Global trade is good for everyone but it’s taken a back seat in the past year. Can we look forward to its renaissance in 2021 and beyond?
One of the few topics on which economists agree is the benefits of global trade. Among the first lessons taught to economics students is the Ricardian theory of comparative advantage, outlining how everyone can benefit from trade. Given this academic backdrop, it’s unsurprising that, since 1945, there has been a 38-fold increase in the volume of world trade. Indeed, trade has been one of the major drivers of global economic growth over that period.
Unfortunately, global trade was somewhat ‘missing in action’ post the global financial crisis. This contributed to the rather insipid economic growth profile that we saw. However, just when trade was starting to figuratively put its shoulder to the economic growth wheel, Donald Trump shared his views on both trade (with implied scepticism of David Ricardo’s thinking) and on the uses of trade as a weapon of foreign policy. We might also see the wheels of European trade slow, at least in the short term. Negotiators have had to determine just how far to restrict trade as they conclude the very unusual Brexit trade deal.
So, one of the more interesting aspects of the year(s) ahead will be on this very subject – will trade continue to be one of the pieces of the growth jigsaw that is missing, or will we see its renaissance?
Global cooperation over trade has been in short supply over the past year. But in other areas, teamwork has been more conspicuous. On the development of a Covid vaccine, the world has recognised the necessity of global collaboration, with positive results. Similarly, although perhaps to a lesser extent, there’s been progress on the climate debate. And we can possibly expect a little more at the UN Climate Change conference in Glasgow later in the year. Could these two areas - and the acceptance of a much more interlinked world - herald less fraught relations in other areas such as trade?
It will also be interesting to see how the new White House administration views the trade landscape. I suspect that caution on China exists on both sides of the aisle in the US. However, at least we can expect a more predictable and reasoned articulation of trade strategy. That in itself will be helpful.
And on European trade, now that the politicians have cleared the battlefield, businesses can get on with navigating the new, albeit more difficult, terrain. One of the factors economists underestimated last year was the flexibility and innovation of the corporate sector. We may again witness this, as businesses seek to cope with a less well-oiled European trade environment.
One of the factors economists underestimated last year was the flexibility and innovation of the corporate sector.
And so perhaps a little trade optimism is merited as we look beyond the painful shorter-term effects of the pandemic. We could certainly do with the renewed tailwind of global trade. Trade has helped lift a billion people out of poverty, lowered prices and widened choice. Trade has also boosted productivity and swollen the ranks of potential buyers and consumers. We’ve missed it - the economists are right.
This article first appeared on Citywire on 8 January 2021.