Saturday, July 26, 2014

Free Trade limitations:Beyond theory

From 1990 up to 2008 free trade grew twice as fast as global GDP. However, since then the pace of free trade growth has become slower. Following the financial crisis of 2008, new protectionism demands have been increasingly stronger, especially in those countries with competitiveness constraint to compete with foreign goods. Some people believe that Globalization based upon ever higher trade flows, seems to be under threat, so it does globalization itself .(, Adair Turner July 18,2014). This situation state some key questions: a.-Is globalization linked to always increasing free trade flows as its source of expansion? b.-Is there somehow a limit for free trade? a.- Globalization roots are more related to the return maximization of financial capital, than trade flows. Globalization is the way to seek that maximization ,because otherwise they would be lower .Trade is the positive externality of that purpose, as long as new ventures with high capital returns become real, boosting the production of goods. Having said that , the next step is to determine whether trade flows have high income elasticity to sustain its growth pace such as to make globalization more trade dependent. The fact that economic growth is biased toward the services sector, which are within the non tradable goods, seems to pose important doubts about it. Services sector, are becoming more important as a share of the GDP in the majority of advanced economies. The USA economy recovery under way, is well based on the service sector as well as service consumption resilience. Income elasticity of foreign average quality goods, is probably less than one. So, globalization is unlikely to be driven uniquely by trade flows. The implication of this assessment, may be provocative: In the margin, Protectionism is not longer a threat to globalization, as long as trade liberalization get decreasing marginal advantages. So, this outcome becomes a limitation to the pace at which new trade agreement may be signed, unless it goes into more complex issues. This leads us to the second question. b.- Free trade was thought to be based on comparative advantages, factor prices equalization forces, and high incomes elasticity for foreign goods. However, as trade flows involved more sophisticated goods, because of technology intensive production and automation, it required higher mobile and better human capital endowment, along with higher capital mobility, so factor prices differences become less of an incentive for trade growth .They converge as knowledge is also mobile, and although competitive advantage becomes the new source for trade, as long as incomes level convergence take place, trade growth rate may get its stationary status or even become slower. All of these arguments do not mean that free trade is either negative or unnecessary for the well being of mankind.Low income countries may still expect to get gains from trade, but the trend over time is to make those gains lower. Massive internet availability will make virtual trade the new source of global flows as long it get an higher share of total transactions.-