Recovery needs more demand not free trade

In today's Scotsman Michael Moore, Secretary of State for Scotland is reported to have said in a speech to US business leaders that free trade between the UK and the US is essential to economic recovery and prosperity in both countries.

This is incorrect.

It is also a diversion from the real reason holding back recovery: a lack of demand. And a lack of demand worsened by the UK coalition government's fiscal austerity policy.

This not to argue against free trade, which can lead to improved economic efficiency if trade barriers are reduced and removed. But as Paul Krugman notes in this recent post, the costs of current levels of protectionism pale in significance against the resource waste of high levels of unemployment and output much below capacity.

Research by K. Bhattarai (2001) in this paper found that gains from moving to global free trade were 1.3 percent of global GDP. For the UK, gains were about £7 billion in 1995 prices or, by my calculation, just below 1 percent of GDP. And this is from global not bilateral free trade.

So, clearly the gains from a bilateral removal of trade restriction between the US and UK would be small compared to an estimated UK output gap averaging - OBR page 38 and 39 - just under 3 percent of GDP.

Moreover, Krugman rightly points out that one shouldn't view the removal of trade barriers as a job creation tool. The reason is that while getting rid of trade restrictions should raise trade, imports will rise as well as exports. In Krugman's words

There is no reason at all to assume that the jobs gained from export creation would exceed the jobs lost to import competition.

        Globalization is not the answer to the Lesser Depression.

Comments

[Ian Jenkins]

"There is no reason at all to assume that the jobs gained from export creation would exceed the jobs lost to import competition. Globalization is not the answer to the Lesser Depression."

You may be interested in other views from the US on this.

There is little chance of a strong economic recovery that will create the millions of new jobs necessary to get America back to full employment and rising wages and living standards. Of the jobs created in the US between 1990 and 2008, 98% were in the non-tradable sectors of the economy, especially in government, the health care industry and home construction. http://prestowitz.foreignpolicy.com/posts/2011/08/31/a_sign_of_a_coming_obama_failure

In the absence of enforceable rules for a sustainable global political economy, we seem to be left with 1930's style beggar-thy-neighbour regulatory arbitrage in finance - what the Governor of the Bank of England alluded to yesterday in New York.

[Ian Jenkins]

Recent developments.

How to address the lack of demand?

First stage deglobalisation. This week Reuters organised a presentation on the fall of capitalism. The news organisation invited US academics/consultants Ian Bremmer [geopolitical risks] and Nouriel Roubini [macro finance] to give their 2013 predictions for politics and the economy - with a US slant.

IB reckoned that politics - mainly security interests - are coming to the fore. Political groupings of like-minded nations will form, with the US inspired Trans Pacific Partnership trade deal as an example of the way ahead.

NR supported this view by saying that agreement on the values that should be promoted in the global economy is proving impossible: 'there's no agreement on fiscal policy, on monetary policy, on exchange rates, on global imbalances, on reform and regulation of the banks, on the financial system, on the role of the dollar, on climate change, on energy, food security, let alone the big geopolitical issues of the world - there will be lots of volatility going forward; much disagreement.'

So financial deglobalisation seems inevitable - but how global investment will be unwound as a consequence [a huge problem for the US especially]- was not discussed.