Global Trade: Myths and Truths

Many popular beliefs surrounding cross-border commerce are debunked by data.

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With international trade all over the news media and dominating politics, panelists at “Trade Issues Today,” a recent conference cosponsored by the Jerome A. Chazen Institute for Global Business, tackled some of the biggest misunderstandings surrounding trade. “It’s a shame arguments [against global trade pacts] are not based on facts,” said Anu Bradford, a professor at Columbia Law School and a Chazen Senior Scholar.

Here are five myths of global trade that the panelists debunked:

Trade is a zero-sum game.

Adam Smith addressed this myth as long ago as 1776 in a theory called “mercantilism,” pointed out Douglas Irwin, a professor at Dartmouth College. Mercantilism holds that trade can be profitable for both parties because of specialization. Countries tend to specialize in areas where they have natural resources or expertise, export their surplus and use the income to buy goods that other countries specialize in.

“It’s an extension of the way we run our lives. We don’t make our own clothing, we don’t plant our own food,” Irwin said. “Just think back when we didn’t have washing machines or grocery stores. That takes us back a number of centuries and life was hard when you had to do everything yourself.”

Trade also benefits consumers in that it increases product variety, says Irwin; it’s what enables us to eat avocados in winter and drive foreign cars.

The United States loses jobs when trade barriers are lowered.

Despite how widespread the notion, the link between employment and trade is tenuous at best. In fact, technology has had far more to do with the loss of manufacturing jobs in developed markets than overseas competition.

Amit Khandelwal, professor of finance and economics at Columbia Business School and director of the Chazen Institute for Global Business, said technology has had a profound role, accounting for as much as 80 percent of US job losses. (For a deeper dive into the employment link to trade, and what the experts say we should do about it, see "The Truth About Trade and Jobs.”)

China is the biggest job thief.

The rise of China has been so dramatic that it “has masked other factors” argued Phil Levy, senior fellow at the Chicago Council on Global Affairs, including the elimination of jobs in the West through productivity gains and the rise of other emerging markets.

It’s easy to blame imports “because you can see ‘Made in China’ on all the goods that are coming in,” said Khandelwal, “but you can’t really see ‘Made by Robot 149.’”

The American legal system apparently recognizes that punishing China — or any other specific market — for stealing jobs is a fruitless exercise. Levy, who served as senior economist for trade in the George W. Bush administration, said his office turned down all subsidy and tariff requests from businesses that charged their markets suffered disruption due to Chinese competition. “Bi-lateral protection would not protect American jobs when a factory can relocate from China to Vietnam in a couple of weeks,” he said.

Trade treaties drain GDP growth from developed nations.

It’s true that emerging nations stand to gain the most from access to large consumer markets. Lawrence estimated passage of the much-slandered Trans-Pacific Partnership agreement would boost Vietnam’s GDP by as much as 8 percent.

But benefits go both ways. Robert Lawrence of Harvard University said US GDP would also get a 1-2 percent bump from the TPP, not insignificant when annual GDP growth is 5 percent or less. Since the treaty would support bilateral trade, growth would come from increased exports of goods and services that the United States specializes in.

Khandelwal noted that trade hawks invariably concentrate on lost wages and ignore the benefits that lower-cost goods bring to the poor in developed countries. Although people who lose jobs may suffer painful adjustments, “poor individuals spend more of their income on tradable goods such as clothing and groceries.” he pointed out. "So the benefits are widespread."

Product quality will suffer.

Nope. In order to become competitive, even emerging markets need to institute comparable quality standards. Price alone tends to move few markets, especially over the long term.

Competing on a world stage also appears to raise standards relating to non-commerce issues, such as the environment and human rights. Outside investors and customers increasingly balk at abuses, causing offenders to behave better.

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