The end of the 58 year old political cycle

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

Why did the the Western countries favor trade liberalization after World War II? There were many reasons, but a lot of it was driven by war. The USA wanted to create a free-trade zone that would be solid against Communism. France wanted to bind Germany in the European Coal and Steel Community to make World War III impossible. The great European empires collapsed, and the newly freed Third World had to be tempted away from Communism. The trade opened up slowly, though the first steps in the process were the most important and brought the biggest benefits:

The quantitative restrictions on textile imports from developing countries were first introduced in 1930s, mainly directed against the increasingly competitive Japanese cotton textile industry. It was Japan’s textile exports to the industrial countries, which spearheaded its export-led industrialisation after the Second World War. The industrial countries came under pressure for protecting their textiles and apparel sectors not only because of international competition but also mainly due to shrinking domestic industry as a result of sluggish domestic demand (Keesing and Wolf, 1980).

International trade in agricultural products and in textiles and clothing was gradually taken out of reach of GATT-1947 disciplines starting in 1950s. The textiles and clothing sectors in the developed countries were increasingly coming under pressure from relatively cheap imports of these products from the developing countries. The developing countries had gradually been acquiring comparative advantage in these sectors, which were high on labour intensity but relatively low on the required levels of skill, scale, technology and capital.

The developed countries aimed at protecting employment of skilled and semi-skilled workers in textiles and clothing sectors, which, as of 1960s, accounted for a major share of employment in the manufacturing sectors of many OECD countries (Hoekman and Kostecki, 1995). Instead of permitting reallocation of resources in line with shifting comparative advantage, the developed countries chose to limit imports of textile and clothing products. Despite such protection, total employment in these sectors along with the real income of the low-skilled workers declined steadily. Low-income groups were especially hit hard due to rise in prices of lower-quality garments as the result of controlled imports thereof. Estimates for Canada revealed that the relative burden of protection is four times higher for low-income consumers than for higher income groups (UNCTAD, 1994)

The USA economy began to suffer after 1958, with what became a large trade deficit, and a declining standard of living. The inflation-adjusted decline of male wages, in the USA, begins in 1973 if you use the Consumer Price Index, but started in 1958, for young men, if you include rent.

Therefore, one of the great questions of our times is why it took 58 years for a backlash to form?

Kevin O’Rourke:

It has recently become commonplace to argue that globalisation can leave people behind, and that this can have severe political consequences. Since 23 June, this has even become conventional wisdom. While I welcome this belated acceptance of the blindingly obvious, I can’t but help feeling a little frustrated, since this has been self-evident for many years now. What we are seeing, in part, is what happens to conventional wisdom when, all of a sudden, it finds that it can no longer dismiss as irrelevant something that had been staring it in the face for a long time.

The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash (O’Rourke and Williamson 1999). We argued this based on late-19th century evidence. Then, the main losers from trade were European landowners, who found themselves competing with an elastic supply of cheap New World land. The result was that in Germany and France, Italy and Sweden, the move towards ever-freer trade that had been ongoing for several years was halted, and replaced by a shift towards protection that benefited not only agricultural interests, but industrial ones as well. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened, as workers found themselves competing with European migrants coming from ever-poorer source countries.

…This is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in (Rodrik 1998). Dani – who was long ago asking whether globalisation had gone too far (Rodrik 1997) – argues that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks.

In a series of articles (e.g. Huberman and Meissner 2009) and a book (Huberman 2012), Michael Huberman showed that this correlation between states and markets was present before 1914 as well. Countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.

Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. But if the problem was a lack of services per capita, then there were two possible solutions:

Reduce the number of ‘capitas’ by restricting immigration; or
Increase the supply of services.
It is astonishing in retrospect how few people argued strongly for more services rather than fewer people.

Concluding remarks and possible solutions
If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it. If these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldnít have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with George Osborne at the helm.

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