Ivo Pezzuto - "Globalization ain't dead yet" published on Forbes on July 23, 2018
1. 24/7/2018 Globalization Ain't Dead Yet
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Jul 23, 2018, 12:16pm • 171 views • #Economy
Globalization Ain't Dead Yet
Simon Constable Contributor i
Claims that the era of free trade is on its last legs are much exaggerated.
It is nowhere near dead. Not by a long shot.
Assurances that the U.S. has embarked on a trade war that will collapse the world
economy similarly grasp at a phantom menace.
Who knows for sure why people say such things, but we can make educated
guesses.
A couple of probable reasons stand out as feasible. First, it may be because such
scaremongers are too focused on the recent spats between the U.S. and China, plus
the U.S. and the European Union. Alternatively, it could be that they aren’t aware
of how the current tariffs fit into the move towards increasingly freer trade over
the last two centuries.
2. 24/7/2018 Globalization Ain't Dead Yet
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Here’s some detail:
The U.S. Isn’t the World
The recent tit-for-tat tariffs binge by the U.S. And China, and also the one between
the U.S. and E.U. aren’t good news for trade. But they aren't catastrophic either.
New York-based bank Brown Brothers Harriman hits the nail on the head with the
title of a recent report: “Globalization is more than Pax Americana.”
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In other words, international trade doesn’t start and end with the U.S. There are
indeed other countries in the world which trade with each other.
While it was true that after WWII much of the developed world lay in ruins. What
wasn’t a mess was the U.S. industrial and commercial base. It isn’t a stretch to say
the U.S. was the main game in town when it came to global business, at least for a
while. Now that is less so.
So, while the Trump administration appears to have launched a wrecking ball at
some parts of its free trade deals, other countries remain committed in startling
ways.
“[...O]ther countries have not abandoned their commitment to globalization,” even
if the U.S. has,” the report states. “After nearly five years of negotiations, the E.U.
and Japan signed a free-trade agreement,” earlier this month, the report
continues. That deal will cover a third of the world’s GDP, BBH says.
But perhaps even more than that, the deal will bring the E.U. and Japan close to
what economists dream of: zero-tariff trade between the two.
“Tariffs on about 94% of EU goods to Japan would be removed,” the report states.
“After several years, the agreement will eliminate 99% of Japan's tariff on EU
goods.”
Americans who work for international auto companies demonstrate against trade tariffs. AP Photo/J. Scott
Applewhite
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When this deal is fully implemented, both sides will get an economic boost. They
will have lower costs for imported goods and trade will increase so helping lift
GDP.
The EU is busy cutting lots of other deals as well which will only add to its
economic prospects.
Tariffs Still Low
Tariffs are low by historical standards. I pointed this out in recent columns which
you can read here and here.
BBH also reminds us that for the U.S., Japan, E.U. and Canada the effective tariff
rates charged are all below 2%.
Contrast that with the blistering high 46.5% charged by the U.S. in 1878.
It is also true that tariffs are no longer quite the threat that they were in the past in
part due to the flexibility of businesses.
"Todays' firms can quickly, reconfigure their business models and value chains
globally to circumvent protectionist measures," says Ivo Pezzuto, professor of
global economics and disruptive innovation at The International School of
Management in Paris.
In the simplest terms, that might mean shipping U.S. soybeans to Brazil and
Brazilian soybeans to China in response to China's recent imposition of tariffs on
the American-grown crop.
The Weak Get Hurt More
For economists, free trade is great. It leads to more growth. It is true vice versa, as
Pezutto highlights.
In other words, the developed world should be able to carry-on reasonably well, at
least for the time being, and probably even in the event of a full-on trade war.
That's because tit-for-tat tariffs between two countries (for example the U.S. and
A full-blown trade war can be destabilizing but mostly for the weaker
economies and export counties or those less connected to the global value
chains.
“
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China) will likely result in increased trade between other countries as business
people work around the tariffs. Of course, there is also all the trade between the
countries that are cutting new deals with each other such as the E.U. and Japan.
For investors, the first thing to watch is for where trade is increasing
geographically. Then look for what sectors are benefiting or might gain the most.
Right now, there seems to be little impact on global trade. However, some trade
between the U.S. and Europe and China may fall.
However, trade between other countries (such as Japan and EU as mentioned
above) looks likely to jump over the coming years.
In the case of Japan, it carmakers such as Toyota Motor and Honda, will both
likely sell more Japan-made vehicles to the E.U.
For Europe, agriculture looks set to prosper from the trade deal. When farmers do
better, then the companies which sell farm equipment and supplies tend to do well
also. That should be Bayer (for agriproducts) and John Deere (for tractors.)
Simon Constable is a writer, economics commentator, and a fellow at The Johns
Hopkins Institute for Applied Economics, Global Health and the Study of
Business Enterprise.