Trade wars – the economic impacts and beyond: By Shiv Dave

When I went to Indonesia, nearly 25 years back (early 1993), I spent almost 5 months in a garment factory of a group that employed me. That was my first encounter with the globalisation of trade.

The garment factory employed 500 workers, which was a disciplined workforce that produced shirts and bottoms for exports to the USA and Europe. The products were tailored and packaged with price tags, ready for shelves of shopping malls in destined countries. The garment company received US$2 to 5 each for these bottoms and shirts and was required to buy out of this amount all the materials, conforming to the specifications of buyers. The quality controller approved the shipment. This person was from the buying company and his salary exceeded the salaries of all the 500 workers! US$5 shirts were price tagged from US$20-35 per piece. What was that? A favour in form of employment to Indonesians or something else?

Let’s go back a few decades, even prior to 1993. The industrialised nations needed new customers to sell machinery and products that were produced in the home market. They saw a large population in poor countries as a possible target market. These poor countries could not afford to buy machinery or products and the industrialised rich countries offered ‘aids’, long-dated loans; carrying little to no interest to enable these countries to buy their machinery and products. The industrialised countries argued for the removal of tariffs, in order to create a barrier-free global trade, basically to expand the market base for their home industries. Primarily, this was never intended to benefit the countries’ receiving aid or importing machinery.

Over time, the machinery making companies realised that they can set-up manufacturing bases on their own in poor/developing countries, utilise cheap labour and export to their home countries either in part or in form of finished products as well as to other markets, including the markets where manufacturing facilities have been set-up.

An alternative mechanism was to ask businesses in the developing countries to produce goods for companies in the developed economies. This created a huge global economy, with several adjustments that continue to date. Firstly, setting up of manufacturing facilities overseas (or outsourcing the tasks to the developing economies) were aimed to cut the operating costs in the home market (of the developed economies). This initially resulted in job losses for the developed economies, but converted into higher profits for the corporates in the developed economies’, increased their share prices and benefitted the investors in these companies. The lost jobs were redeployed in most of these economies elsewhere. The developed countries managed to increase their productivity through ‘outsourcing’ and thus continued to increase their profits. These economies also faced closure of many labour-intensive industries in the home market as these industries (like steel) became increasingly inept to compete with cheaper imported goods from the developing countries.

The developing economies too benefitted in several ways. They saw an increase in job opportunities with the opening of their economies, investments increased (domestic and foreign investment) and the combination of all of this created a demand that helped domestic as well as global economies.

With time, we have seen a large global economy, so intertwined that it is hard to argue that globalisation has only benefitted a few countries or to debate that it has only benefitted the developing economies where manufacturing bases were shifted. The benefits have been shared by both sets of economies.

The globalisation of the 21st century has brought the world to a near perfect competition, envisaged by classical economists. The advent of the internet further boosted the information flow and shrunk the time of communication. We have not just reached a level of perfect competition, but have also attained the near optimum benefits of a competitive trade. The developed countries created intellectual properties by inventing new machinery, software or medicines, just to mention a few areas, and the developing countries mastered the low-cost manufacturing, apart from providing a large market to some of these inventions. Many of the large Fortune 500 companies derive more than half of their revenues from the overseas markets, which is a testament to the globalised business or the global economy at large.

Benefits beyond economics

Globalisation or the boundary-less trade did more than just the expansion of economies or creation of riches around the world. If we look back at the post World War II era, the world has witnessed a peaceful co-existence for more than 7 decades, which has seen improved living conditions, higher life expectancy, reduction of poverty, lesser wars, better human conditions (human rights could be construed in political context only, so I prefer to use ‘human conditions’ to connote improved living conditions and realisation of happiness for people in general) and a lot of other benefits.

The internet aided to the economic benefits by furthering the flow of information and by becoming an amazing forum of expression for all.

We have seen localised wars and threats of extremist behaviours, but we have seen the world has put trade ahead of petty wars in general. The condition of women and oppressed classes has improved a lot, largely due to the spread of economic benefits all around the world.

We all are too interconnected and too interrelated (even if we do not like to say interdependent) by the present globalised economy and do not want this to go away due to the imminent threat of trade wars, caused by some parochial thoughts that are springing up for political reasons.

The dangers of trade wars

Trade wars do not benefit anyone during the long-term or even the medium-term. The threat of trade wars or its implementation may appeal to a political class in the short-term, but in the very first place, it hurts the developed countries more than other nations.

Let us revisit the garment company example with which I started this blog. If we begin to make import of garments from developing countries more difficult or stop it altogether, Europe and America will start to see more of their labour force working as tailors in the next few years, people there will pay nearly two to five times more to buy shirts or the companies making these shirts will have lesser profits, with the stock prices of these companies tumbling. The developing countries will no longer have that much capital nor will there be a need to buy machinery from the developed world, further reducing the profits and jobs for the developed economies, and so on and so forth. We will be laying a foundation for a shrinking global economy.

The global economy has created a sense of togetherness, shared interest and a common thinking, this will be lost and the tendency to go to war will increase than it was in the past 70 years. Human conditions or rights for a lot of women and the oppressed classes may reduce and they will suffer even more.

Global trade has been the most peaceful mechanism of change for everyone in this world, we cannot let this be impacted adversely for political expediencies. We all should stand up against any efforts to push the wheels of global trade backwards. It hurts everyone.

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