Economists and policymakers, both aspiring and practicing, are in a particularly busy time of analyzing and understanding markets and what moves them.
The economic headlines have been broadcasting news of persistent inflation and tighter monetary policy in the U.S., the European Union and elsewhere, prompting many of us to join the Federal Reserve watch on interest rates. What will they do next? Most recently: the Fed decided to leave interest rates (already elevated following 11 consecutive hikes starting in March 2022) unchanged despite stubborn inflation.
Trade is when a company in a particular country sells goods outside its borders or buys goods that come from somewhere else. As former Wharton School management professor Ann Harrison, now dean of UC Berkeley’s Haas School of Business, previously shared with Wharton Global Youth: “iPhones are manufactured outside the U.S. To get them here, we need to bring them in, which is an import. When we sell goods around the world, that’s an export…this is the backbone of trade.”
Trade is influenced by the changing economic environment. For example, economists with the World Trade Organization scaled back projections for growth in global merchandise trade in 2023 amid a “continued slump” that began in the fourth quarter of 2022. Macroeconomic factors like inflation, Fed policy, consequences of the war in Ukraine, and other factors have “cast a shadow over the outlook for trade,” said the WTO. “The trade slowdown appears to be broad-based, involving a large number of countries and a wide array of goods.”
The Power of Resilience
Economic impacts on global trade date back a few years, suggests Anthony Landry, a Wharton adjunct full professor of finance and deputy vice dean of the Wharton MBA program. “Until COVID, I would say that global trade was an efficient way in which companies, especially multinationals, were expanding,” says Landry, who specializes in macroeconomics and has worked as a senior economist and economic policy advisor. “Since COVID-19 happened, we’ve seen, especially in the U.S., the relocation of a lot of that manufacturing activity. This is because firms were thinking about whether efficiency was better than resilience. They had so many problems with supply chain during COVID, that resilience [to quickly recover from a shock or disruption] became more important for them.”
With the pressure of geopolitical tensions, companies have preferred in recent years to invest in trade practices known as friendshoring or reshoring, notes Landry: “Friendshoring would be to bring that production to one of the countries that is either close or friendly to the U.S., while reshoring would be to bring back that production here within the U.S.” – thus, strengthening that resilience. Landry adds that other factors like technological advances and the regulatory environment have made the prospects of international trade more costly for manufacturing companies.
Despite the current economic challenges and this shift to a resilience mindset, the World Trade Organization and others predict that trade growth should pick up as inflation moderates and interest rates start to come down.
Landry stresses that, when faced with shifting business cycles and macroeconomic trends, it’s important to remember why countries trade in the first place. He presents his students with three fundamental motivations for international trade. They are:
1️⃣ The spice of life. “We all like variety,” says Landry. “Some countries are better at producing certain goods. We trade with France because we sometimes enjoy a different glass of wine. And we trade with Canada because we sometimes enjoy maple syrup. Our love for [choice] here is going to play a role in trade.”
2️⃣ Playing it safe. “The second big reason we trade is to reduce risk,” notes Landry. “Think about the big natural disaster that might happen around California, which makes getting wine this year impossible. We will still be able to drink wine because we will rely on the production of another country, such as France.”
3️⃣ It’s good business. “The third reason we trade is because it’s efficient,” says Landry. “Some countries are just relatively better at producing, say, toys than computers. And by specializing in what we’re better at, there is a welfare gain [a boost in economic wellbeing] that happens on both sides. If we think about manufacturing activity happening in China and the technology development happening in the U.S., while the U.S. might be slightly better than China producing both computer and manufactured goods, there’s actually a welfare gain to outsource manufacturing to China and specialize in producing technology like computers here in the U.S.”
In his macroeconomic professional and academic life, Landry has thought deeply about the bigger concept of globalization, or the process of increasing economic interdependence among nations. Globalization is reflected in the growth of cross-border trade in goods and services, which he and others believe has helped to alleviate poverty in some countries.
He is a champion of globalization and its effects on economic development. “In the U.S. sometimes we feel that globalization has hurt a segment of the population – and it did – but overall it has been a positive for the U.S. And it has been a positive for the world,” suggests Landry. “For example, outsourcing the manufacturing of washing machines to China hurt those who were producing washing machines badly. But on the other hand, now it means that everybody in the U.S. can [buy] washing machines for $100 less. The pain is very concentrated, but the gain is spread. And the total effect is positive.”
While the current trade slowdown may threaten the living standards of people around the world, a rebound is expected. Said WTO chief economist Ralph Ossa: “Positive export and import volume growth should resume in 2024, but we must remain vigilant.”
What does Dr. Landry mean when he says that companies pulled back from international trade because they were prioritizing resilience over efficiency?
What are some of the business benefits of international trade?
Dr. Landry believes that globalization has been a positive for the world. Do you agree? Why or why not?