Along with my degree in Computer and Information Science and before I immersed myself in Marketing Science, I also took a year off my career in 2002 to study Applied Economics at the University of Adelaide. The sole reason? I was curious about econometrics. Whilst I enjoyed econometrics, the funny thing is that the subject I enjoyed the most was International Trade – it was taught by Kym Anderson, who is now an Emeritus Professor at the University. He made what was seemingly a dry topic into something that was highly interesting and intellectually compelling.
If I zoom in on the course, what I remember the most from the subject was my introduction to the Heckscher-Olin (H-O) Model. The namesake for the model is Eli Heckscher and Bertil Ohlin from the Stockholm School of Economics in 1933. The model explains how international trade occurs based on the differences between two markets. For example, if one market has an extensive labour market, and the other is capital-rich. In a free-trade situation, both countries would benefit from the specialisation. For example, textiles out of Indonesia and TV sets out of Japan. Indonesian households would enjoy the effects of free trade by allowing them to buy cheaper TV sets, whilst Japanese consumers would also benefit from lower cost textiles.
In reality, life is never as straightforward as that – as interest groups could then lobby the government to impose tariffs for what is seemingly an unfair situation. Consider the example I give above, textile conglomerates in Japan may think that it’s unfair that Indonesia benefit from selling cheaper clothing when consumers only bought TV sets once over a longer time period. If they succeed in convincing the Japanese government in imposing a tariff against Indonesian textiles, the following aftershocks will occur:
- The price of clothing will increase in Japan.
- The textile industry in Japan will then gain an advantage.
- Japanese consumers will suffer by paying more for clothing – as textile production in Japan may not be as efficient as the labour-abundant Indonesia.
The effect of trade tariff in this case would naturally reduce the amount of textiles imported into Japan from Indonesia. Indonesia may then also retaliate by setting a tariff for TV sets and other electronics out of Japan. The overall effect of tariffs unfortunately would lower market specialisation, less efficient resource allocation (in my example above, Japan will need to start producing more textiles and Indonesia will also need to invest in electronics production despite other markets being more efficient in the sector. The tit-for-tat trade wars could also flow into other related sectors — with more players involuntarily pulled by the government aiming to inflict more economic pain on the other country.
Thankfully, the example above is just for illustrative purposes, however there’s a mammoth problem looming over the horizon: the United States against other large economies.
There’s nothing trivial about the unfolding situation which involves the US, Mexico, Canada, China, Australia, and Europe. The impact will be felt globally, especially since it is extremely difficult to pinpoint a specific product that is produced entirely within a particular country. The tariff imposed by the US for Canada for example, will also affect US production that relies on the nickel out of Canada. Think about products that belong to an an American brand but manufactured in China, with specific parts out of China, India, Vietnam, South Korea, and presumably more countries. As countries feel that they should retaliate for national pride and political survival, more sectors and categories are dragged into the mess.
Ultimately, the victims are the end consumers having to cope with higher prices.
I mention earlier that the real life is never as clean-cut as economic models. There are industry spokespersons, lobbyists, and politicians who are championing certain industries and sectors. There are winning and losing industries in all the countries involved. There are political and societal implications for trade strategies. Decisions also need to consider the workforce and communities that are affected by trade agreements. However, with this insular focus, it is easy to lose sight of the enormous cost to the whole country and beyond. On the other hand, free trade also opens up vulnerability of one country being highly reliant for a commodity from another country. We’ve seen this distrust across hostile nations, and now we see this among friends.
Let’s bring the picture to a neighbourhood. If your neighbour is a plumber, and you are a digital marketing whizz – he benefits from your assistance in setting his marketing campaigns on social media, and you enjoy the privilege of having him around to fix any bathroom maintenance for free. If one household starts enacting punitive controls, he would have to either do his digital marketing himself (poorly) or pay somebody else to do it, and you may have to either do all the maintenance yourself (poorly) or pay a professional plumber to do it.
It’s a lose-lose situation when market specialisation breaks down. Let’s hope that common sense will prevail.
Soon.