July 7, 2018
Trade, Technology, and Xi Jinping’s Question
by Kaushik Basu
Despite unprecedented technology-enabled development, the world is beset with challenges, from violent conflict to rising inequality. The underlying reason for these problems may be that we have reached a turning point in the march of technological progress – and we are navigating it very badly.
NEW YORK – “It was the best of times; it was the worst of times,” said President Xi Jinping, quoting Charles Dickens’ famous line to open his speech at the 2017 World Economic Forum. “Today,” Xi continued, “we also live in a world of contradictions.” On one hand, “growing material wealth and advances in science and technology” have enabled unprecedented rates of development. On the other hand, “frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment, and a widening income gap” are generating deep uncertainty.
Xi then posed a potent question: “What has gone wrong with the world?”
Perhaps the answer lies with the very technology that Xi regards as the key to China’s rise to high-income status. Specifically, it may be that we have reached a turning point in the march of technological progress – one that we are navigating very badly.
Technology has been shaping and reshaping our lives ever since early human beings discovered how to make tools from stone. It is only natural for such a long process to include moments when technological change generates unprecedented challenges.
One such turning point was the Industrial Revolution. In mid-eighteenth-century Britain, the revolution’s birthplace, progress entailed considerable adversity. Some workers toiled 12-14 hours per day, yet inequality surged. And the incidence of child labor rose beyond the levels seen in some of the poorest Sub-Saharan African economies today.
But Europe rose to the occasion. Groundbreaking research in economics was carried out by the likes of Adam Smith and Antoine Cournot, leading to novel interventions like progressive income tax, as well as new labor laws and regulations. As a result, the Industrial Revolution accelerated economic development and human welfare.
Human development has seen other “industrial revolutions,” including the one that is currently unfolding. This so-called Fourth Industrial Revolution is centered on advances in digital technology, including “labor-linking technologies” (which enable workers across continents to work together in real time) and, more recently, artificial intelligence and robotics.
These advances have enabled economic globalization, which, like the Industrial Revolution, has brought unprecedented progress, as Xi acknowledged, while generating new challenges, including rising inequality and worker vulnerability. But instead of managing those challenges, as Europe did in the nineteenth century, much of the world is succumbing to political polarization, rising nationalism, and a toxic blame game. Most notably, the United States under President Donald Trump has initiated what is rapidly escalating into a tit-for-tat trade war – one that will be devastating for the entire world, but especially for the US itself.
What such behavior fails to take into account is that globalization is, fundamentally, a natural phenomenon. It is the result of billions of individuals going about their daily activities, making decisions based on the possibilities available to them. Arguing against globalization is as constructive as blaming gravity for a building’s collapse. As Xi pointed out in his WEF speech, it “is a natural outcome of scientific and technological progress, not something created by any individuals or any countries.”
In the case of Trump’s trade war, US policy also reflects a misunderstanding – one that economists have repeatedly pointed out – about bilateral trade deficits. According to Trump, a trade deficit is essentially a loss, and the countries with surpluses vis-à-vis the US, such as Mexico or China, are behaving in unfair and exploitative ways. Thus, they should be made to pay.
To understand the fallacy, consider your interaction with the neighborhood grocery store. At the end of each year, you run up a large “trade deficit” vis-à-vis the store, because the store sells goods to you, whereas you do not sell anything to the store. To claim that China “owes” the US for its trade bilateral trade surplus would be like saying that your local grocery store owes you for the money you spent there during the last year. In fact, you were not cheated, just as your employer was not cheated by the bilateral deficit it runs with you. Rather, you made mutually beneficial transactions based on your needs.
The modern economy depends on bilateral trade deficits; it would collapse without them. In an age of advanced technologies and accelerating specialization, attempting to manufacture everything domestically or bilaterally would be prohibitively costly.
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For now, the US seems committed to its demands that its partners pay up. The more likely scenario, however, is that economies like Canada, Europe, and Mexico will seek to offset the impact of Trump’s tariffs by deepening their ties with China – an obvious win for America’s main global competitor. Meanwhile, US corporations will probably move production elsewhere to avoid retaliatory tariffs, as some – such as Harley-Davidson – have already threatened to do.
There is no denying that the technological turning point at which we find ourselves has caused strain for all countries. But instead of blaming one another for the challenges generated by technological progress – an approach that will only bring about the worst of times – we should work together to address them. Any country that refuses to do so will create strain for all – and end up condemning itself to being left behind.
Kaushik Basu, former Chief Economist of the World Bank, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.