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Free trade has come under increased fire. The adverse consequences of trade liberalisation, including job losses, are usually more immediately visible than longer-term gains such as a greater choice of products at more competitive prices.

In the US, concerns over the imbalance between exports and imports have provoked new tariffs and regulatory restrictions on imported goods. But trade liberalisation is not wholly to blame. There are myths about international trade that need debunking.

Myth 1: Trade deficits are bad, surpluses are good.

To reduce its trade deficit with the world  especially mainland China  the US has pursued protectionist policies to limit its imports while increasing exports. But using trade policy to lower deficits disregards the importance of imports: they can help supplement domestic production, and give consumers greater choice, often at lower cost. And in today’s globalised world, successful exports increasingly rely on access to globally competitive imported inputs.

For the US, macroeconomic factors such as the savings-investment imbalance are more prominent drivers of the trade deficit.

Myth 2: Open markets increase trade deficits.

Free trade may not necessarily expand trade deficits and protectionism might not reduce trade deficits. Instead, protectionism may lead to slower economic growth via higher import prices, domestic production costs and inflation. These factors could weigh on domestic consumption, investment and employment, and may ultimately lead to a widening of the trade deficit.

On the other hand, trade liberalisation may actually help to improve a country’s trade balance by lowering trade barriers faced abroad.

Myth 3: Foreign exporters pay the additional tariffs.

Tariffs are ultimately a tax on imports and someone has to pay the price. Importers could either absorb the tariff cost, pass it on to local consumers by increasing retail prices, or seek a price discount, effectively passing the burden to the exporter.

While Washington expected its punitive tariffs to be paid by Chinese businesses, evidence suggests that these duties are largely borne by US firms and consumers. Indeed, while the US collected USD29 billion more revenue in 2019 from additional tariffs, it has spent about USD28 billion so far to support local farmers impacted by the tariff war.

Myth 4: Freer trade leads to net job losses at home.

Trade can hit jobs, especially over the short to medium term, with disproportionate impacts on particular occupations, and specific sectors or regions. But, the economy-wide effects of trade on labour markets tend to be positive. In the long run, openness to trade delivers stronger overall growth and generally better employment outcomes, even if the gains may not be evenly distributed.

Technological change is a far greater contributor of manufacturing job losses than trade liberalisation. But protectionism is not an effective response to labour-market dislocation. Public policy measures can help support displaced workers and facilitate the adjustment process.

Myth 5: Goods trade is independent of services trade.

Traditional trade flows have focused on physical goods, but services are increasingly intertwined with goods trade. For example, research and development and design services are important inputs into the production of exported goods, while finance and logistics help facilitate the manufacturing and trade of tangible items. And maintenance and repair services, like customer training, are increasingly sold with exported goods.

Looking ahead, digitisation is expected to blur the line between goods and services trade even further. Goods might be increasingly delivered electronically across borders rather than in physical form.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

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