What we're about to talk about is much bigger than Donald Trump. It's bigger than 'Make America Great Again' and fake news. It's bigger than Brexit, and it's bigger than France's National Front.
What we're about to talk about is trust, and how it demonstrates its presence in markets. We're going to talk about cooperators and non-cooperators. We're going to talk about world peace.
But let's start small.
Over the last week, Donald Trump has turned his back on the world's best hope for wealth and happiness — global trade. He has reignited an old, failed fight over Canadian lumber, upsetting our allies to the north. He has played on the fears of Americans by using national security as an excuse to investigate steel and aluminum imports.
He has opened the door for American corporations willing to use the power of the White House for their own ends.
And yet, there are many in the United States, the richest country in the world, who cheer this bullying.
On both the extreme right and left, trade has become maligned as a harbinger of economic catastrophe — a violent force with the power to decimate the industries employing entire nations. And that can be true.
But what is also true, is that trade is a powerful force for good. We've known that for decades. More importantly, perhaps, we know that trade is an approximation for trust.
"Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair competition with war," said Cordell Hull, the US Secretary of State from 1934 to 44."It is a fact that war did not break out between the US and any country with which we had negotiated a trade agreement."
If trade leads to trust and cooperation, turning away from trade creates mistrust and animosity. While some think that globalization — a leap of trust and cooperation if there ever was one on this planet — started with the end of WWII, many economists and historians believe it actually started in 1870, only to collapse with the rumblings of WWI in 1913.
What these academics have found is that cooperation and trust, like trade, do not move in a straight line. Instead, they move in cycles — in ups and downs, in moments of darkness and light.
Guess where we're headed.
Perhaps you're familiar with Professor Nowak
This idea of the cycle is based on the work of mathematical biologist, Martin Nowak of Harvard University. He posited that trust and cooperation are cyclical simply because decisions have consequences, and those decisions impact people's worlds. That world, in turn, impacts people's decisions. It's a conversation.
Here's an example. Say you buy a tank of two dozen piranhas, and within about 10 days of setting up the tank with all your gorgeous fish, one piranha realizes that it can eat one of its tankmates. And it likes the taste. This is a very high form of non-cooperation to say the very least.
All of the sudden all of the piranhas realize that non-cooperation is delicious and that its tankmates are dangerous and not to be trusted. There is a feeding frenzy and by day 14, there are only 5 piranhas left swimming. They decide at that point, after all the decimation, that cooperation is better. Trust is better. Without it, they'll all die.
That's how the cycle of trust and cooperation works.
(Peterson Institute of Economics; Klasing and Milionis (2013) for historical data, WTO for 1960–2011, Johnson and Noguera (2012) for value-added adjustment.)
Economists Mariko J. Klasing and Petros Milionis, Professors at the Netherlands' University of Groningen then gave us the data to overlay Nowak's cycle onto the history of global trade. In their paper, Reassessing the Evolution of World Trade, 1870-1949, they figured out that trade was a much bigger deal before WWI than economists initially thought.
"Our estimates indicate that trade shares during the 1870-1949 period were on average 32% higher compared to existing accounts and the world ís level of openness to trade in 1913 had been comparable to that in 1974. This implies that the rise and fall of world trade that took place over this period were much more pronounced than previously documented," they wrote.
In other words, we've already had a period where globalization came and went when deep cooperation turned into non-cooperation in markets. Indeed, back in 1914 legendary economist, John Maynard Keynes extolled the virtues of his globalist era, one marked by the ease of transportation thanks to deflated costs.
"What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914." he wrote. "The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend."
In short: What a time to be alive.
But of course, as we know, this globalization did not benefit everyone. While income convergence was taking place on a global scale, some members of society were being left behind. Returning to Nowak's thesis, these people are the non-cooperators. They are the ones who want to throw out the elites and rip it all down.
You see, every cycle has them.
Non-cooperators in the 2nd era of globalization
Our non-cooperators are Nigel Farage and Donald Trump, they are scared because this second wave has left them behind in a world they no longer recognize. In the US economy — and indeed in the world — during second globalization era, service goods like banking and healthcare have become more tradeable than manufactured goods. People who made the latter, especially those in the developed world, are no longer comfortable in this economy. For many, instead of converging, their incomes are disintegrating. That's why a populist message is resonating.
But populism and protectionism needn't go hand in hand. It was President Theodore Roosevelt, America's most successful populist, who opened up trade with Canada and the Caribbean. He had his reservations about free trade, but he also saw it as a challenge that the U.S., as a strong nation, should face with energy. After all, he loved a competition.
This is the opposite of the lethargy Trumpians recommend. Instead of innovating our economy, they prefer to reignite old fights. The 20% tariff the administration just put on softwood lumber is a perfect example.
Commerce Secretary Wilbur Ross announced the tariff arguing that, because lumber harvested from Canada's state-owned timber lands is cheaper than lumber from U.S. private lands, the country has an unfair advantage. The United States has argued this before the World Trade Organization before, and we've lost.
Structural differences in domestic economies do not count as a trade advantage in the eyes of international law.
But here we are.
"It is an old subject, unfortunately, it's coming back," Carl Grenier, a former executive vice-president (1999-2006) of the Free Trade Lumber Council and current professor at the University of Leval in Canada told Business Insider. "There is a pattern in the three deals that have been made in the past... each deal has been more restrictive to the US market than the previous one. That's why it [this fight] keeps coming back even though we've beaten them every time, it never seems to die."
Grenier accuses the US lumber industry of seeking a hand-out, and hurting Canada's industry in the process.
"The only thing they [American lumber companies] want is more money," Grenier told Business Insider. "When they bring countervailing duties the price of lumber and land goes up in the U.S... "The fit is perfect but the US lumber industry has found a quick way, a cheap way, and an easy way to make money."
Of course, it's at the expense of goodwill with one of our country's best allies. Grenier called this issue a "major irritant" for Canada.
After it was announced, The National Association of Homebuilders put out a statement saying that this lumber tariff would be devastating for housing. The group agrees with Grenier in that it believes the US lumber industry doesn't have enough supply to meet domestic demand alone anyway.
“If the 20 percent lumber duty remains in effect throughout 2017, NAHB estimates this will result in the loss of nearly $500 million in wages and salaries for U.S. workers, $350 million in taxes and other revenue for the governments in the U.S. and more than 8,200 full-time U.S. jobs," according to Granger MacDonald, chairman of the National Association of Home Builders. "Lumber prices have already jumped 22 percent since the beginning of the year, largely in anticipation of new tariffs, adding nearly $3,600 to the price of a new single-family home."
In other words, protectionism makes things more expensive.
It also makes things more complicated. Consider Trump's 'Buy American, Hire American' mandate. It requires companies to do more research into who and what they're buying (kind of like a regulation, wouldn't you agree?). It will require that products be made with more expensive American components. That cost will be passed on to the consumer.
The word 'credit' actually comes from the Latin word for 'trust'
This trust and cooperation deficit is happening at a bad time for the driver of our domestic economy — the almighty American consumer. Right now, US consumer debt takes up 20% of gross domestic product, and the consumer is starting to show strain.
This showed up in the country's dismal first quarter GDP print, 0.7%, below the 1% expected by economists. This was in large part due to a lag in personal spending.
"Real personal consumption grew by just 0.3% in the first quarter, down from an increase of 3.5% in the fourth quarter of 2016," Business Insider's Bob Bryan noted following the reading. "It's the smallest increase since Q4 2009, just two quarters removed from the recession."
Now there are a bunch of reasons for all this. Despite the fact the country dug itself out of a mortgage debt hole after the great financial crisis, other things gave. Student loans for one, auto loans for another. Some of this is much deeper than that though. Some of it is that income divergence we were talking about.
"Higher income inequality seems to have been conducive to unsustainable consumer borrowing in the run-up to the Global Financial Crisis (GFC)," Morgan Stanley said in a note to investors last year. "After disadvantaged households bumped up their consumption possibilities through borrowing, they found themselves with impaired balance sheets, limited income prospects, and heavy debt loads in the aftermath of the crisis. Unsurprisingly, they are frustrated by their dim prospects."
This, Morgan Stanley, is a global phenomenon. It hasn't gone away either. To solve this problem, the bank suggests investing in "access to education, enhance social mobility and improve financial stability."
But that's not what we're doing. Here in the United States we have an Education Secretary who barely believes in public education. We have a Republican Congress callous enough to call for kicking millions of Americans off of health insurance. We have a President who is willing to abuse something that builds trust, connects nations, fosters cooperation, and makes up 28% of our country's economic output.
We're in a tight spot.
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