This page deals with economics and business issues,concerning Latin America, and the global economy.-
Sunday, July 24, 2016
Beyond free Trade
Last April, according the World Trade Organization (WTO)in its Press release 768, free trade growth indicators for the years 2011-2015, had a path very close to the GDP global growth. It grew less than a 3% annual rate (Y/Y).For the year 2016, the WTO is expecting that Free trade will grow at 2,8%.Before the financial crisis (2008),Trade was growing at a rate twice higher .
This outcome is not somehow unexpected , and in fact it is probably the new trend:Trade growth growing a slower pace.
From the above arise some hard questions, and no less both complicated and worrisome answer:
a.- Does free trade by itself able to get higher welfare level for a community?. If it does , trade would be always expanding higher .The fact suggest the contrary.Free trade seem to be a necessary, but not a suficcient condition to improve welfare at a steady rate.-
b.- What about the answer the mainstream models supporting free trade does provide?.The Heckscher-Olhin model, states that following key assumptions, free trade improve the welfare of a community as a whole, but not necessarily to each of its members individually considered.In other wordss, Free trade does not solve income distribution, and it may allow some people, get higher benefit than others. Thus,it follows that to improve the social value of trade, it is required an effective complementary public policy. Doing so, it allows to get the highest impact of trade upon welfare.-
Moreover, free trade means that all resources are fully mobile. This means that as long as resources move everywhere any time ,coupled with trade expansion, theres is a "job creation" and a "job destruction" outcomes, which do not match each other up,such the outcome is a relocation of jobs to keep employment level at the same level.It rather means that in somes places "job destruction" may be higher than "job creation".The underlaying assumption is that because its higher prices and value added, capital intensive goods, becomes more profitable than labor intensive goods one, to be part of trade flows.Besides, two homogeneous countries in terms of technology development , capital intensive goods,complementary chain value, and high human capital and income level, may get higher benefit from trade taking place among them.-
On the other side (heterogeneous contries), capital subtitute labor, at a faster rate than the arising new opportunity jobs for those left behind.No doubts, in this case, both an effective and efficient public policy, is needed to cope with this implications.-
But , the following implications are even more troubling: As the world becomes interconnected and smaller, at an increasing rate ,the current approach to negotiate trade based upon regional blocs, makes geography a negotiation tool,aside from market size.
Because of Geography ,there are countries , that are in a better position to get more from free trade today, than they were before. The European Union for instance, may get a better trade agreement as such, now than in the beggining of such experience (1999).Latin america pacific ocean boundaries countries, can get a better trade agreement now, than the were able in the nineties. So, geography matter for better trade deals and outcomes , which it is not just about markets.
Finally, taking into account the above, some conclusions becomes clear to explain trade flows trend.Two issues becomes the most relevant:
a.- Trade by itself do not seem to replace effective public policy for improving its impact on social welfare.
b.- Geography is as much important as markets as input for better trade.
c.- A Sucessful Globalization depend upon an evolution from free trade to better trade, which at the end imply that politics have also something to say when it comes to better trade.-