Applied Econometrics and International Development Vol. 17-1 (2017) TRADE TREATIES AND DEGLOBALIZATION Christopher E.S.WARBURTON* Abstract The central issue in this paper is whether technological innovation and international trade can spur economic growth and sustainable development within a structured environment of trade agreements. By analyzing historical precedents and data on trade imbalances, innovation, dynamic comparative advantage, weighted exchange rates, poverty, and wages, the evidence suggests that freer international trade very often has a greater potential for increasing welfare and sustainable development, although a few exceptions hold when free trade implies unfair trade, diminution of industrial production per head and strong trade deficits. Implicitly, exports must be strongly encouraged when wages are stagnant, poverty is substantial, production costs are low, and disposable income is insufficient to substantially absorb domestic production. On the other hand, trade imports have positive effects on domestic market when they increase production, productivity and income per head. JEL Codes: F13, F15, F18, F31, K33, O 13, O24, O44, O51 Keywords: Dynamic Comparative Advantage, Free Trade Area, Globalization, Trade Weighted Dollar, Trade Law, Renewable Energy, and Sustainable Development 1. Introduction This paper investigates the performance of free trade areas (FTAs) as models of economic growth and sustainable development. Members of an FTA agree to trade among themselves without erecting tariff and non-tariff barriers. On the other hand, a customs union is an elevated form of an FTA in which the members agree to have a common trade policy against the trading interests of outsiders. In another form of economic integration, a common market, the members adopt a common trade policy, but also allow the free movement of goods and services as well as the factors of production. The highest form of economic integration is a monetary union in which the members decide to use a common currency in addition to the previously identified freedoms. At the time of this writing, factor movement is increasingly coming under stringent scrutiny. The central issue in this paper is whether technological innovation and international trade can spur economic growth and sustainable development within a structured environment of trade agreements or laws. By analyzing historical precedents and data on trade imbalances, innovation, dynamic comparative advantage, weighted exchange rates, poverty, and wages, the evidence suggests that very often freer international trade has a greater potential for increasing economic growth, economic welfare, and sustainable development. Implicitly, exports trade must be strongly encouraged when wages are stagnant, poverty is substantial, production costs are low, and disposable income is insufficient to substantially absorb domestic production. This paper provides additional dimension to the trade literature by analyzing the interaction of multiple * Christopher E.S. Warburton, Ph.D., Department of Political Science and Economics. East Stroudsburg University, Pennsylvania, United States. E-mail: [email protected] Applied Econometrics and International Development Vol. 17-1 (2017) variables in the context of dynamic changes and the changing comparative advantage of the US economy. I conclude that US trade negotiations must be encouraged, but that they must also be sensitive to human rights laws for their successful implementation. In this paper, “deglobalization” alludes to the bifurcated mechanisms that reduce the volume of trade and economic welfare. The re-emerging patterns are evaluated from two perspectives with common insular effects. First, the concept is used to analyze traditional forms of trade restrictions, tariffs and non-tariff barriers (without trade talks). Second, the concept is used in the context of the prompt repudiation of trade talks, sometimes due to a false sense of nationalism without careful thought about the effects of technological innovation and dynamic changes that are generating new opportunities for robust trade and sustainable development (inter-generational equity of resource consumption). The paper cuts across a broad spectrum of international trade and sustainable development to highlight the usual importance of freer trade and trade negotiations (talks). I discuss the literary background and some historic experiences in the next section. The economic and lawful bases for international trade are then presented in Section 3. The theories of dynamic comparative advantage and sustainable development are discussed in Section 4. The arguments for freer trade, within even relationships in a trade area, and the findings in support of economic integration are continuously reported through the paper under different and appropriate categories of importance. I finally provide brief comments at the end of the paper. 2. The literary background of deglobalization The US has a long experience with insular trade policies and the lessons are very unpleasant. Of course, when policy makers think about tariffs they are generally preoccupied with the real sector. They generally see no compelling reason why identical thought patterns should be extended to the financial sector or financial markets. That is, there is a presumption that imprudent decisions that can unfavorably destabilize one sector of a macroeconomy are not applicable to another. Lessons of aggressive tariffs are immutable and new proposals to employ old tariff theories will not change the adverse and apparent consequences of restrictive trade. In the history of the US, two tariffs—the 1828 Tariff (of Abominations) and the Smoot- Hawley (1930)—are particularly enlightening. The destructive political and economic consequences of the tariffs were strongly influenced by negligent parochial politics of the nineteenth century, and the outcomes are unsurprisingly unsavory. The 1828 tariff, which was passed by Congress on May 19, 1828, was designed to protect American industry from cheaper British goods. The hated tariff became resentfully known as the “Tariff of Abominations.” The southern opponents of the tariffs were rightfully concerned about the increase in taxes on raw materials like cotton and tobacco, and the increase in southern opposition led to a Nullification Crisis.1 The southerners knew that the outrageous and hateful taxes on tobacco and 1 By “Nullification,” a State formally suspended the application of federal law within its borders. The concept was introduced to the US by Thomas Jefferson and James Madison, in opposition to the Alien and Sedition Acts, which was ostensibly intended to control the actions of foreigners in the US during an impending war. “The principle was accepted by the Hartford Convention of New Englanders in 1814 as well as many in the South, who saw it as protection 72 Warburton, C.E.S. Trade Treaties and Deglobalization cotton would seriously affect their ability to have access to foreign markets beyond the northern markets of the USA. Explicitly, by paying more for southern goods, the British importers were surely going to have less money to buy from the American farmers. The reduction in the volume of trade was invariably and adversely going to affect the welfare of the dissenting southern farmers. Apparently, even some New England industries were also opposed to the tariff, because it included provisions for increasing the taxes on raw materials. John Quincy Adams—the 6th American President (1825-1829)—who was more interested in protecting the business interests of the industrial and manufacturing class in the North, raised taxes on British imports to nearly 50 percent and confronted the strong southern opposition. In fact, the “Tariff of Abominations” was just one of many tariffs during the nineteenth century. A tariff of 1816, which was a response to a wave of nationalism (jingoism) after the War of 1812, placed a 20 to 25 percent tax on all foreign goods. An 1824 tariff imposed a 35 percent duty on imported iron, wool, cotton, and hemp. As time progressed, nineteenth century tariff philosophy degenerated from nationalism to regionalism (industrial north v. agrarian south) in the USA. The Nullification Crisis diminished the 1828 tariff and a Compromise Tariff became inevitable, even as the US Congress and the President (Andrew Jackson) tried to coerce South Carolina to pay its dues to the Federal government. By concurrently passing the Force and Compromise Bills of 1833 a compromise was reached. The compromise required reversion of the 1828 tariff to the 1816 level over a ten-year period. South Carolina eventually repealed its nullification of the 1828 tariff, but jarringly nullified the Force Act of 1833. By the 1930s, the tariff lessons of the nineteenth century had not been very well absorbed. In 1930, the US passed the Smoot-Hawley Act. This time, the Act was intended to protect the agricultural sector. Irwin (2011) estimates that the law probably raised the average tariff on dutiable imports by about 15 to18 percent, an increase of about 6 percentage points on previous tariff. The tariff was not as extreme as conventional wisdom might suggest, but it was problematic. For example, the tariff is reported to be far less than the Fordney-McComber tariff of 1922, which raised the average tariff rate by 64 percent.2 However, one major problem with the Smoot- Hawley tariff is that it compounded a tariff, the Fordney-McComber, which was already considered to be very high. The depression