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The overarching theme at last week’s Republican
convention was one of anger—fury at government and
“a rigged system” and rage at an economy that is
supposedly “not working.” But, Donald Trump’s
biggest applause came when he slammed trade and
immigration (“Build the wall! Build the wall!”).
And yet this is not just an American phenomenon.
These themes would have been familiar to the British
who voted to exit the European Union or in France,
Austria, the Netherlands, Poland, Switzerland,
Denmark and Sweden where extreme-right parties are
leading in the polls. So why are voters so angry? Have
trade and globalization gone too far?
Or maybe not far enough! The graph below shows
how incomes have grown over 20 years for people at
different levels of the global income distribution. We
can see that the bottom 10% saw incomes rise almost
40%, so the world’s poorest are better off. The really
big winners came from Asia where China’s urban
median income grew by almost 300% while in
Indonesia and Thailand, it roughly doubled. The top
1%, of course, did well.
Those who gained the least were in the 80th and 90th
percentiles—people in rich countries who are in the
lower halves of national income distributions. In the
mighty German economy, those folks gained just 7% in
real terms over 20 years while the U.S. was essentially
flat, and Japan saw incomes decline.
Should we blame trade? Research shows that some
workers in the rich world struggled with the rise of
China’s exports. Trade creates lots of jobs, but when
losses are concentrated in certain sectors or regions, it’s
difficult for workers to find other employment.
However, a recent paper by the IMF shows that almost
all of the world’s income inequality and working class
wage stagnation is driven by technology. This is
because the automation of routine work by robotics
and computing has increased the demand and price
premium on higher skills while reducing opportunities
in relatively lower skill sectors. From robot greeters
and automated checkouts to self-driving vehicles, this
transformation is accelerating.
No one can build a wall that will stop technology from
coming, so it’s easier for populist leaders to blame
trade and immigration.This is not surprising. In 1824,
Thomas MacAulay said, “Free trade, one of the greatest
blessings which a government can confer on a people, is in
almost every country unpopular.” We’ve been arguing
about immigration for just as long even though all the
evidence shows that immigration actually raises
incomes of native workers.
Protectionism is always bad news for Canada. We have
to press ahead with CETA and the Trans-Pacific
Partnership while doing a better job explaining the
benefits from trade. Building walls is a dead end.
-Hendrik Brakel, CCC
Senior Director, Economic, Financial & Tax Policy
613.238.4000 (284) | firstname.lastname@example.org
The polls were wrong; the government was wrong and even the bookies were wrong, and now the U.K. has voted to leave the European Union. Back in 2013, Prime Minister Cameron promised a referendum on EU membership to shore up support in the midst of a tough election campaign. It has now exploded in his face as a national calamity. Last Friday, the pound fell to its lowest level in 30 years, and global markets lost $2.1 trillion.
The hardest question in all of this is “Why?” In many ways, it’s like asking why 16 million Americans voted for Donald Trump. Is it partly a protest vote, a symptom of frustration with politicians, globalization and declining family incomes? British motivations are similar: the working class is angry about wages; the EU has always provided a convenient punching bag for politicians, and there is a streak of xenophobia as the migrant crisis got mixed into the debate.
The more important question is “What comes next?” Business hates uncertainty—it becomes paralyzing as investment and hiring decisions are put off indefinitely. For now, the U.K. will remain part of the EU. The Lisbon Treaty allows for a two-year period of negotiations once official departure notice has been given to the EU. But the PM has announced his resignation and has said that a new leader will have to provide notice and take charge of negotiating the terms of departure. This will be excruciating because the British government must then ask for a divorce with bedroom privileges—to exit the EU while maintaining access to trade in the common market, investment, banks and the financial sector, some labour mobility, public procurement, input into regulations, etc.
Why would the European Union go along with that? There is great fatigue with British whining; there is anger at being rejected, and it is very much in Europe’s interest to make the U.K. suffer, lest it create an example that could be emulated by other frustrated member-states. For if the Brexit (British exit) works out well, then why not a Frexit, a Departugal, an Italeave, a Beljump or a Luxembuggeroff? (Thank you Twitter.) Quite seriously, nationalist, anti-EU parties are jubilantly crowing with delight all across the continent. Marine Le Pen, the leader of the Front National, called it a “Victoire de la liberté” and called for an identical referendum in France “ le plus vite possible.” Just 38% of French people view the EU favourably.
This comes at a bad time as Europe had emerged from crisis and was returning to healthy growth. Unemployment was falling, confidence was returning and consumers were spending. With 500 million people and GDP of $18.5 trillion, the EU is the world’s largest economy, so a return to instability and fear will have a depressing effect on the global economy.
For Canada, slower global growth means weaker commodity prices and it means that our largest trading partner in Europe will struggle for years with weak investment and political uncertainty. Of Canada’s $37.7 billion of exports to the EU in 2015, $15.9 billion was destined for the U.K.
The best thing the Government of Canada can do is to press ahead full speed with signing the Comprehensive Economic and Trade Agreement (CETA) to show our commitment to the European Union. The U.K. may one day cease to be part of the EU, so we should also begin negotiating a new trade agreement with our old friends.
-Hendrik Brakel, KCC
Senior Director, Economic, Financial & Tax Policy 613.238.4000 (284) | email@example.com