You hear it often: more trade means that we get to know each other better and that there is less chance that we start a war against each other. It is one of the main arguments in favor of free trade.
I have serious doubts about this. The first World War happened when the world was very integrated. And when the world resumed globalization after World War I it ended in the Depression of the 1930s - very much an economic war between countries. More recently we see Trump taking on China - despite huge trade ties.
The problems with trade are many:
- First of all there are the terms of trade: they are to be negotiated and that can make them quite arbitrary. Just look at the oil price to get the idea.
- A related problem is dependency: if you depend on other countries to produce certain goods for you they are in a position to blackmail you. The increasing use by the US of economic sanctions is a good example.
- The theory of relative advantage made sense in a time when most trade was about natural resources. But nowadays most trade is about industrial products. And you can place a factory everywhere. Nowadays free trade often means the advantage of the incumbent: they have the patents, the infrastructure, the skilled workers, etc. and it takes a lot of effort for a country that doesn't have that to build it up.
- Some sectors are seen as important strategically either because they are believed to be growth industries or because they are related to defense industries. If you want to be able to build tanks you better have some steel works.
- Finally there is the issue of perception. If there are problems and you are dependent on others, it is easy to blame those others. That was what we saw happening in the 1930s and that is what Trump is doing now. If the US would be self sufficient Trump wouldn't be able to blame other countries for America's economic problems.
Trade has two important functions: it allows poorer countries to catch up and it helps spreading technology. But I believe that outside that its benefits are limited.
Just imagine that the US would be self-sufficient. Trump would have nothing to complain about America's trade partners. A politician like him would be forced to focus on internal issues instead.
I believe that - when all things are equal - we should strive to localize production. It is a matter of giving people as much control over their life as possible.