One of the most important trade deals in the world is back on.
But that doesn’t mean that anti-globalization sentiment is going anywhere, anytime soon.
CETA, the historic free-trade agreement between the European Union and Canada, is close to completion after an agreement between the Belgian government and the Wallonian Parliament was reached on Thursday, as Business Insider’s Adam Payne reported earlier.
After seven years of negotiations, it looked like the deal was about to fall through last week after Wallonia, a French-speaking region in Belgium with a population of 3.6 million, and two other regional legislatures vetoed the deal at zero hour and later rejected an ultimatum to reverse course.
However, the revised deal now looks like it could be finalised by the weekend, if the national parliaments of every EU member state to agree to the updated trade deal by midnight Friday. But the difficulties in getting the deal done show that scepticism about globalization is still a big global trend.
Benefits and costs
Mainstream economists virtually all agree that free trade is “good” for an economy in the long-run (even though within an economy there will be some people who benefit less, particularly in the short-term), while trade-restrictive measures hurt consumers.
However, some argue that the CETA deal in particular won’t be a slam dunk economically speaking. Paul Ashworth, chief North America economist at Capital Economics, wrote in a note that tariffs are already pretty low, which suggests that the long-run GDP bump for Canada would be just 0.3%. “Furthermore, that is a pre-Brexit estimate,” he continued. “Nearly half of Canada’s exports to the European Union go to the UK. So the boost from this deal post-Brexit would be so small that it would barely cover the cost of negotiating it over so many years.”
Against this backdrop, voters across various developed economies believe that free trade actually hurts their countries, which could be a reflection of their personal experiences. Stateside, 89% of Americans think that the loss of US jobs to China is a somewhat or very serious issue, according to Pew Research statistics previously cited by Bank of America Merrill Lynch’s Ethan S. Harris and Lisa C. Berlin. Moreover, only 46% of Americans think NAFTA was good for the economy.
And there actually is some empirical evidence to back up those grievances. Back in January, labour economists David Autor, David Dorn, and Gordon Hanson published a paper showing that increased trade with China actually caused some big problems for US workers.
From the paper’s meaty abstract (emphasis ours):
“China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labour markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. … Adjustment in local labour markets is remarkably slow, with wages and labour-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialise.”
But in other cases, voters sceptical about globalization might not necessarily acting in their own best interests: A chart created by the Financial Times the day after the Brexit vote showed that the regions with the highest share of votes for “Leave” were also the most economically dependent on the EU.
Plus, it’s worth remembering that globalization has lifted many out of poverty in emerging market economies. One of the more popular charts illustrating this is the following from economist Branko Milanovic, via Bank of America Merrill Lynch’s Ajay Singh Kapur and Ritesh Samadhiya back in June:
We’ve already done a lot of globalization
In any case, it’s inaccurate to say that free trade is never good. Regarding why CETA might not add a huge direct economic boost, it’s worth keeping in mind that we already live in a world where tariffs between developed markets have been sharply reduced over the last 30-something years. In other words, any additional gains are less than they would have been when the world was first opening up because we already have many of those benefits.
Plus, there are benefits for individuals: It’s definitely easier on consumers’ wallets to not pay 45% tariffs. To put it into a real-world perspective, a $300 microwave would set you back $435 with such a tariff. Not awesome.
And finally, given that China’s opening up was such a huge shock, one could argue that 15 years hasn’t been enough for the global and US economies to adjust to it.
TPP and the US election
The bulk of the discussion among voters regarding the Trans-Pacific Partnership trade deal (TPP), which would lower tariffs for 12 countries around the Pacific excluding China, has centered on the growing populist movement and the rising backlash against trade. And it’s not just Americans dreaming of a manufacturing comeback — for example, Japanese farmers have been staunchly against TPP.
Both Hillary Clinton and Donald Trump have said they oppose the TPP deal, zeroing in on workers’ anxieties as they vie for the White House (even though Clinton had previously called it the “gold standard” of trade agreements.) Trump once called the deal “a rape of our country,” and named NAFTA as “the worst trade deal in the history of our country.” But the Obama administration has kept pushing for TPP, and the president aims to get it through Congress during the lame-duck period after the election, providing a cushion for Clinton to publicly maintain her opposition to the deal, should she win the election.
“The upshot is that even if Donald Trump doesn’t win the US presidential election, the backlash against free trade, prompted by the resulting rise in income inequality in advanced countries, means that the chances of even already negotiated deals being implemented are quite slim,” argued Ashworth. “Countries have almost no incentive to start negotiations on new deals.”
It’s about politics
Despite the voters’ concerns, it’s worth pointing out that these deals are about more than economics. The TPP deal, for example, is arguably more about the United States’ position in Asia than about the near-term economic advantages as China continues to grow economically on the global stage and militarily in Asia.
In fact, Japanese Prime Minister Shinzo Abe furiously promoted the TTP deal at various media and investor events back in September when major world leaders congregated in New York for the UN General Assembly.
During one event attended by the prime minister that week, an investment seminar hosted by the Japan External Trade Organisation and the Japanese Ministry of Economy, Trade, and Industry at the Pierre Hotel, Dr. Ziad Haider, special representative for commercial and business affairs at the US Department of State said, “Secretary Kerry … likes to say that foreign policy is economic policy, and in saying that he’s referring to that interplay between foreign policy, foreign affairs, economic issues, and it’s certainly true with bilateral diplomatic relations, as well.”
“A lot depends on TPP,” Eurasia Group President Ian Bremmer previously told Business Insider. “If it doesn’t get done, China will become the fall-back leader for Asian economic architecture. And US relations with many countries in the region will slip.”
And so it’s interesting to think about the split between what politicians and economists argue is “good” long-run for countries versus what everyday voters perceived as “good” for themselves — and how this issue will be addressed going forward.