Foxtail Research

The words Tariffs, Trade, Globalization, Protectionism are driving the globe into jitters. We hear about market fluctuations, and the possibility of going into recession due to tariffs and trade. These reactions reflect the importance of Trade and Tariffs and its role as an integral part of global activities.  Here, in this blog I brief on the history of trade, its transformation into the current hyper-globalization form and the possibilities for the future.

This blog is inspired by my reading of the book”DEMOCRACY and the FUTURE of the WORLD ECONOMY – The Globalization Paradox” by Dani Rodrik. References to facts are taken from this book.

Introduction

Trade has been construed as a path for prosperity from time immemorial. The desire for market expansion, exports and imports has been at the back of the people’s minds as a way to economic growth. The urge for trade motivated exploring new land and sea routes. Trade has gone through many transformations and at present is in a hyper-globalized form. Each transformation has come with challenges, opportunities, possibilities and with lessons for better ways of handling them. If there are two areas that beg us to look back at history and learn from them, they are Trade and Globalization. Almost every person in the world today has experienced the effects of Globalization in their various walks of life. They have a profound impact on politics, economics, incomes, wages, values and institutions. I am seeing the impacts of it not only in opportunities (or deprivations) but also in the drastic changes it has brought about in the social structure/values in my country – India.

Evolution of Trade

Barter Trade (2nd century BCE to 15th century AD)

Trade should have started long ago but we cannot get to the origin of it. But we need a time period to begin our understanding of Trade and let that be from the silk route that stretched from China to Europe. Items such as silk, spices, porcelain items, pottery items were traded along this route from 2nd century BCE to 15th century AD. There have been other kingdoms/dynasties which built flourishing maritime trade from their coastal cities. One such kingdom was the Chola Dynasty (in the Southern part of India) which used the sea routes to trade textiles, spices and other goods with countries in South East Asia.

Chartered Trade (17th and 18th centuries)

This is the period of Imperialism or Mercantilism which existed during the 17th and 18th centuries. The empires engaged with private entities or businesses. The Empires funded the businesses and in turn the businesses executed the trade. This marked the beginning of a government-business relationship for trade. The private businesses were given all the powers to execute trade including military operations.

The British empire engaged with the Hudson company in Canada who traded fur from native Americans. The British Empire engaged with the East India Company to trade in India. They procured raw materials from the regions where they had established themselves and shipped them to Great Britain where it was processed into items of higher value. When local people started to revolt against the presence of these businesses in their regions, the Government had to directly intervene and establish their own government institutions.

Era of free trade and globalization (19th century up to World War I)

The trade policies in the 19th century started the era of trade globalization. The introduction of the Gold standard facilitated currency exchange rates and capital flow across countries paving the way for Financial Globalization. The onset of Industrialization in Europe and USA laid the foundation for the need for trade globalization. However, countries prioritized their national interests over Globalization and their policies reflected their priorities. Country-specific trade and financial policies were to continue until the beginning of World War I in 1914.

Britain was becoming an industrial powerhouse. Britain traded with countries abundant in raw-materials to import them, transformed them into higher-value products in their industries and exported the finished products across the globe. Britain favored free-trade with low tariffs as it was benefiting from it. During the same period, other countries in Europe –  Germany, France which were in the initial decades for free trade later on went into protectionism mode imposing high tariffs when the free flow of grains from other countries hurt their farmers. 

Meanwhile, the policies in the United States favored protectionism. The tariffs on manufactured goods were as high as 45%. The Northern states which were manufacturing states supported high tariffs. The Southern states which were plantation states relied on international trade and were in favor of low tariffs. 

The policies in countries in Asia and Latin America were in majority crafted by imperialist powers. The British empire signed policies with China, Japan, Turkey, India that would favor free trade for the empire.

Protectionism and the era of Great Depression (1920s to 1940s)

After world war I, there was high unemployment and inflation. Unions were formed and they became powerful. Britain could not maintain its financial supremacy.  The United States, Germany, France and other nations were facing internal economic hardships. Economic and political reasons resulted in letting go of the gold standard. 

The 1930s saw a massive failure of international cooperation in trade. International trade halved in the period between two world wars. Each country levied high tariffs and went into protectionism. Britain levied a tariff of 10% on imports. The US levied 20%-50% tariffs. Other countries retaliated against the US with higher tariffs. It was the period of the Great Depression.

The lack of international trade, failure to maintain international finance through a stable gold standard policy, and domestic unrest led to different forms of economies. Some countries gave higher priority for social reforms, closing themselves from world markets and pursued socialism. Some countries in Europe and developing countries prioritized nation building and pursued fascism. Some countries chose to follow a welfare-state social economy. The United states which is a strong believer of free markets would go for capitalism.

First National interest, then International Trade (1950s to 1970s)

This was from the Bretton Woods Model drafted in 1944. This model for International Trade was in place in the second half of 1950s, 1960s and slowly started to be undone in the 1970s and 1980s. This model suggested giving priorities to domestic issues. The concept of multilateralism was put in place where rules are set by International Organizations. International Institutions namely International Monetary Fund, the World Bank and General Agreement on Tariffs and Trade (GATT) were  established and they governed International Trade across the globe. This system was different from the previous Imperialism era where Britain was setting rules for International Trade. These organizations are supposed to be unbiased though they were not so exactly as they had to favor nations which funded them more. This period saw the peak of International Trade. The volume of International Trade grew at an average annual rate of almost 7% between 1948 and 1990. This era marked enormous economic progress never seen before. Most nations reduced tariffs and were as low as 5%. 

There came a push for globalization in this period of economic growth, Globalization is different from International Trade in the sense the former required setting up of Institutions and involved transaction costs. Domestic economies were improving post world-war period. Liberalization in some areas such as Agriculture and services (Insurance, banking, construction, utilities) were not done under GATT.  Advanced economies wanted to globalize in these areas. 

Even in Manufacturing, countries started imposing quotas in Textile Industry (Multi-Fibre Agreement) and Automotive Industry (Voluntary Export Restrictions (VERs). There were quotas in Exports of steel and Industrial products. Loopholes in GATT were exploited by both developing and developed nations to favor their respective nations.  Here it is worth mentioning how countries got categorized as developing and developed countries. Countries which were advanced in Industrialization were called developed countries. Countries that were rich in raw materials but lagged industrialization were called developing countries.

During this period, each nation built and strengthened institutions based on their national strengths. The United States was for liberal market economy. Japan built a strong export-based economy and protective domestic economy. Continental Europe pursued different forms of capitalism namely social market economy, welfare-state economy and others.

Decades of descending growth and raise of China and Eastern Asian countries (1970s to 1990s)

The growth witnessed after world war started to slow-down. The United States started shifting from a Goods economy to Services based economy. In this period, China was building a strong manufacturing economy that would drastically reshape trade and globalization. Eastern Asian countries – South Korea, Taiwan, Thailand were building strong manufacturing economies and started establishing themselves as global powers in a few specialized industries such as electronics, semi-conductors, and automotive.

These countries kept their national interests at first and designed their trade policies customized to their nations. If we look at the history of China with the silk route and several inventions they have made (paper making, printing, gun powder, silk, compass), it is not surprising to me to see the rise of China as envisaged by many countries. They are indigenous innovative people and I would want to mention this period as the re-rise of China.

Hyper Globalization era (1990s to present)

The United States was transitioning from a Goods to Services Economy. The NAFTA Trade Agreement was signed to increase trade among Canada, the United States and Mexico. The outlook for leaders in the USA was why focus on jobs of yesterday when better jobs can be created at home. This led to outsourcing of manufacturing jobs. 

Meanwhile, countries in Asia and other developing countries wanted more exports and foreign investment. Growth in East Asian countries with a boom in exports and limited imports made people have a high amount of savings. Europe and the United States pushed for financial globalization to take advantage of the high savings rate in East Asian countries. The rationale was that capital from all across the globe can be put to good productive use with free flow of capital and that people in those savings-rich countries will benefit from higher returns on their money. 

Financial Globalization liberalized Capital mobility leading to free capital flows of high magnitudes which were characterized by short-term sudden influx and outflow of capital. This even led to financial instability such as the crisis in East Asian countries in 1997, Argentina crisis in 1990s, US subprime mortgage crisis in 2007 and a few more. 

This period saw the dismantling of GATT and establishment of the World Trade Organization WTO in 1995. WTO catalyzed economic globalization. In essence, the Bretton Wood model was reversed leading to deep integration among nations. Nations adopted policies to align with global rules. Global rules became domestic rules. Further, Multi National Companies wanted more extensive global rules to undertake international operations. 

Thus global trade policies have undergone rapid transformations to align and adapt with external forces and with ambitions of individual nations.

Discussion on the possible direction of future Globalization

If we look back, Manufacturing drove trade globalization leading to the flow of Goods around the world. It took advantage of raw materials available at lower cost and abundance in developing countries. When the shift was from Goods to Services, the Services industry made use of Labor available at lower costs in some countries. The finance industry which comes under the services industry took advantage of Capital and savings available across the world. These directions towards services and globalization were aided by advancements in Computing, Internet and Internet-based applications. Without these technology advancements, it would not have been possible to reach this hyperglobalized form of globalization. 

The past push of globalizations has facilitated free flow of Goods, Capital and Labor (to a certain extent with restricted visa rules). People from all across the globe are investing their money for global uses. If that is so, then it is reasonable for global citizens to expect equal levels of access to quality of living and healthcare. Hence I think the next big push for globalization will be for healthcare services and medical industries pushing medical globalization such as global standards in treatments, medicines (pills), diagnosis, medical devices, surgical treatments and such. An upper middle-class senior citizen living in Mumbai will have the same level of access to home-based healthcare services and hospital treatments as a citizen in a developed country. Labor laws, visa rules and regulations will facilitate the liberalization of this industry. Computing, Cloud technologies and AI technologies will aid in propelling healthcare and medical services globalization.

History has given the following pattern as trade transformations:

Free trade (until 15th century) -> Protected trade (under Imperialism in 15th to 16th centuries) -> Liberalized (Free) Trade (in 19th century) -> Protected Trade (in 1920s, 1930s, 1940s) -> Liberalized (Free) but national interest first restricted trade (in 1940s, 1950s, 1960s, 1970s) -> Liberalized Free trade (in 1970s, 1980s) -> Hyper globalized Free trade (from 1990s to present)

Protectionism: With the spread of globalization and current level of integration, it will not be feasible to get back to Protectionism

Hyper globalization is not bringing stability and is creating panic, crisis and stress across the globe. Though it seems possible, it is not desirable. 

Restricted Liberalization seems possible. The current tariffs are for trade and not for services though it may have subsequent implications. Financial Globalization is not touched by the new tariffs which makes me guess, it is coming under Restricted Liberalization.

None of the Above appears as a very unlikely answer. We cannot go to that level of  “out of the box” thinking to bring about a drastically new way of pursuing trade and globalization.

Conclusion

In this blog article, we travelled through the history of trade and globalization. Based on past needs and arguments for globalization, it seems that the next big push for globalization will be for healthcare services and the medical industry. The plausible reasoning is that when capital and goods are globalized, then why can’t access to the same level of quality of living and access to health care services (at home and hospital)  be available all across the globe. Further based on the current global integration, it is not possible that the world can get back to protectionism but it will be in some flavor of hyper globalization and restricted globalization.

Image courtesy: Image by freepik