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Less intrusive trade agreements today may do more for trade tomorrow

Raghuram G Rajan
Raghuram G Rajan1/23/2020 7:0 AM GMT+08  • 6 min read
Less intrusive trade agreements today may do more for trade tomorrow
Toward the end of the last decade, globalisation – the lowering of barriers to cross-border flows of goods, services, investment, and information – came under severe pressure. Populist politicians in many countries accused others o
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SINGAPORE (Jan 23): Toward the end of the last decade, globalisation – the lowering of barriers to cross-border flows of goods, services, investment, and information – came under severe pressure. Populist politicians in many countries accused others of various economic wrongs, and pushed to rewrite trade agreements. Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But why are similar complaints now emanating from the developed countries that established most of those rules?

A simple but inadequate explanation is “competition.” In the 1960s and 1970s, industrialised countries focused on opening foreign markets for their goods and set the rules accordingly. Since then, the tide has turned. Emerging economies, especially China, got a lot better at producing goods; and the old rules dictate that developed countries must keep their markets open to the now-more-productive producers from elsewhere.

To a cynical observer, the developed countries’ current efforts to rewrite the rules look like an attempt not to level the playing field, but to thwart competition. One reason why emerging-market producers are competitive is because they pay workers less (typically because those workers are less productive). Hence, the US-Mexico-Canada Agreement (USMCA, the renegotiated Nafta or North American Free Trade Agreement) would limit Mexico’s advantage by requiring that 40-45% of automobile components be made by workers earning at least US$16 ($21.50) per hour (by 2023).

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