© David Illif, User:Colin and Kim Hansen / Wikimedia Commons / CC BY-SA 4.0
Asian prosperity depends on free trade. The West is rapidly coming to realize that the economic theory behind free trade, that is to say, comparative advantage, is wrong. Comparative advantage theory misses a whole host of causes and effects that often renders fair trade for the workers in wealthier nations a losing proposition. Free trade is disadvantaging many of the workers in consumption economies. The political blowback is fierce. Far Right parties are seizing upon the discontent to advance their message of racial purity and military strength.
There are regional trends that sometimes mask the situation, such as
Germany’s apparent success at dealing with the problems of fair trade. But the workers in the rest of the EU subsidize Germany, although you’ll seldom see that in writing. But the workers in most EU countries are well aware of it.
The News is Bad for Free Trade
Brexit, Trumpism and a variety of other populist movements are likely to reshape the world over the next decade, and it is reasonable to assume that the transition is going to lead to hardship all around, but most of all for the “Next 11” countries (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam).
By and large the Next 11 are still dependent on exports of physical goods to fund their growing economies. At the same time, they lack the level of income for the middle and lower classes that could allow them to shift quickly to internally-generated growth. Protectionist measures and policies designed to protect the workers of trading-deficit countries will leave them struggling to find a way forward.
The News is Bad, But Not A Disaster, Yet
We need to ask what the liklihood is that free trade is in jeopardy and how long do we have before we can expect to feel the effects.
The good news if you aren’t an affected worker is that it can take a long time for major policy shifts to occur in liberal democracies. And the nations most likely to erect barriers are liberal democracies. (Warning – don’t relax and quit reading now!)
Even after the policies are in place, the practical impediments are still significant. For example, the factories necessary to create the components and build flat screen TVs cost billions of dollars and take years to build and outfit. It is clear that they are going to move slowly in throwing up barriers to trade. JUST look at their demand for imported consumer goodsHowever, for easy-to-make products, the barriers may go up quickly. And, unfortunately, the Next 11 are the source of many of those easy-to-make products. (e.g. crockery, pots & pans, furniture) so it is probable that those sectors will decline quickly.
Less Danger for Some Countries
I’ve been ignoring the BRIC countries in this discussion so I’ll take a moment to explain why. Each of the BRIC countries is characterised by a strong industrial base. Each also has a vast hinterland and a large or huge population clamouring for consumer products. They can lever this into dynamic growth for decades to come if they implement the correct policies. In a protectionist world, they still have the ability to prosper.
I have also skipped Singapore. The decline in trade will affect Singapore in significant ways. However, for decades it has been diligently moving its focus away from physical things into providing services and the creating intellectual property. It is unlikely that trade barriers are going to affect either of these areas. But the bill to be paid is that those with the least useful skills will be unemployable.
Singapore could, however, be out-competed by China, India, Indonesia or any other country that has a larger population and decides to replicate Singapore’s approach. That will happen at some point, but given the difficulties of managing large countries, it is unlikely to happen in the lifetime of anyone reading these words.
G7 Workers Not Likely to Benefit From Trade Barriers
We will see the huge trade disparities that exist today disappear over the next two decades. There is no reason to expect that this is going to improve the lot of workers in the EU or the U.S. The reason: robotics.
As humans, we are faced with the distasteful fact that we are not all born with the same capabilities. No matter how strong a person’s will, they are not going to become an astrophysicist with an IQ of 90. Even a person with IQ of 130 is likely to find it exceedingly difficult to become an astrophysicist. If she succeeds, she is unlikely ever to make major contributions to the field. The same holds true in software development, medicine, finance and on and on.
We have to face facts, and so do our politicians. Folks with lesser intelligence are not suited for the most-in demand jobs of the near future… or even now. It is inevitable. The answer to the inequity that arises is political in nature. I don’t do politics here.
Robots Are Here. More Are Coming.
The sad reality is that those with even an average IQ are becoming more and more at risk for replacement by robots. The factories that return to the EU, Britain and the U.S.,aren’t going to look like the ones that went abroad decades ago. They will be robotised with just a few highly-skilled human technicians to keep them running. The remaining jobs will either be very high-end with significant intellectual challenges or they will be at the low end. They will be jobs for which robots have not yet been developed or for which it is simply cheaper to use a low-wage human.
In the U.S. between one and two million truck-driving jobs will be eliminated by automation starting as soon as five years from now. Soon after ten million cashier jobs will start disappearing. Europe faces the same problem. Robots are already putting Chinese factory worker out of work. Automated factories, cars and stores have huge implications for the workers in the advanced countries. Telerobotics will certainly make it even worse.
Businesses, Factories & Trade Will Migrate
Many multinational businesses presently headquartered in Britain are planning their own version of Brexit. They will be leaving Britain and taking up residence in Europe if the terms of Brexit are not to their liking. Even worse for Britain, those companies will also be uprooting their factories and moving them into Europe. Quite possibly, the City will find itself denuded of banks, hedge funds, brokerages, etc. as they move to Europe in order to stay within the EU.
We will see LG, Samsung, Apple and numerous other companies moving their factories into the U.S. and the EU, leaving a big hole in their domestic GDP. For example Samsung Galaxy phones are manufactured in Gumi, South Korea.
In India they make some Samsung televisions, mobile phones, refrigerators, washing machines and split air conditioners. A second Indian factory opened in 2007.
More recently, in 2014, Samsung began manufacturing computer memory modules in China. There are two semiconductor facilities: one in Austin, Texas and one in Giheung, Korea.
A manufacturing facility and a research and development center are located in Warsaw, Poland.
Most Samsung microwave ovens are manufactured in Malaysia. Its refrigerators are constructed in South Korea, China and Poland. Televisions are made in Portugal, England and the U.S. A third manufacturing facility is planned to be built in Vietnam in 2014.
That is surely the tip of the iceberg as this doesn’t include their supply chains. Somehow, Samsung is going to have to figure out how to prosper in a protectionist world. It won’t be easy.
Warning for Next 11 Businessmen
Trade barriers are not going to rescue workers in the G7 but they are likely to have disastrous consequences for the Next 11.
If you are a businessperson that depends on the Next 11 or on countries that haven’t made it into the Next 11, now is probably the time to start making plans to deal with the transition away from free trade.
Where you incorporate, where you domicile your business and where your bank accounts are located will have far reaching consequences in the future. Stay tuned, we’ll have a lot more to say on this subject.