Part 1 of a series: Silk Road Soliloquies
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By Tyler Sapsford
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[dropcap]C[/dropcap]onsider the life of Mr. Fukumoto. Mr. Fukumoto—who is, to be clear, a hypothetical character meant to provide life to this exercise—is one of Japan’s 5.5 million workers in the country’s automotive industry, occupying nearly 9 percent of the country’s total workforce. He works for Mazda Motor Corp, which employs directly 22,000 domestic workers, 48,000 when counting internationally. But as a lower-middle class factory worker stationed in the suburbs of Hiroshima, Mr. Fukumoto realizes that his job is already threatened by the industry move towards factory automation; in an economic downturn, his position will be the first to be displaced.
Today, the global trade system on which Mr. Fukumoto’s job security relies on faces a crisis; many economists are pointing to the increased tariffs as harbingers of an imminent economic downturn. Ever since June, the United States, and in retaliation, some European and Asian nations, have enacted tariffs on hundreds of billions of dollars worths of goods coming in and out of the country, disturbing the free flow of goods and services and wreaking havoc in markets of all products and asset classes. The chances of survival in this new hostile trade environment for Mr. Fukumoto and his cohort, the 624,000 global auto workers who face the threat of unemployment due to these increased tariffs? Very slim.
While Mr. Fukumoto may not be real, his anecdote highlights a crucial point: trade matters. Not only to the high-ranking government officials that need to control the politics of protectionism to maintain votes from their constituencies, or to the high-profiled executives that see their compensation drop as stock prices plunge due to lower expected revenues in the protectionist global market climate. But it matters to the everyday workers and producers around the world, like Mr. Fukumoto and his non-hypothetical equivalents, and to those of any economic class, in any line of work, exposed to global imports or exports. Thus, we – as educated participants in the world economy – need to understand the indirect and direct consequences of hindrances to the unrestricted global flow of goods and services.
Understanding these consequences requires knowing that the roots of the problem lie deep in the soil of a protectionist worldview. America’s past rejection of the Trans Pacific Partnership, for instance, signs and seals the rejection of an ideological declaration pronounced during the Obama administration to focus on the security, trade, and persistence of the liberal world order in East Asia: the Asia Pivot. Now, in lieu of a commitment to the world’s most rapidly growing region— home to the only other global economic superpower—the current administration under President Trump is engaging in an all-out tariff war with countries from the most export-oriented region in the world.
These tariffs are detrimental because they are an additional tax on a country’s exports, discouraging growth in the exporting nations. In retaliation, exporting nations slap tariffs on goods imported to protect their own domestic industries against the added competition in foreign markets, further diminishing growth on a global scale. In the end, nobody benefits. The Trade Partnership, an economic consulting group sponsored by the Peterson Institute for International Economics estimates that before the additional tariffs were added in September, the direct effects of China’s retaliation to American protectionist policies in August, will kill at least 146,000 jobs in America alone. More concretely, the most recent round of tariffs applied by the U.S. on Chinese goods have led the founder of China’s largest e-commerce business, Jack Ma, to announce that he will no longer move forward with his plans of expanding his business in America. Ma was planning on bringing 1 million jobs into the U.S., and yet the U.S. administration, despite promises to expand America’s workforce, is the very reason these jobs won’t be available anymore. Does this not contradict Trump’s rampant promises on the campaign trail to bring to the U.S. ‘good jobs’ in the technology and e-commerce sectors? These examples, however, only scratch the surface.
But the economic consequences also go beyond the direct detriments to producers around the globe. History teaches us that in a global financial downturn, free trade can help mitigate the damages caused by market disarray: during the Great Depression of the 1930’s, an era marked by protectionist tariff-based trade policies, the world GDP shrank by over 4 percent. As a contrast, in the 2008 Great Recession, global GDP only shrank by around 1 percent, due to, as many economists acknowledge, free trade providing economic support for exporting nations faced with economic headwinds. In fact, global GDP is roughly five times bigger today than it was 1970. During that time, cross-border trade in goods and services, as a percent of world GDP, has grown from 26 percent to 56 percent. This correlation is not causation. But one would have to be thick, indeed, not to attribute at least some of this massive increase in prosperity, to the ability to buy and sell with people in distant lands.
Today, if another recession were to hit, would we be so lucky? Would producers be able to access markets in distant lands, mitigating the effects of a market downturn? A flurry of economic indicators are now pointing to a chillingly similar set of conditions to those that preceded the Great Recession in 2008: a narrower yield curve split than pre-2008 levels between the 2-year and the 10-year treasury bonds, higher levels of corporate leverage than any time in the past decade, artificial stock market growth driving by share-buybacks by companies benefitting from tax overhaul, the overvaluation of certain sectors within the U.S. economy, and one of the longest bull markets in record history.
In this increasingly risk-on environment, policy makers around the globe must realize that the current hindrances to the free flow of goods and services can not only catalyze a market downturn, but also intensify the destructive effects of such an event. And in such an event, the biggest hit will not be incurred by those policy makers in political office, or the finance-savvy bankers on the top floors of big-city skyscrapers; as is in any other war in history, this trade war is a ‘rich man’s war and a poor man’s fight.’ In such an event, it will be the Mr. Fukumotos’ of the world that will endure the pain. Our awareness and interest is the first step in stopping it.
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Tyler is a junior in Saybrook College. You can contact him at tyler.sapsford@yale.edu.