(Bloomberg Opinion) -- Is the age of free trade coming to an end? It sure feels that way, with the U.S. levying tariffs against its allies, the Chinese not budging from their mercantilist system, Brexit on track, and authoritarian governments on the rise. The good news, however, lies outside the realm of politics: The long-run trend is one of greater interconnectedness, at least for traditional goods and services.
Here’s why I am still (mostly) an optimist about the future of trade.
First, the changing nature and greater complexity of international supply chains makes effective protectionism hard to pull off. To cite a simple example, foreign steel is an input into many American products sold abroad, such as cars. If tariffs or quotas restrict the importation of foreign steel, American automakers will face higher costs, and they will find it harder to export. Policy makers might like to think that tariffs can target foreign interests with precision, but that has never been less the case than now.
Second, we have been down this protectionist road before, in the 1980s under President Ronald Reagan, who imposed limitations on Japanese auto imports and tariffs on Japanese computers and televisions. In 2002, President George W. Bush imposed tariffs on steel imports. Whatever you think of those policies, they did not reverse the longer-run trend toward more cross-border trade. Over time, the economics proved more potent than the politics, and those restrictions were removed.
Third, and perhaps most important, human beings around the world are tied together more closely than ever before. In particular, migrants from emerging economies now live in many different countries in unprecedented numbers.
Why does this matter? Well, the numbers on international trade suggest that distance is usually a greater barrier to trade than are tariffs, a result from “the gravity model.” To put it concretely, the U.S. trades far more with Canada than with Australia, even though those two countries have broadly the same economic profile. The reason isn’t mainly about the costs of transportation (water transport is pretty cheap), but rather the U.S. has better networks with Canada than with Australia. Canadians are more likely to have school experience, business contacts or friends in the U.S., and vice versa, because of proximity. That encourages subsequent business ties and trade.
A lot of the recent cross-border migration is planting a hugely positive, pro-trade legacy that will yield dividends for decades to come. The Chinese, Indians, Nigerians and many other groups around the world will continue to build economic connections, even when the countries involved aren’t always so geographically close. I expect the positive trade gains from these connections and personal networks will outweigh the downside from some higher tariffs in the meantime. Ultimately the opportunities are there, and the biggest problem is the lack of human talent to execute on them.
I do think there is a major threat to free trade today, but hardly anyone is talking about it, at least not in the U.S.
I am not so much an optimist about free trade in China. The Chinese government may make marginal concessions to limit the scope of a trade war, but I don’t think it will let in the major American tech companies anytime soon. Their government obsesses over controlling the flow of information, and if only for national security reasons it won’t liberalize technology or communications. More than ever before, information flows and trade flows are inseparable.
The internet shows some signs of breaking down into separate networks, connected only imperfectly. The Chinese “Great Firewall” has proved robust, and recently the European Union has moved toward creating its own set of stringent privacy and data protection laws, such as the new General Data Protection Regulation standards. Sitting here in Norway for a conference, I find I am unable to access many American websites, such as the Chicago Tribune, which are not (yet?) GDPR-compliant. There is thus a danger that the internet will become carved into three or more separate systems, to the detriment of trade, data flows and eventually personal connections.
Even on this issue, I am relatively optimistic because I think markets will find ways to connect the various balkanized networks, more or less seamlessly, perhaps using more advanced versions of today’s VPN or blockchain technologies. Still, for all the talk about President Donald Trump endangering the international economic order, in the longer run the combination of China and the internet is the greater risk. It won’t help much to have China – slated to become the world’s largest economy – firmly committed to censorship and tech restrictions.
The internet as an open, well-governed commons, is one of today’s most significant public goods, but exactly who or what is going to keep it that way? In the broader sweep of world history, we’re probably not going to remember this era for its temporary uptick in steel tariffs.
©2018 Bloomberg L.P.