The first issue this series will consider is globalization. The term means different things to different people, but according to the definition coined by the International Monetary Fund (IMF) in 2000, globalization has four aspects: (1) international trade; (2) international capital and investment; (3) migration and movement of people, and (4) the worldwide sharing of knowledge. When most people talk about globalization, they are really talking about its impact on business and economics. Some academics have broken down globalization into three major areas: economic globalization, cultural globalization, and political globalization. For modern-age presidents, the primary concern has been the effect of globalization on their economy.
The 19th century witnessed the birth of globalization. The Industrial Age led to cheaper production of household items, as rapid population growth created sustained demand for commodities. The First and Second Opium Wars opened up China to foreign trade, and the the British conquest of India made the vast populations of these regions a ready market for European exports. The conquest of new parts of the globe by Europeans, especially sub-Saharan Africa, yielded valuable natural resources such as rubber, diamonds and coal, which enriched the treasuries of the colonizing nations and helped fuel trade and investment between the European imperial powers, their colonies, and later with the United States. The invention of the telephone, and other methods of rapid communication and transportation made the world a smaller place.
The 20th century saw a rapid growth in the number of multinational corporations. Natural trade barriers such as transport costs decreased. The latter part of the 20th century saw the signing of multinational trade contracts and agreements, such as the General Agreement on Tariffs and Trade (GATT), and the North American Free Trade Agreement (NAFTA). The creation of the European Union (EU) saw the elimination of tariffs between member states. Technological changes lowered transport costs and goods could be transported between continents within hours, instead of weeks or months.
Negotiations known as the Uruguay Round, from 1986 to 1994, led to a treaty creating the World Trade Organization (WTO) to mediate trade disputes. Other bilateral and multilateral trade agreements, including NAFTA, were signed to reduce tariffs and barriers to trade. World exports rose as a percentage of the total gross global product from 8.5% in 1970, to 16.2% in 2001. Then in late 2000s, much of the industrialized world experienced a deep recession.
United States trade policy has varied widely through various historical periods. As a major developed nation, the U.S. has relied heavily on the import of raw materials and the export of finished goods to fuel its economy. The 1920s marked a decade of economic growth in the United States. President Warren Harding signed the Emergency Tariff of 1921 and the Fordney–McCumber Tariff of 1922. Harding's policies reduced taxes and protected U.S. business and agriculture with increased tariffs. Following the Great Depression and World War II, the United Nations Monetary and Financial Conference brought the Bretton Woods currency agreement. The Bretton Woods conference was an agreement by the world's leading nations to create framework for international commerce and finance. It led to the founding of several international institutions including the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund (IMF).
The US last had a trade surplus in 1975. The balance of trade in the United States has been a concern among economists and business people. Warren Buffett, founder of Berkshire Hathaway has called the U.S. trade deficit "a bigger threat to the domestic economy than either the federal budget deficit or consumer debt. Right now, the rest of the world owns $3 trillion more of us than we own of them." This is an opinion shared by President Trump, but according to Bob Woodward in his recent book Fear: Trump in the White House (reviewed here in this community), his leading economic advisers disagree.
There is not universal agreement on whether or not development of the global economy and free trade are good or bad. In his recent book Right Here Right Now (reviewed here in this community), former Canadian Prime Minister Stephen Harper points out that the biggest winners have been the developing nations of the world, where poverty has been significantly reduced and the standard of living has increased. But in developed nations such as the United States, it has resulted in a lower standard of living for many lower and middle class workers. In the 2016 Presidential election, Donald Trump won a majority of the popular vote in counties in which the average income declined over the last 10 years due to globalization and free trade. This enabled Trump to win the traditionally blue states (with large blue-collar populations) of Michigan, Pennsylvania and Wisconsin.
President Trump has criticized NAFTA, cancelled negotiations towards the Trans-Pacific Partnership (TPP), imposed tariffs on steel and aluminum, and proposed to significantly increase tariffs on Chinese and Mexican exports to the United States. He has been critical of the World Trade Organization, and has threatened the US withdrawal from the organization unless his proposed tariffs are accepted.
In March 2018, Trump signed an order imposing import tariffs of 25 percent on steel and 10 percent on aluminum, with exemptions for Canada and Mexico. In response, the EU imposed retaliatory tariffs targeting $3.4 billion in U.S. exports. In July, the United States and China imposed tariffs on $34 billion of each other's goods, increasing to $50 billion in August. In September the U.S. introduced a 10% tariff on $200 billion worth of Chinese goods, scheduled to increase to 25% by the end of the year. He has threatened further tariffs on an additional $267 billion if China retaliates. China countered the move with a 10% tariff on $60 billion of U.S. imports, which, when added to the previous round of tariffs, amounts to almost all $110 billion of U.S. imports to China. The policy's purpose is not a complete rejection of the free trade, but rather as incentive for the renegotiation of existing trade deals. It is also predicated on the idea that "free trade" with China is an illusion because of the power imbalance caused by the differences in population, the cheap cost of production of Chinese goods, and the restrictions that China puts on sale of American goods in its country, in comparison with how extensively Chinese products are sold in the United States.
Presidents of this generation cannot ignore the problem of the decline in working-class income in the age of globalization. Until 2016, the political establishment of both major parties called for staying the course, and continued to preach the gospel of free trade. Donald Trump charted a different course, rejecting the status quo in favor of a more protectionist approach. It is one that has met with opposition from a number of establishment economists. The Council on Foreign Relations, a non-profit think tank specializing in foreign relations, has expressed the opinion that the President's proposed steel tariffs could result in the loss of up to 40,000 jobs in the auto manufacturing industry. The CEO of the United States Chamber of Commerce has also expressed concern that the protectionist policies could put 2.6 million American jobs at risk.
A group of 101 "Economists for Trump" disagree with this conclusion. They point to estimated from the Congressional Budget Office (CBO) that predict real GDP growth over 3.0% in 2018, which in their opinion is "another bellwether of an improved outlook on economic growth, in part resulting from the President's pro-growth economic policy agenda." They add, "We reject the notion that the economic stagnation realized since the 2007-2009 recession is the best our economy can generate...We believe that the President's economic policy efforts are a strong step in the right direction to restore long-run economic growth and opportunity for all Americans."
Agreement on economic policy is almost never unanimous among economists. It remains to be seen whether restoration of working-class incomes can be achieved by these protectionist policies, or if continuation of the previous administration's policies is the answer. While polarization on this issue prevails, both sides seek the same result to this perplexing problem that sits atop the president's desk.