The Economist: Implications of Global vs. Regional Trade Strategies

Colorado’s economy benefits immensely from economic freedom

President Trump initiated “fair” and “strategic” trade posturing earlier this year — raising the specter of a trade war. Most economists support free trade and point to the interstate commerce clause in the U.S. Constitution as one of the great historical innovations in economic development. The unimpeded flow of commerce between states guarantees the migration of economic resources (labor and capital) to areas of greater opportunity. It allows businesses to expand nationally and minimizes state protectionism. Colorado’s economy benefits immensely from this economic freedom. 

Unfortunately, reality gets in the way when we discuss global free trade. The U.S. Constitution established the framework for a national government to help guide commerce. While the World Trade Organization was founded in 1995 to promote free trade and has authority granted by member nations to impose penalties, enforcement on trade and intellectual property disputes appears to have less of a bite. Furthermore, unlike interstate commerce in the U.S., there is no global institution promoting the migration of labor for economic benefit. As a result, trading partners, like marriage and business partners, must assess fairness and devise strategies that include self-serving aspects while still maintaining long-term, mutually beneficial relationships. This is where we are today: questioning if we have been too naïve as a nation in our post-World War II pursuit of globalism. Are we better off with heavy doses of nationalism or regionalism since the natural geography of trade tends to be more localized?

Strategic trade has many nuances. First, there is national defense. In wartime, we need to secure critical materials and components. This argument offers some legitimacy. But does that really apply to tariffs on steel and aluminum from Canada and Mexico? National defense argues for domestic auto production. But does this work when many components are sourced globally? Given future wars will be different than past wars, more high-value defense-related manufacturing and technology investment in the U.S. would benefit the nation and Colorado due to the state’s strong connection to defense. Consumers, however, will pay a price.

There also is strategic trade related to comparative advantage. U.S. companies and individuals are known for innovation, creativity and branding. The system of protecting intellectual property is greatly compromised when technology is transferred too fast and brands are routinely copied. This is the biggest complaint against China, along with unevenly applied regulations for U.S. companies operating in China. Colorado’s technology economy stands to gain in the long-term from the protection of intellectual property, but in the short-term it appears more than half of Colorado’s $8.1 billion in exports would be in jeopardy in a trade war.

Another angle to strategic trade is the protection of infant industries. Many countries protect certain industries to promote competitiveness in global markets. Colorado’s solar industry would benefit from protectionism in the short-term – again, with consumers paying higher prices. But open trade and technology transfer ultimately promote competition and technological advancement in the interest of all societies.

The above challenges with trade relationships endure over time. One strategy seldom discussed is our regional relationship with neighbors in Central America. Excluding Mexico, Central America houses 48 million people in nations with populations comparable to Colorado’s. The median age in Central America is 27 (Colorado is 37) and the population growth rate is 1.3 percent (Colorado is 1.6 percent). In 2015, 3.4 million of all U.S. immigrants living in the U.S. were Central American. In the northern triangle of El Salvador, Guatemala and Honduras, human existence is often dominated by gangs establishing their own rule of law. This extreme violence combines with political corruption, drug trafficking, and lack of infrastructure to create persistent poverty. The situation is so grim that some parents sent their unaccompanied children through Mexico to the U.S. Imagine that!

What if the U.S. pursued the Chinese model of infrastructure investment in Africa now associated with their Silk Road initiative? Heavy infrastructure investment could create jobs in the U.S. and Central America. The success of the Mexican Maquiladoras along the U.S. border could be replicated throughout Central America with heavy initial incentives to attract manufacturing to the region. This would come at a time when a lot of lower value manufacturing is moving from China to other developing areas in Asia. Why not Central America?

While there are plenty of challenges to a regional strategy and heavy investment is required, consider what’s possible. Think of Germany and Japan after WWII and China after President Nixon in the 1970s. Both the U.S. and Colorado economies would benefit greatly from economic development in Central America, as would people throughout the American hemisphere.

Categories: Economy/Politics