Financial Expert: Global Free Trade Necessary - Pacific Standard

Financial Expert: Global Free Trade Necessary

Financial theorist and trade historian William J. Bernstein portrays globalization as inevitable and ultimately more benign than malign.
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In an age when spikes in the local price of milk can arguably be tracked to riots on the streets of Cairo, it’s only fair to wonder — just how did we become so economically interconnected?

In his 2008 economic history, A Splendid Exchange: How Trade Shaped the World, William J. Bernstein, a retired Oregon neurologist turned financial theorist, author and adviser, is remarkably adept at providing answers. In less than 400 pages, Bernstein’s ambitious tome is surprisingly successful in tracing globalization’s long route from ancient camel trains to air-conditioned container ships.

Bernstein ventures that what we call “globalization” is merely the culmination of a centuries-long process of ever-increasing international trade.

Bernstein's book, A Splendid Exchange: How Trade Shaped the World.

Bernstein's book, A Splendid Exchange: How Trade Shaped the World.

“Trade is an intrinsic human impulse, as primal as the need for food, shelter, sexual intimacy, and companionship,” Bernstein writes. And for all its pitfalls, the road to globalization, the author says, is a process that we should continue to embrace.

The book ends with an account of the 1999 “Battle in Seattle” in which anarchistic protesters laid siege to much of the city’s downtown during a meeting of the World Trade Organization. However, Bernstein was not fazed by the ferocity of the protests, noting that such popular uprisings are nothing new. Instead, he argues that for all its problems, global free trade continues to be our only real option.

Globalization’s alternative, writes Bernstein, is a state of autarky — “a condition in which nations achieve self-sufficiency in all products, no matter how inept they are at producing them.”

Bernstein recently took time to answer a few questions about globalization’s current progress for

MILLER-McCUNE: What impact could the current upheavel in the Middle East have on the global economy?

WILLIAM BERNSTEIN: The current political instability in Egypt could close the Suez route. But the major effect would be to greatly lengthen the transit time of oil flow to Europe and somewhat lengthen the transit time for most goods flowing between Asia and Europe. [However], the Suez Canal was closed between 1967 and 1975, and [it] was not a catastrophe.

M-M: Does the sea still offer the best form of trade transport?

WB: Maritime routes always have been, and for the foreseeable future will be, the most efficient way to transport goods. This, in turn, greatly magnifies the importance of strategic [maritime] choke points. As early as the 16th century, the Strait of Hormuz [which runs between the Persian Gulf and the Gulf of Oman] saw conflict between East and West over control of the spice and silk trade. The parallel with [today’s] dangers to the West’s — and East Asia’s — oil supply is obvious.

M-M: As you point out, the Middle East, specifically what was ancient Mesopotamia, is the region of some of the world’s oldest trade. Is trade hardwired into the human psyche?

WB: Man is the ape who trades; it's a spontaneous activity. Tens of thousands of years ago, areas near volcanoes were blessed with obsidian, the premier cutting stone of the Stone Age. The folks who had it could, and did, trade it thousands of miles for other goods. By 2500 B.C., there was a 3,000-mile-long trading arc extending from Anatolia through Mesopotamia, the Persian Gulf, the Indian Ocean and up the Indus River.

M-M: How would you compare the globalization of the ancient silk trade with globalization today?

WB: It's not entirely kosher to compare a world in which only the most expensive and precious goods are traded globally, which was the situation in the 16th century, with the situation in a modern world where even apples get shipped from New Zealand to Germany. But that's precisely the story my book tells, which is just how continuous improvements in transportation technology made that transition possible.

William J. Bernstein

William J. Bernstein

The "big" microeconomic trend during the modern period is just how prosperous the average person has become. In 1000 A.D., the average inhabitant of Western Europe had something like $1,000 of [annual] income in today's dollars. Now it's about 20 times that.

In the pre-industrial era, each purchase was economically more important, because there were so few to make. Now, we buy so much stuff, there's less relative importance to each one.

M-M: In the current era of super container ships and a soon-to-be-widened Panama Canal, did the ancients know things about global trade that we have for forgotten?

WB: Just as people 200 years ago were better at shoeing horses and had better handwriting, ancient and medieval traders could do many things modern merchants cannot, because they were much closer to their cargoes back then. In many cases, they traveled with them — and sometimes even slept on them. They could perform just about any function on a ship, take care of camels, and had a much greater nose for physical danger than their modern compatriots. Were I lost in the desert or surrounded by menacing strangers in a souk, I would certainly much rather have one of these guys next to me than his modern cousin.

M-M: You attribute the spread of the black plague as being a by-product of international trade. In the current era, can you point to similar contagions brought on by global trade?

WB: Not trade so much as individual travel, with HIV and SARS being the prime examples.

The "great mixing" phase of the world's then separate pools of existing pathogens occurred roughly between 3000 B.C. and A.D. 1800. Epidemics occasionally killed very large fractions of the population. In some parts of Europe, up to a half the population died of plague. In parts of Asia that fraction may have approached 90 percent, and in the ancient world similar fractions succumbed to measles and smallpox. These were all diseases that had existed for millennia in large geographical areas but had not spread because of the relatively inefficient level of international trade and travel. But when they did jump to other locations, where the populations had no historical immunity, the effects were disastrous.

The worst modern pandemic, the influenza epidemic of 1918, killed about 50 million people, or "only" 3 percent of the world population, far short of what happened during the prior "mixing" epidemics. So, the only new contagions are going to have to be from newly mutated organisms, which seems to be a much more benign process than what happened when the Black Death, smallpox and measles first hit Europe and the New World.

M-M: You describe slavery’s historical impact on global trade. What impact is contemporary slave labor in China, for example, having on globalization and the global economy?

WB: Slave labor is a basic fact of human history and prevalent wherever rule of law and individual liberties are weak: Vietnam, Cuba, North Korea, Burma and in much of the Middle East and Africa.

For a half century after the [U.S.] Civil War, a de facto slave system existed in the American South. Many thousands of black men were picked up for minor offenses such as loitering or vagrancy and sentenced to long terms by corrupt police and judges, who sent them to prison factories and farms run by private businessmen. Conditions in these places were, in many instances, worse than on the slave plantations, and mortality rates were high. The system ended only when the work of W.E.B. Du Bois and others exposed it.

Sunlight is a marvelous disinfectant everywhere, not just the U.S. As the reporting of worker abuses and occasional outright slavery in China increases, the Chinese will have little choice but to improve labor conditions — if they want to maintain their credibility on the international stage and participate as full members of the world trade system.

M-M: Climate change is having a trade impact; it will soon open up a new passage for trans-Arctic polar trade from Europe to the American Northwest at least in the summer months. How will climate change affect trade elsewhere?

WB: The main impact will be our shift away from fossil fuels. Theoretically, we can currently power both sea and surface transport with solar/wind/hydrogen fuel cells. They would be a lot less efficient than current fossil-fuel propulsion, but within a short period of time we could have those technologies up and running on ships, cars, trucks and trains, and they would improve rapidly with time. With present technology, none of those are anywhere near practical for aircraft. Hydrogen fuel cell [technology] is closest, but even that's decades away.

M-M: How has ready access to the imported cornucopia of luxury goods and exotic foods affected American society?

WB: My personal bias is toward viewing American society as suffering from overconsumption, under-saving and an under-appreciation of the long-run financial and psychological damage those things do to individuals and families. But anything that strengthens global economic ties — and even foreign luxury goods do that — helps increase global interdependency, which has been a real stabilizing force in the world. You're much less likely to bomb the people who produce your luxury sedans.

M-M: So, trading nations are less likely to take up arms against each other?

WB: Of course, nations will still go to war, but major big-party conflicts are becoming, ever so slowly, a thing of the past. The most obvious example of this is Western Europe, which was almost constantly at war before 1945. Today, that seems inconceivable.

M-M: Your final chapter argues against protectionism, but are there exceptions?

WB: No, none at all. Protect an industry, any industry, and it becomes fat, dumb and lazy. What is unarguable is that free trade hurts some segments of society, some quite large, and some quite badly, while at the same time benefiting the overall population.

M-M: What is the long-term future of globalization?

WB: It can only increase with increasing wealth and improvements in communications and transport. It really extends far beyond trade. If you look at human history from the widest possible angle, you see that people around the world homogenize their dress first, then their cuisines, and next their racial makeup and cultures. I am reasonably sure that in a thousand years or so the races of the world as we know them will be much less distinct than they are now, and over the next few millennia, if we make it that far, perhaps entirely disappear. The one thing that will continue to separate us is our religions, which have a strong historical tendency to fissure and multiply.

M-M: Has global trade ever been dominated by a single culture in the same way the U.S. has dominated global trade since 1960?

WB: The electronic media and cheap transport have certainly seen American soft power become the largest cultural force in human history. It won't last forever.

M-M: The Chinese aren’t spreading their culture with their merchandise in the same way the U.S. has over the last few decades. What’s the difference do you think?

WB: What makes American culture so addictive is its extreme racial and cultural heterogeneity in all spheres. I live in Portland and am within walking distance to some of the best croissants, pad thai, masala, dolmas and high-concept pasta in the world. The variety of food is just a metaphor for a diversity of cultural and intellectual ferment that gives rise, for example, to our film and cable industries, which are our cultural faces to the world. I doubt that anyone — the Chinese, Japanese, or even Europeans — are going to match that any time soon.

M-M: Has there ever been a previous epoch where a super power like ours had such a plethora of imports from an economic comer like China?

WB: We've already got a backlash against China. But there are now two countervailing forces. First, we're much more historically aware of the costs of igniting a trade war. Second, in the specific case of China, we're painfully aware that they're our biggest creditor and of the damage they can inflict on us if we raise tariffs on their goods. I don't see any great danger of that actually happening. I don't rule out relatively limited specific tariffs in response to a particularly acute political effort. But an across-the-board levy on broad classes of Chinese imports? No.

Probably the most similar period was in the late 19th century [following the] the dramatic fall in land-transport prices after the introduction of cheap steel by the blast process. [That] allowed the U.S., Argentina, Australia and the Ukraine to flood Western Europe with cheap grain, which triggered an agricultural protectionist backlash that is still with us.

M-M: Although Wall Street may have embraced globalization, middle-class America seems to take umbrage at the decline of American manufacturing. But it still continually falls prey to consuming the discount goods that globalization serves up. How do you explain this dichotomy?

WB: Are we all prisoners, to some extent, to modern consumer culture? Of course. But it's not clear to me that globalization is the cause. I think our current predicament is more a function of advances in advertising and marketing technology than international trade. Over the past several decades, Madison Avenue has learned just how to push our buttons. We need to learn how to push back.

M-M: Who are the biggest winners and losers inside the U.S. in terms of the current global economy?

WB: If you have a highly marketable skill in global demand, you win. But the days when you can drop out of 10th grade, work 40 years on an assembly line and wind up with a pension and house by the lake are long gone. Learn to make medical equipment, pharmaceuticals, precision instruments, movies, specialist software, aircraft parts or even drywall, and the world comes to you.