What should be the future of the global trade order?
Between the U.S. election of President Trump, and Britain’s ongoing attempt to exit the European Union, the revolt against the existing trade order is well underway. But it’s painfully obvious both of these developments were purely nihilistic events, with no coherent ideas for what should come next. Meanwhile, elites and experts in the economics profession are equally adrift. There’s growing recognition that the principles underlying the modern global trade regime didn’t deliver the promised results, and caused a lot of collateral damage. But that’s about it.
But given the mistakes made and the lessons learned, we can at least sketch some rules of thumb that should guide us. These are principles that can be applied to developed and developing countries alike. They can form a new planned global arrangement, or just serve as guiding principles for a more decentralized world; one of piecemeal trade relationships between individual countries.
1. Center workers, voters and the environment, not investors and big corporations.
The status quo is designed to maximize the freedom of private capital to seek efficiencies and profits wherever they may be found. That means standardizing rules and regulations across countries, so that companies face the same “playing field” wherever they go. That is an inherently anti-democratic process, which restricts national populations’ ability to govern themselves.
Technically, you could make strong labor rights and environmental protections the international standard. Instead, the practice has generally been to standardize trade agreements around weaker rules, impose draconian standards for things like intellectual property, and even allow private companies to sue governments over their sovereign policymaking.
Beyond trade agreements, the deeper problem is the demand that governments avoid fiscal deficits, and rely on high interest rates to combat trade crises. Again, the point there is to create an environment where governments stay out of private companies’ way, and where economic recoveries are directed and driven by private investors. But the cost is a perpetual cycle of recessions and high unemployment.
2. Everyone should have their fiat currency, and avoid reliance on other currencies as much as possible.
Most advanced western governments abide by this principle already. But middle-income and developing countries are another matter. Often, large portions of their domestic economic activity is carried out in another nation’s currency, which they obviously don’t control. These countries may also be shackled to foreign currencies because they rely on imports for crucial things like food, energy, or advanced technology. Finally, a lot of developing countries peg their currency’s value to another foreign currency. (In all three cases, the foreign currency in question is usually the U.S. dollar.)
Relying on the currency of an advanced western country like the U.S. supposedly brings stability. But again, that’s only “stability” for private investors. For the everyday consumers and workers in a given country, reliance on foreign currencies exacerbates that aforementioned cycle of recessions and trade crises, particularly by drowning countries in foreign-denominated debt. Obviously, rooting out all reliance on foreign currencies will be very difficult. But we should at least acknowledge it’s the direction everyone should move in.
3. Full employment should be the goal of everyone’s domestic economic policy.
By designing their fiscal and monetary policies to be as friendly as possible to private investors, countries not only harm themselves, but leave the entire world fighting over an inadequate supply of global consumer spending. Instead, everyone should try to run their own domestic economies as hot as possible: make maximal use of capacity, and keep unemployment as low as possible.
While this would make the biggest difference for poorer countries, they also face the biggest hurdles. But advanced nations could hit this target much more easily. A focus on full employment here in America, for instance, would likely have made China’s entrance into the global trade order much less damaging. Moreover, given how much the rest of the world relies on the U.S. dollar, a more generous monetary and fiscal policy on our part would make life better for everyone.
4. Capital controls are useful and should be widespread again.
Capital controls are just government rules that restrict when private investors can move money across borders — usually on when they can take money out of a country. Obviously, if your focus is on friendliness to private investors, capital controls are a no-go, and the world has dismantled them over the last few decades. This was a mistake. Even if we don’t return capital controls to the old role they played in the middle of the 20th century, we should at least recognize that we went much too far in freeing up private capital to move across borders. Again, the biggest beneficiaries of this change would be poorer and developing countries. But even advanced economies like America could, if they wanted, use capital controls to buffer against the worst tendencies of offshoring and outsourcing.
5. Countervailing asset purchases are better than tariffs.
While countries should have their own fiat currencies, and shouldn’t use hard pegs in their monetary policy, that doesn’t mean they should follow a strictly hands-off approach to exchange rates. Sometimes, it might behoove them to adjust their currency’s value relative to others.
Hopefully, adhering to the other principles already listed will minimize the need for those interventions, either by moderating trade imbalances, or by neutralizing the damage those imbalances can cause. But when countries do need to intervene in their exchange rates, doing so by buying or selling assets in other currencies — usually via their central bank or a sovereign wealth fund or some such — will work much better than tariff wars. Tariffs only affect currency values and deficits indirectly, requiring games of whack-a-mole with global supply chains. They ultimately have to force larger negotiations to have a meaningful effect. Purchasing assets, by contrast, cuts much closer to the roots of currency imbalances, and are policies countries can engage in unilaterally.
6. Countries should place a higher priority on self sufficiency.
Right now, the global trade order emphasizes comparative advantage — countries specializing in particular goods and services, and relying on trade to provide the rest. In theory, this is supposed to make everyone better off. In practice, it’s been enormously destructive, particularly since what a lot of countries have “specialized” in is cheap labor.
While total self-sufficiency won’t be realistic all the time, we should at least swing the pendulum back in that direction. Once again, this is most important for developing countries, particularly when it comes to food, energy, and advanced technology. Nations should produce their own food and energy as much as possible, which will inevitably require more sustainable practices and more green energy. (Sun and wind, unlike oil and coal, are available everywhere.) Becoming self-sufficient in high technology will be much more difficult. But we can at least try to set countries on the path, and help them manage the challenges that come with relying on high-value imports in the interim. Protecting certain industries from global competition is an area where tariffs could be of use, not to mention subsidies and support from explicit and planned industrial policy.
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