs and their access to global trade is rising and with better access to global trade we could see a rebalancing on the cards, especially with digitization and improvement in logistics.
Trade partnerships, on the other hand, has the jury still guessing whether that created value in the long term. But surely if we look at history there is much to be said for and against the argument. Starting with the Canada-U.S. partnership to the much acclaimed NAFTA, we have seen participants on both the sides vying for space in the U.S. markets vis-à-vis U.S. getting the benefit of raw material support for its industries and services sector.
Anti-dumping and safe guard measures were at the root of the trade wars that ensued in the earlier decades that fructified into trade agreements. The formation of the EU is the biggest example of partnerships with one single market and one currency making trade flows unimpeded by tariffs and protection. EU also came up against the American dominion in trade.
It is often said that trade agreements do not leave both sides happy, the stronger partner gets away. But history has shown that there is always the next round when things get squared.
When we look at the South East Asia there are largely uncoordinated and fragmented production systems on one hand and similar fragmented markets. But we must look at the potential of partnerships from the point of view of the following critical factors:
- Commodity Vs Service
- Access to markets at what costs
- Quality and reliability of access
- Strategic objectives
Most vocalists against free trade agreements, which destroy jobs according to them, fail to note that low skilled jobs would in any case move to the least cost location in any case. With digitization, this process is irreversible.
Let me take the example of the NAFTA, which showed that since 1993, 20 million new jobs got created in U.S. and trade increased from $293 Billion to $475 billion in 1997. So those against free trade agreements please note.
But one glaring statistics is evident that after most FTAs and PTAs are signed it is finally the game of competitive forces as we have seen in the case of India. India-Malaysia, India-Singapore, India-South Korea and India China will show that Indian imports increased more than exports and India moved from current account surplus to current account deficit.
So at the end of the day it is competitiveness that would drive trade flows, with or without partnerships.
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