Monday 3 October 2016 5:00 pm

From job losses to security threats: Five myths about global trade

Despite trade accounting for nearly six in every ten pounds of global economic output last year, anti-trade rhetoric is spreading on both sides of the Atlantic.

This has been noticeable during the US Presidential elections as well in Europe, where a growing backlash against the EU-US trade deal, the Transatlantic trade and investment partnership (TTIP) has reflected a souring public opinion of free trade.

Coupled with a fifth consecutive year where growth has failed to pass the three per cent mark, free trade has come under the spotlight.

Yet trade is essential. Since 1990, 1.1 billion people have been lifted above the poverty line worldwide because of policies that encourage trade and investment.

Between 1970 and 2000, manufacturing workers in open economies benefited from pay rates that were three-to-nine times greater than those in closed economies. 

Nevertheless, myths around trade perpetuate.

Myth 1: Trade leads to job losses

While trade can impact labour markets, it is rarely the primary driver of job losses or declining wages. It is more likely that jobs are affected by the transformation of business models driven by new technologies. According to the World Trade Organisation (WTO), more than 80 per cent of job losses are due to automation and poor business models.

Rather than attacking trade governments must move beyond rhetoric and really invest in infrastructure and skills to help local communities engage with global opportunities. An Organisation for Economic Co-operation and Development (OECD) report found that globally, countries need to invest $53 trillion (£41 trillion) in infrastructure over the next 20 years in ports, airports, and key rail routes alone.

Myth 2: Trade only benefits big business

Around 80 per cent of trade occurs across global value chains in which small companies benefit significantly. Small and medium-sized companies are the backbone of the world economy – accounting for 95 per cent of enterprises and 60 per cent of private sector jobs. If implemented, the WTO Trade Facilitation Agreement could boost their exports by up to 80 per cent in some economies and have a transformational impact on the ability of smaller businesses to access global markets.

While large companies are still the principal actors of world trade, they rarely do so unilaterally. Unilever, for instance, works with 76,000 suppliers across the world.

Finally, trade helps small businesses grow. The newly-created Department for International Trade notes firms that have exported for more than two years are substantially more likely to be in profit – with 85 per cent of businesses claiming that exporting helped them grow to a level not otherwise possible. These are the growth companies which will generate the new and local jobs for the future.

Myth 3: Trade means open borders and increased security risks

Contrary to public perception, open trade strengthens links between countries and reduces conflict.

The EU has benefited from the longest period of peace and security in its history because of its approach to open borders.

Trade between countries strengthens relationships, facilitates cooperation and minimises risk – particularly since working together makes it easier to share data and expertise. Digitalisation is entering international trade and innovations like blockchain could provide more security to trade transactions going forward.

Myth 4: Trade liberalisation depletes  the natural environment and is a central cause of climate change

Several landmark international agreements acknowledge the important role that trade plays in promoting sustainability.

The 1992 Rio Earth Summit, for instance, recognised that international trade is a key component of sustainable development. In addition, the UN’s landmark agreement on development financing in 2015 – known as the Addis Ababa Action Agenda – focused on delivering sustainable growth through trade.

More recently, the Paris Climate Change agreement agrees to limit the global temperature increase to 1.5 degrees. Clearly, multilateral agreements are a constructive way of tackling big environmental and climate issues.

Finally, WTO rules provides a framework for members to adopt trade-related measures aimed at protecting the environment – provided that conditions to avoid the misuse of such measures for protectionist ends are fulfilled.

Myth 5: Trade is a zero-sum activity. For every winner, there is a loser

Trade agreements are a voluntary exchange premised on both parties reaching a consensus before concluding a deal. It is in neither party's interest to come away from negotiations with less.

One myth surrounding TTIP, for instance, is that it will cause product standards to fall – something neither the EU nor the US want to happen. TTIP presents the opportunity to harmonise the two regimes – cutting barriers to trade.

Many also argue that trade deals pose a threat to domestic products, workers and deficits. Yet trade provides greater consumer choice and lower prices for goods, and exporting helps countries develop specialisms in certain products – boosting competitiveness. On the flipside, countries can import materials, goods and services in areas they are lacking.

Furthermore, trade creates jobs on both sides – even for the importers. Imported goods are increasingly used in local value-added production – with the output often intended for export markets. The production of the Boeing 787 Dreamliner, for instance, involves 43 suppliers spread over 135 sites around the world.

The point is trade agreements are not static empty vessels. Rather than being summarily dismissed, they can, and should, be made to work for broader important social issues which encourage sustainable and inclusive growth. The alternative offered by those wanting to revert back to a closed world is far less progressive and inspiring.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.