A worrying theme recently is the escalating threat to world trade posed by the Trump administration. The possibility of a trade war between the three largest trading blocks in the world is now considered a real possibility.
The reasons for reducing trade barriers and tariffs are well known and were outlined by Ricardo in 1817. Countries should specialise in what they are best at producing and export surplus production in return for the goods and services they are not so efficient at producing which they instead import. If all nations specialise in their ‘comparative advantage’, total GDP increases overall.
The macroeconomic arguments in favour of free trade are overwhelming and have resulted in decades of effort to reduce trade barriers globally through agreements now managed by the World Trade Organisation. The success of these efforts continue to be felt. The value of trade globally has grown from 20% to over 30% of global GDP since 1995 alone. The world economy is much more interconnected and interdependent than ever because of trade.
The problem is that the gains from trade need to be evenly spread. The large multinationals have benefitted more than smaller companies, as have Asian countries (particularly China). Countries in the sub-Saharan region have hardly benefited at all. In addition, many lower and medium income workers in the richer countries have not seen significant gains from free trade with jobs and investment moving to Asia in particular. The Trump administration is focusing politically on this latter effect under the slogan ‘America First’. The big challenge for free trade in the years to come is to ensure the economic benefits are felt more widely across the world, and by workers in developed economies on low to middle incomes.