New McKinsey Study Pokes Fatal Holes in Common Trade Myths

Readers of this blog know that one of the themes here has been dismantling pervasive "protectionist myths" that mislead the public into supporting - and thereby empower politicians to implement - anti-trade policies.  Now, a new study from McKinsey, "Trading myths: Addressing misconceptions about trade, jobs, and competitiveness," contributes to this line of attack scholarship.  There are a few things here that I don't totally support (e.g., erroneously labeling an expanding trade deficit a per se "deterioration"), but the whole thing is definitely worth a read.  Some of the myths addressed include the following:

Myth: Mature economies are losing out to emerging markets in trade and thus face increasing trade deficits.

Reality: The trade balance of mature economies has remained largely stable in the aggregate and even begun to improve. There are wide variations between individual countries, but no evidence supports claims of a wholesale deterioration of the trade balance between the mature and emerging economies over the past decade. 

Myth: Manufactured goods drive deteriorating [SL: sorry, I couldn't resist] trade deficits.

Reality: Imports of primary resources, whose prices have been rising sharply, are the largest negative contributor to the trade balance of mature economies. In 2008, mature economies ran a 3.3 percent of GDP trade deficit in primary resources but a 0.5 percent of GDP surplus in manufactured goods and specifically a 1.6 percent surplus in knowledge-intensive manufacturing. Some individual mature countries run trade deficits in knowledge-intensive manufacturing.

Myth: Trade is at the heart of the loss of manufacturing jobs.

Reality: Changes in the composition of demand and ongoing productivity increases are the main reasons for the decline in the number of such jobs in mature economies. The share of manufacturing in these countries’ total employment is bound to decline further, from 12 percent today to less than 10 percent in 2030, according to our analysis. MGI finds that trade or offshoring are responsible for the loss of around 20 percent of the 5.8 million US manufacturing jobs eliminated between 2000 and 2010.

The authors also hit on several other myths in the report, such as:

Myth: Mature economies create jobs only in low-paid, low‑value domestic services

Myth: Service trade is small, and emerging economies with low‑cost talent will capture any increase

Myth: “Service economies” such as the United States are the world leaders in service trade

After dispatching all of these myths, the authors make several policy suggestions that also should sound familiar to this blog's readership:

- Resist protectionist pressures.

- See emerging economies as an opportunity, not a threat. 

- Push vigorously for the fuller liberalization of trade in services, where restrictions remain high.

- Gear trade-related policy toward supporting—and benefiting from—comparative advantage in attractive stages of global value chains (like R&D and design), and avoid any emphasis on sustaining or creating direct employment through manufacturing exports.

- Improve measurements of global value chains and services trade.

I, unsurprisingly, think that if the federal government implemented these policy solutions, US businesses and workers would be much, much better positioned to dominate the 21st century global economy.  (And I've been screaming it from the rooftops for a few years now.)

Now, if only a few of our political leaders - from either party - would listen.

(h/t ToGetRichIsGlorious)