The decline in global trade – end of an era

Of the numerous ideological shibboleths under threat from the ongoing demise of the established liberal-capitalist economic order none is more venerable than belief in the beneficence of international trade.

This belief is reflected in the continuing official acceptance of the theory of international trade formulated by the classical economist David Ricardo some 200 years ago based on the principle of “comparative advantage”. According to this all countries would benefit by maintaining freedom of access to their home markets, as it would guarantee maximum benefit to their consumers and, by avoiding protection of their producers from competition, maximum efficiency of use of their domestic resources. Over the intervening two centuries this theory has been much criticised – one might think for obvious good reasons – but has never been dislodged from the tenets of the ruling capitalist ideology. This seeming endurance seems surprising. For it has occurred despite the fact that no country has ever actually practised a policy of free trade, with the possible exception of Great Britain in the period 1860 to 1914.

Different explanations may be offered as to why this dogma has proved so durable in the face of evident resistance to applying it in practice. Among these are the fluctuating power of different vested interests – such as that of the landed aristocracy in England up to the repeal of the Corn Laws in 1846. But perhaps the most important single motive behind continuing official insistence on the need for free trade was the long-standing prominence of trade, particularly of imports, in the pattern of economic activity among those Western nations – most notably Great Britain – where the rules of “political economy” were first formulated into something vaguely resembling a science.

The reasons for the importance of commerce in the economy are rooted in the fact that trade in commodities – comprising largely raw materials – for centuries constituted the largest and most lucrative sector of economic activity in Europe. This in turn is to be explained by the relatively primitive level of technological development prevailing in production industries (agriculture and manufacturing) and transport prior to the first Industrial Revolution dating from the late 18th century – such that these activities were concentrated in small-scale “cottage” enterprises of low capital intensity. Hence the largest and potentially most profitable outlet for capital investment in Europe up to that time was in the importation of those goods – for the most part largely unprocessed – that could not be found or produced locally. The attractiveness of these activities was often all the greater to the extent that the main sources of supply were in distant lands with which communication was difficult or hazardous, making the potential profits to those who could succeed in bringing them back to Europe phenomenally attractive.

Such was the basis of the so-called mercantilist economic ideology that still predominated at the time Adam Smith’s Wealth of Nations appeared in 1776 – and which he strongly criticised. According to this doctrine wealth and power would belong to those groups or nations who could secure most effective control of the supply and price of more or less scarce commodities – to the exclusion of rivals from other countries. This was evidently demonstrated by the success of such small states as Venice and the Netherlands in commanding enormous wealth based purely on maritime trade and despite a total lack of
their own domestic natural resources.

Hence the perception that control of trade and trade routes was the key to national success, a view that inspired the first wave of European overseas expansion in the 16th, 17th and 18th centuries. No country was a more committed exponent of this ideology than Great Britain. This lay behind the moves to increase British naval strength in the fifty years after 1714, when political power lay predominantly with the Whig party representing mainly commercial interests. At the same time the development of infrastructure in the shape of trading companies (including the East India Company), commodity exchanges and financial institutions based in London served to reinforce the powerful British vested interest in maximising opportunities for overseas trade.

The advent of the Industrial Revolution from the late 18th century, in which Britain was the world leader, further underpinned this commitment to “free” trade, although increasingly this was as much concerned with opening export markets to British manufactures as to securing control of import flows. (On the other hand, it should be noted, from the 18th century in Britain tariffs were imposed on imports of textiles from India, which had previously had a dominant position in the British market, while cheap textiles from Britain were enabled by the authorities of the Raj to have free access to the Indian market, with disastrous consequences for local manufactures. This was a demonstration of what has become a familiar reality over the ages: that belief in free trade is never more than skin deep).

Such considerations undoubtedly go a long way to explaining why Ricardo – himself a highly successful City trader – was so committed to minimum restraint on trade. What is at first sight much harder to understand is why in the 21st century it is still the received wisdom within the global establishment that

a) free trade (so-called) is generally beneficial, and
b) the rate of growth of international trade is regarded as an important indicator of global prosperity.

Such persistent views are all the more remarkable given that, as noted above, no major nation has ever practised anything resembling free trade for a sustained period. At the same time countries which have attained high levels of economic development – such as Germany and the United States in the 19th century and (more recently) Japan, Sooth Korea and China – have done so despite adopting highly protectionist strategies.

The most obvious explanation for this apparent perversity is the legacy of the traditional trade-based economies of pre-industrial Europe dating back centuries, as described above. These have spawned powerful vested interests with an ongoing commitment to maximising trade volumes, especially as shipping has continued to be dominated by large, mainly Western-owned enterprises, often in de facto cartels. The same is also true of all forms of freight transportation by land and air as well as the many service activities such as ports and trade finance that depend on maintaining a healthy volume of trade. These sectors also employ vast numbers of people world-wide.

Turn of the tide?

However, developments in recent years must cast doubt on how far these powerful forces favouring high levels of world trade can sustain traditional rates of growth, which have until very recently been typically well above those of global output. In fact since the onset of the Global Financial Crisis (GFC) in 2008 this relatively rapid growth has declined markedly, such that since 2008 global trade has, for the first time since the mid-19th century, been growing more slowly than output (GDP) – according to the most authoritative estimates (see Bank for International Settlements Annual Report – page 103). The main reasons for this appear to be:

  1. Disenchantment with globalisation. From the 1980s there was a worldwide trend in favour of what was termed globalisation, or the removal of barriers to cross-border movement not only of goods but services, labour and capital, with a view to enabling enterprises to access inputs and productive factors at the lowest available cost while also allowing suppliers of goods and services free access to end-user markets. This gave transnational corporations (TNCs) in particular the opportunity to create “global value chains” (GVCs) utilising the most cost-effective inputs at each stage of the production and distribution process. Yet while this might have worked well in theory from the perspective of maximising corporate profitability, it ran into the practical difficulty that

success depends on effective management of the whole process at every stage, avoiding the possible negative impact on costs of unforeseeable interruptions to supply;
resistance to attempts to minimise costs and maximise profit at each stage could generate precisely the kind of costly interruptions to GVCs that could imperil the whole operation.

More broadly, governments, particularly of poorer countries, have become increasingly resentful of pressure to open up their markets to agricultural and other exports from the advanced countries, especially as they perceive these – usually with good reason – to be unfairly subsidised. This was the essential reason behind the final collapse in 2015 of the Doha round of multilateral trade negotiations sponsored by the World Trade Organisation (WTO), after 14 years of increasingly fruitless haggling.

  1. Impact of climate and technological change on production and distribution costs.

Concern at the large contribution made by freight transport (particularly maritime) to global carbon emissions is leading to effective pressure to reduce this. This is likely to result in higher costs of global trade so that, other things being equal, there will be a greater premium on producing goods closer to end-user markets and shortening value chains. Meanwhile shipments of the most heavily traded commodities of all – oil and gas – seem set to largely disappear over the long term as they are progressively replaced by renewable energy sources. At the same time hi-tech advances in production methods have made it more cost-effective to supply markets for goods from local sources. This applies not only to manufactures, where techniques such as 3-D printing are making it possible to produce at low cost even with very small production runs; it also affects agriculture and horticulture, where the application of techniques such as LED lighting and aquaponics are enabling the
production of many fruit and vegetables, as well as flowers, close to urban consumer markets rather than importing them expensively by air.

Taken together these tendencies appear to foreshadow a steady shrinkage of the volume and value of goods transported internationally, particularly over long distances. Such a development is highly significant for three main reasons:

a) It seems bound to be a strongly negative influence on the amount of value added generated by the commerce sector – i.e. its contribution to global GDP;
b) Likewise it is likely to curtail the ability of TNCs to locate their activities in different countries according to whatever seems the most advantageous and profitable configuration from their point of view;
c) It will result in massive loss of employment not only in the trading activities directly affected by slowing or negative growth, but also in supplying industries such as petroleum and shipbuilding and ancillary services such as banking and finance (losses compounded by those resulting from technological change affecting these sectors, including notably road transport).

Such tendencies, it may be noted, appear to fit with emerging trends among developed countries towards “bringing home” production and service activities that had earlier been moved offshore, supposedly in the interests of greater cost-effectiveness. This is most conspicuously reflected in the policies of President Donald Trump in the US, which have been overtly protectionist in imposing tariffs on imports of steel and other products from China and the EU. As such they seem to reflect the growing awareness of the flaws in the whole ideology of globalisation referred to in another recent posting. Significantly, this also shows signs of being in line with the views of Jeremy Corbyn’s Labour party that there should be a greater emphasis on local provision, particularly as Britain is freed from its obligations to the EU Single Market following Brexit. Any such tendency is of course anathema to upholders of the status quo, including the big business interests seeking to maintain a post-Brexit regime similar to that enshrined in the EU’s Lisbon Treaty, the epitome of the ideology of neo-liberal globalisation.

Whatever the shape of post-Brexit Britain turns out to be, it is certain that the trends and pressures described above will continue and intensify. Hence, although it would be premature to try and forecast trends in the pattern of activities in the commercial sector in either the short or long term given the huge changes and obvious uncertainties in prospect, it is safe to say that the volume as well as the value of international trade is set to dwindle further over the long term, with momentous consequences in terms of value added, profitability and employment for the sectors concerned.

2 thoughts on “The decline in global trade – end of an era

  1. Very illuminating article. I have two points. One is that although S Korea and China don’t believe in free trade, they certainly believe in exporting to the West and that is a core part of their prosperity, so attempt at re-sourcing will affect them.

    The second is that you can easily trace the rise in carbon emissions to globalisation after 1990. So reducing emissions surely involves backtracking on that process. How is possible to do this in a way that doesn’t involve Trump-style tariffs, trade wars. Corbyn has definitely talked about this. Has he got to go further and if so, how can he in a civilised way?

    • Thanks for this. As for China, Korea etc. practically everyone engaged in international trade knows that free trade is a myth, as pointed out in title of the first book I ever wrote (over 30 years ago). The reasons the powers-that-be (especially the US) have mostly chosen to turn a blind eye to this reality – at least until Trump – are complex and various. But all will have to adapt to this new reality – which, as noted, is the result of tech advance as well as environmental constraints – and should benefit from it in the long run.

      Am grateful for the info about carbon emissions taking off in the 1990s, which I was unaware of but am hardly surprised by. It should of course lend impetus to policies aimed at shortening supply chains and increased localisation.

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