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By HaleStewart March 18, 2018 7:14 am
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Central Bankers Are Starting to Push Back Against Protectionist Rhetoric

          Comparative advantage is central to the idea of international trade.  It states that a country will produce more of product X if the country’s opportunity cost for the extra unit of production is lower than other choices.  The easiest example is derived from the different standard of living between a developed and newly industrialized economy; in the latter, the opportunity cost of producing nearly any good is lower than the cost in a developed country.  This is why “muscle jobs” move offshore so easily – the cost of sending those jobs to the country with the lower standard of living is low relative to the cost of production in the developed country.

            The problem with comparative advantage is that it also leads to dislocation which is typified by the flight of U.S. blue-collar jobs to countries like China and Japan.  It has also led to a great deal of social angst, which explains support for Trump’s protectionist policies, which he began to implement over the last few weeks with the implementation of steel and aluminum tariffs.  Trump also withdrew the US from the Trans Pacific Partnership and is currently renegotiating NAFTA. 

Several central bankers have responded to Trump’s policies.  In his opening statements to the latest ECB policy announcement, Mario Draghi noted,

Whatever convictions one has about trade.... we are convinced that disputes should be discussed and resolved in a multilateral framework.  Unilateral decisions are dangerous.

If you put tariffs against your allies, one wonders who the enemies are.

As if the prospect of Brexit wasn’t enough, the EU must now deal with 1.) the possible exclusion of their exports from the U.S. market and 2.) becoming the market that absorbs steel and aluminum turned away from the U.S.  And this adds to the already growing tensions between the EU and the US over a variety of non-trade issues. 

            Draghi wasn’t the only central banker publicly speaking on the issue of trade. In a speech given in Brazil, NY Fed president Dudley discussed the central problem of international trade: displaced workers and industries (emphasis added):

Second, how changes in trade can create challenges for industries and their workers when they lose competitiveness.  Insufficient attention has been given to this issue.  We must do better in addressing the very large costs that can be imposed on particular communities and households.

Dudley continued (emphasis added):

Research has documented that the effects on individuals of job dislocation-including those resulting from trade-can be significant and long lasting.  Older workers tend to suffer larger earnings losses, and often face more difficult transitions.  Displaced workers may not have the appropriate skills to find good jobs in other areas of the economy, including in growing export sectors.

When the affected industry represents a large share of the local economy, the damage is often magnified.  In this case, the burden can become more widespread as the level of wages across the community is negatively affected.  And, this doesn't begin to capture the full human toll-including the impact on workers who have lost confidence in the future and the poorer health outcomes that occur because of increased stress.

This illustrates the problem that those who promote free trade have: it’s easy to highlight the drawbacks; all one has to do is look at a town or region that has lost its economic engine to trade to show the negative impact.  The benefits, while still tangible, are difficult to show.  For example, most cell phones are produced internationally; making them in the U.S. would be far more expensive.  But to demonstrate the positive impact of protectionism, one has to argue a counter-factual: “Imagine a cell phone that costs twice as much.”  It just doesn’t have the same gut-level appeal as the story of a worker who has lost his job. 

            All of this couldn’t be happening at a worse time.  Global trade, which languished for a number of years after the GCF is once again rising.  In the early 2000s, trade was expanding over 5% a year.  From 2012-2016, it increased below 5% for five years.  As a result, expect more central bankers to push back against the rising protectionist rhetoric.




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