Friday, 8 November 2019

Dirk Baur encourages us to think beyond the detriments of the US-China trade war on the global economy and to consider possible positive effects of a little less trade for Australia’s workers and its economy.

Recent headlines including the words ‘trade war’ sound scary and consequently alarmed many people including commentators, politicians and investors. War is bad so a trade war must also be bad. But the time before trade war was not a time of ‘trade peace’ illustrated by the long list of trade disputes brought to the World Trade Organisation (WTO).

Besides the many trade-related conflicts in the past, trade brought many benefits. It helped the majority of countries to lift their living standards and transition from a relatively poor, developing country to an emerging or even industrial country.

And Australia is no different. The gains from free trade are obvious. We sell iron ore, gold, coal and University education to other countries and are able to buy Mercedes, iPads and French wine in return. Without free trade we could hardly afford those luxuries and we would most likely have to pay much more for clothes and toys as well. So if trade has obvious benefits, less trade due to a trade war must result in fewer benefits. Put differently, more trade is better than less trade. This was the main argument for decades. Free trade and globalisation is good, and any attempt to restrict the free flow of goods, services and capital is bad.

But times have changed. The Brexit vote in 2016 and the election of Donald Trump as US president have given the ‘losers’ of free trade and globalisation a voice. Free trade is not automatically good for all and less trade is not automatically bad for all. Free trade and
globalisation is beneficial for a country as a whole and the world as a whole, but it is not necessarily beneficial for every member of society, every industry or every region. For example, if car production is moved from Australia to China, this may have more benefits for
China than costs for Australia and result in more jobs in China than jobs lost in Australia, cheaper cars for all Australians and higher share prices for investors.

There is just one problem. What about the workers in Australia who lose their jobs because of the move in production? Unless they are fully compensated, trade does not benefit all. Arguably, Brexit and the election of Donald Trump could happen because full compensation did not happen. It appears that most of the gains went to investors and consumers, and most of the costs were borne by workers. If these groups are not equal, i.e. the typical investor and beneficiary of free trade is different from the typical worker, the benefits and costs are distributed inequitably, and free trade is not an ‘everybody wins’ situation.

If free trade causes inequality, less trade may cause less inequality. For example, if free trade and globalisation increase competition, there is not only downward pressure on prices for goods, but also on prices for labour, i.e. wages. The implied low wage growth affects workers and ultimately all Australians if low wage growth means low inflation and thus low interest rates. The Reserve Bank of Australia (RBA) regularly refers to weak wage growth and low inflation as a justification for its interest rate policy.

But a little (!) less trade may not only have positive effects on wages, income and wealth distribution in Australia. It may also have positive effects on the environment and the climate. Less trade means less transport of goods and thus fewer CO2 emissions. Less trade also means that we can buy more locally produced goods and services. We can still buy Chinese or US smart phones, tablets and TVs but we may buy more locally grown vegetables and fruit and less Brazilian or Indonesian lumber. We may become even more creative and innovative and benefit from a more diversified economy that is not overexposed to mining and exports to China.

It was long argued that free trade (and globalisation) increases wealth for all because the benefits outweigh the costs. But if the benefits do not go to all then we have a problem, a problem that has been ignored for a long time. The trade war may help to solve this problem and result in a fairer distribution of the gains of trade.

Dirk Baur is Professor of Accounting and Finance at the UWA Business School. Dirk's specialisation is in the field of financial economics and financial econometrics. He is an expert on the financial economics of gold, the modelling and estimation of financial contagion, dependence modelling and empirical applications of quantile regression. His current research projects are on environmental finance, gold mining, Bitcoin, blockchain and cryptocurrencies.


UWA Public Policy Institute