Why We Can’t Let Luddites Ruin Global Trade

Luddites.

It’s a term most of you know as being somebody who is backward or uninterested in learning new technology.

Actually, the Luddites were worse than this. They were a movement in England during the Industrial Revolution who had the objective of ruining machinery that was used to build products at scale. They thought factories were a threat to custom assembly of products and ultimately to the agrarian way of life (as more people were moving to urban environments).

You can imagine that if you had spent a lifetime gaining a vocational skill and being a member of a protected industry guild that you wouldn’t be happy with technological change. And if your town specialized in an industry that was being replaced the Industrial Revolution no doubt wreaked havoc.

The Luddites would ruin machinery by “throwing a spanner in the works” (or a monkey wrench to the American reader).

It’s easy to see why people of the time would have taken great issue with machinery — it left some people (industrialists) very wealthy and made people previously in control of their economics often devastated. And of course since machinery costs money and lowers the number of people required to produce a product it pitted labor vs. capital.

It’s not too controversial to look at the march of history and know that there was no way to stop the Industrial Revolution and that societies were better off figuring out how to take newfound prosperity and convert it into a just society where all could benefit. If not for altruism than at least out of invisible-hand-like motives of wanting workers who were safe & healthy. It was also quite useful to one producing products to have people gainfully employed to buy said products. It’s also infinitely better in society when people don’t live at the margins and resort to crime.

There was a grave consequence to nations who were slower to industrialize because the scale advantages wiped out entire local economies in foreign lands including Germany and France and in parts of the Middle East and Asia. People who failed to industrialize, however well intentioned one’s goals, were at a competitive disadvantage to those who had.

Nowhere is this better captured than in the most mind-opening book I’ve read recently, The Accidental Superpower by Peter Zeihan.

Zeihan’s book is a fascinating history of how country’s outcomes are determined by topography and demographics — notably the economic advantages afforded by the luck of one’s natural advantages.

He outlines each major wave of competitive advantage of technology brought about by topography such as why the Dutch and the Portuguese and ultimately the British came to rule the world due to deep-water navigation and ports mastered through their proximity to water.

And he talks specifically about how water trade lowered the costs of transportation and thus products and gave such a resounding advantage to those with great water resources that other nations struggled to keep up. American has 17,600 miles of navigable rivers (more than the rest of the world combined) and water has a 12x cost advantage to land transportation.

Industrialization. Mass transportation. Cost advantages.

The movements raised the living standards dramatically of the countries that adopted them and as a result Industrial nations developed more “surplus” wealth that allowed them to invest in new infrastructure and to create specializations in the service economy that didn’t exist en masse elsewhere (medicine, management practices, banking, accounting, higher education, scientific research, etc.).

In order to combat the losses of traditional jobs we invested in education and training and public infrastructure that enabled the growth of the middle class.

If you could look back on history you might nostalgically wish for different outcomes and of course the Industrial Revolution wreaked havoc on the under-developed parts of the world but the reality is that if any nation simply threw a spanner in the works it simply would have been devastated by neighboring nations who did not. And if you look at the standard of living of even the least wealthy amongst us it is still vastly better than pre mass manufacturing.

And this is similar to the world we face today with global trade.

There are winners and losers in NAFTA (the North American Free Trade Agreement) but it is undoubtedly better for each of the societies: The US, Mexico and Canada. The free flow of goods without tariffs leads to more trade and lower costs and thus more consumer surplus. I know not everybody will agree but I can assure you those who don’t never studied Comparative Economics or Ricardo because the theory and math are very sound.

In trade, like industrialization, there are winners and losers. As societies we face the responsibilities (even if self interested) in ameliorated the impact of change through the same means we did following the Industrial Revolution — investments in education and infrastructure and retooling those left behind by change.

Our problem isn’t trade or globalization — it’s tax policies that favor the special interests of the wealthy and a political system unable to allocate resources properly to those who need the resources most to retool themselves. Again, selfishly, if the wealthy class doesn’t realize the need to take care of those less well off you will continue to see the kind of disenfranchised revolutions you’re seeing in those supporting: Trump, Le Pen (in France) or Brexit. We have probably only seen the beginning of the chaos.

Nationalism and nativism and xenophobia are impulses of the disenfranchised far-right wing of the political spectrum and are crassly being exploited by Donald Trump and the opportunists who want to help him seize power.

But the opposite is equally true. The far left wing, whatever their intentions, have unrealistic policies that aim to throw a spanner in the works of global trade that will bring less wealth to our country — including poor people — that will only fuel the far right. I have seen the allure of some of my youngest friends to the populist messages espoused on the far left but these are the siren calls leading to lower prosperity for all.

To try and pretend we can put the genie back in the bottle on globalization is a fantasy. To promise our manufacturing towns that we will bring low-wage manufacturing back to their communities by cutting trade with China is at best a lie and at worse a huge step back for progress — even for those most affected by change.

If we cut off ourselves to world trade we’ll lower our GDP (how much we can produce) and increase the costs of goods and the people who will suffer the most are those at the bottom end of the rung.

I know the left wing of the Democratic party (and Trump also, go figure!) are championing reductions in trade agreements but they’re selling our people an unrealistic bill of goods equivalent to arguing against the Industrial Revolution.

Here’s the thing. Obama has rightly been pursuing an American-Asian trade agreement called the TPP (the Trans Pacific Partnership) aimed at reducing tariffs and increasing trade.

I’ve listened to Elizabeth Warren and Bernie Sanders and many of my super liberal friends rail against TPP because they believe it will undermine lower-income jobs in the US and hurt the interest of US workers.

It’s actually more complicated than that. Of course it impacts jobs and we need to work hard to create a vibrant economy and find ways to funnel income gains to the middle and lower classes. But increased trade also lowers the costs of goods supplied to America in ways the benefit consumers greatly.

Simply ask any startup looking at the differences in manufacturing in China or Mexico versus domestic manufacturing the US. The prices points for a BOM (bill of materials) would make most of these new startup products too expensive to reach a mass market. Intuitively we know that trade is important and that lower-income jobs should go to regions with the lowest cost labor.

And if we would have sensible immigration policies our companies could attract the best-and-brightest from around the world who already study at US universities and let them stay here and innovate and create jobs like Vinod Khosla, Elon Musk, Sergey Brin and countless others have done.

And while the TPP is an imperfect agreement that does hurt real people — the reality is similar to that during the Industrial Revolution. If we don’t lead in commerce and trade by expanding products, investing abroad & at home and lowering the costs of goods — somebody else will. And they will eat our lunch. And that somebody is China. And India. And Korea. And Russia.

As a nations we compete for trade and jobs and resources and we need to be sure that we remain competitive with the world. If we don’t build global trade agreements do you expect that the Chinese will simply focus only on their own domestic economy? Do you think the TPP countries will simply say, “Oh well, the US isn’t playing ball. Let’s all just focus on our home markets like the US”?

NFW.

Trade has winners and losers. Let’s focus on creating global trade agreements and then use our wealth gains to make sure that our most vulnerable are taken care of and are educated and retooled and remain productive members of society.

Our startups can be “winner take most” but our societies need not be. It’s not in your personal interests for them to be. Distribution of wealth benefits all.

And if you want to read far more comprehensively on the topics of immigration (which actually greatly benefits countries by bringing younger demographics), topographic advantages of nations and how the changes in global resources may change alliances in the next 50 years please consider reading Zeihan’s book.

If you want a quick taste of Zeihan’s arguments Fareed Zakaria does a great 4-minute summary here: http://globalpublicsquare.blogs.cnn.com/2014/11/24/why-america-may-be-set-for-success/


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