Recently, a Congressional report warned American lawmakers that a visa dispute between India and the US could result in a WTO-authorised trade retaliation against the US if it moved to a formal settlement phase.
India had approached the World Trade Organisation (WTO) over the US imposing increased fees on H-1B and L-1 visas.
The report by Congressional Research Service, an independent research wing of the US Congress, said the petition fees increases were “arguably protectionist”.
President-elect Donald Trump said this month that he would not allow Americans to be replaced by foreign workers. He was apparently referring to cases wherein American companies replaced US workers with people hired on H-1B visas.
In such a scenario, it is possible that countries become more and more protectionist, leading to decreasing free trade.
Law of comparative advantage
It is generally believed that free trade is beneficial for the whole world as it allows each nation to specialise in the production of commodities that it can produce more efficiently and then export some of them. This then helps the nation import more of other commodities that it can produce at home.
Economist Dominick Salvatore explains that as per the law of comparative advantage, even if one nation is less efficient than the other in the production of two commodities, there is still a basis for mutually beneficial trade.
Suppose the US produces 6 kg of wheat per hour and 4 yards of cloth per hour and India produces 1 kg of wheat per hour and 2 yards of cloth per hour. Now since India’s labour is half as productive in cloth but six times less productive in wheat as compared to the US, India has a comparative advantage in cloth.
In this scenario, both the nations will gain if India specialises in the production of cloth and exchanges some of it in exchange for US wheat.
But things aren’t so simple in the real world. Already there is backlash against globalisation, which allows relatively free movement of labour and capital, in the UK and the US.
Though globalisation has resulted in growing trade, the real wages of less skilled workers have fallen. As per the Heckscher-Ohlin-Samuelson theorem, trade causes wages to go up in developing nations, and down in developed nations.
This angered the blue collar workers in the West, who then voted for Brexit in the UK and Trump in the US. More and more people now favour restrictive trade policies to protect their country’s economy from foreign competition.
Daniel Gros, director of the Center for European Policy Studies, argued that blind faith in globalisation has caused the political reaction. He said it “led many to overhype” the benefits, “creating impossible expectations for trade liberalisation.”
Nobel laureate Joseph Stiglitz, who has been a critic of the current globalisation agenda, finds fault with the propaganda that free trade would make everyone better off. He says theory implies just the opposite.
“Under the assumption of perfect markets, free trade equalises the wages of unskilled workers around the world,” he says. “Trade in goods is a substitute for the movement of people.” As a result, he says, importing goods from China – goods that require a lot of unskilled workers to produce – reduces the demand for unskilled workers in Europe and the US.
Economists have no single solution to the complex problem. Stiglitz told Project Syndicate that strong Scandinavian-style welfare measures that maintain an open society and economy would do the trick.
Harvard professor Jeffrey Frankel and former Morgan Stanley Asia chairman Stephen Roach say that in the US the government should offer universal health insurance, an expanded earned income tax credit, and broader trade adjustment assistance to help displaced workers retrain.
Lastly, Harvard professor Dani Rodrik says there is a need for a better balance between national autonomy and globalisation.