More maritime trade, less poverty?

An important study on the impact of global trade shows: more protectionism hits poorest harder; fewer restrictions help everyone.

We cannot allow the coronavirus pandemic to hit the poorest countries hardest. It is threatening to erase the great strides that have been made in poverty eradication over the last few decades. Most people agree: this cannot happen! What is to be done about it is far less clear.

The universal answer to economic recession and international trade imbalances seems to be an increasing call for more protectionism. It wasn’t just Donald Trump who boasted that higher tariffs, trade wars and the forced return of outsourced industries would bring back the “good old days”.

This kind of politics is populist and much too simple, and many voters get tangled up in it. The call for more self-reliance is also getting louder in Europe. Covid-19 seems to be providing conclusive arguments for this. If there were bottlenecks in the mask supply, we should move production back to Europe. And the production of medicines, and so on and so forth.

Maritime trade makes growth possible

But can this approach even work? The International Chamber of Shipping (ICS) wanted a clearer picture, so it commissioned a study by one of the best-known trade economists. Questions for Craig VanGrasstek of Harvard University: Is more trade and the dismantling of trade barriers good, bad or neutral for prosperity? Meaning prosperity in all countries, not just in a few select industrial nations. The following map shows the consistently positive results for all countries surveyed.

The analysis, titled “Protectionism in Maritime Economies”, comes to a clear conclusion: Maritime trade is what makes growth and sustainable development even possible. And perhaps even more importantly: the more affordable maritime transport there is, the more global prosperity becomes aligned. More protectionism reduces prosperity for all and simultaneously widens the gap between rich and poor even more.

This is precisely where the populist misunderstanding lies. Tariffs and trade barriers do not make one country richer; what they do is to make the others much worse off. If you want to increase your own prosperity and that of your trading partner, tariffs and other barriers must be reduced to the extent possible.

Globalisation is not the root of all evil

In recent years, it seems to have become increasingly difficult to advocate globalisation and the advantage of global supply chains in public discourse. Leftists and rightists were united in their belief that globalisation is the root of all evil, pointing one-sidedly to negative consequences such as environmental destruction and the exploitation of resources. The fact that several hundred million people have managed to escape poverty since 1960 due to expanded trade alone didn’t fit their picture.

All nations need maritime transport for international trade. This is true for raw materials as well as for technology, consumer goods, and not least, medical products. In view of the growing global population, it is becoming increasingly important that goods reliably land in the right place. Otherwise, hunger and ever greater medical emergencies threaten. The coronavirus pandemic has caused numerous governments to intuitively adopt a defensive stance of closing borders and bringing back local production. This feels secure and comforting, but is usually counterproductive.

More tariffs and exports bans than ever seen before

In the past twelve months, the World Bank and Global Trade Alert recorded hundreds of new tariffs and other trade barriers. Export bans and licensing obligations were introduced to an extent never before seen. What’s more, the WTO, which exists precisely to dismantle trade barriers, was practically paralysed by the USA over the last four years. In November 2020, the organisation calculated that imports valued at 1.7 trillion dollars are affected by the new restrictions.

The ICS study lists the protectionist political approaches in detail and quantifies them. Measures are identified that currently impede economic recovery but are usually not discussed publicly. VanGrasstek also shows in the study that it’s not only tariffs that cause problems. Yet direct discrimination towards foreign companies and the protectionist concentration of port services in the hands of local businesses also impede development. Such heavy-handed methods can even result in up to five times as many negative effects.

The study introduced the PRIME Index (Protectionism in Maritime Economies) to recommend concrete improvements. This provides a global ranking of 46 nations based on the extent of the trade barriers they enforce. Germany is in 12th place, which is relatively good. 

Four scenarios for the removal of trade barriers

Source: ICS / Craig VanGrasstek (Harvard University): Study on „Protectionism in Maritime Economies”; February 2021

Extremely ambitious

All countries reduce or eliminate their tariff and non-tariff restrictions by 50 % by means of comprehensive reforms.

Average GDP growth of the national economies
in the range of 0.3 % to 3.4 %

Modest and equitable ambition

All countries reduce or eliminate their tariff and non-tariff restrictions by 10 % by means of multilateral and domestic reforms, independent of income level.

Average GDP growth of the national economies
between 0.1 % and 0.3 % for most countries, and 0.4 to 0.6 % for some others.

Modest and inequitable ambition

High-income countries reduce or eliminate their tariffs and non-tariff restrictions by 10 %, all others by 5 %.

Average GDP growth of the national economies
Profits would be lower for countries with low and middle incomes in particular.

Only tariffs and trade agreements

All countries reduce or eliminate their traditional tariff restrictions by 10 %, based solely on fees that apply to the obligations assumed by the countries in the trade agreement.

Average GDP growth of the national economies
For the average national economies, profits are only about 25 % of what they would achieve under ambitious Scenario 2.

The ICS study outlines four possible realistic scenarios. The most ambitious of these assumes that all countries will dismantle their trade restrictions by 50 percent; the most cautious scenario at least assumes 10 percent. Complete dismantling of all trade barriers was not considered since it is entirely unrealistic.

In all cases, the positive effects are impressive. Less protectionism in the ambitious scenario could increase global prosperity by up to 3.4 percent. The greatest effects are felt in developing and emerging markets. More trade means less poverty for many millions of people. Nobody would be worse off. However, only governments that emphasise facts instead of emotions can enforce this kind of policy.

Our author Dr. Max Johns is a Professor of Maritime Business at the HSBA Hamburg School of Business Administration. From 2012 to 2019, he was Managing Director of the VDR Association of German Shipowners, which he continues to represent in international bodies.

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