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Thank you very much to the European Policy
Centre for organising this morning’s discussion.
I am grateful for the opportunity to present
the case for international trade as an important part of a global
solution to the recent economic downturn. As economies attempt to
recover from the crisis, keeping international markets open is vital.
Turbulent times
These are not easy times. We know that in
2009, growth of real world GDP was negative, estimated at -2.2 per cent.
Furthermore, the global unemployment rate reached its highest level
ever, with the International Labour Organization estimating the number
of jobless worldwide at over 200 million. The adverse impact of the
recent financial crisis on the world economy in terms of output and
employment is undeniable.
World trade has also been a casualty of this
crisis, contracting in volume terms by around 12 per cent in 2009 — the
sharpest decline since the end of the Second World War. The main
explanation for this freefall in trade has been the simultaneous
reduction in aggregate demand across all major world economies. The
drying up of trade finance during this period has also been a
contributing factor. To a much lesser degree, trade has been adversely
affected by some instances of increased tariffs and domestic subsidies,
new non-tariff measures and more anti-dumping actions.
We started last year with a collapse in trade,
a drying up of trade finance, concerns that donors would reduce funding
for “Aid for Trade”, and worries that protectionism would kick in. And
yet one year on from the onset of the crisis, we see that, to this point
at least, the multilateral trading system has proven its sturdiness as a
bulwark against runaway protectionism.
In most developed economies, including the EU,
stimulus packages have been instrumental in preventing further
deterioration in output while preparing the path to recovery. The jury
is still out though on whether some of the measures introduced to
stimulate economies contain provisions that favour domestic goods and
services at the expense of imports.
But the positive impact of national stimulus
packages is fleeting and worries are mounting over the huge budget
deficits rung up by many governments. Economies urgently need other
sources of growth -- sustainable engines of growth which will not add to
our already seriously indebted economies. This is where trade can be an
important part of the story, both in the long-run and in the short to
medium-term.
Trade as a source of growth and jobs
In the long-run, economic growth is driven
very significantly by technological progress and the quality of domestic
institutions. Trade has an important role in this context.
First, it can enhance technological progress
by increasing the incentives to innovate, facilitating transfer of
technology and fostering “learning-by-doing” effects.
Second, trade reform may directly increase the
quality of institutions by leading to the adoption of certain
institutional norms. Moreover, the preferences that underlie such
institutional reforms may be the indirect consequence of the workings of
market forces associated with trade.
In the short-to-medium run, trade allows
external demand to provide a buffer for economies facing low domestic
demand during periods of recovery from the crisis. This is especially
important in several developed economies, where domestic demand is
likely to be subdued for a while as domestic savings are reconstituted
and the financial system recovers. Trade openness vis-à-vis a diverse
set of countries is important for mediating the effect of a shock.
More generally, trade can increase income or
output levels through efficiency gains from specialization based on
comparative advantages, greater competition, access to a larger variety
of intermediate inputs, scale economies and an intra-industry
reallocation of resources.
Moreover, exports, in particular, can increase
the levels and growth rates of income or output as they often have a
high value-added component. This is especially true in developed
countries, where firms specialise in the high value-added segment of the
global supply chain. Importantly, the value-added component of exports
is likely to have a positive effect on domestic demand due to backward
linkages with several sectors in the economy.
In fact, evidence suggests that the domestic
content of value added by exports is higher as countries develop. For
example, in 2008, 80 per cent of the value of the goods exported by the
US had a domestic content, while this share was only 42 per cent for
Malaysia. In addition to the value-added argument, there is evidence of
“learning-by-exporting”, which increases productivity and hence promotes
growth.
As a digression, it is also worth noting trade
may help keep prices of goods down as economies recover from the crisis.
This means that prices will not increase as much in response to an
increase in output or a reduction in unemployment when economies are
open to trade because trade allows countries to source important goods
or inputs from the rest of the world.
An increase in levels of output or income is
crucial to the process of recovery from the recession. But equally
crucial is a reduction in rates of unemployment. Today unemployment is
intolerably high. More must be done to empower our citizens. Trade can
be part of the solution. So how does trade alleviate this concern?
Naturally, an increase in incomes creates jobs
in different sectors by increasing demand in the domestic economy, which
has subsequent multiplier effects. This resulting increase in jobs is
what may be termed the “second-round” effects.
But trade, in general, and exports, in
particular, are also likely to contribute directly to the reduction of
unemployment in the recovery phase following the financial crisis. These
“first-round effects” relate to the experience of a number of countries
where the share of employment which depends on exports is typically
large.
For example, it is estimated that in 2008, 22
per cent of total employment in Germany depended on exports. Similarly,
in the United States, two out of every ten manufacturing jobs in 2006
were related to exports of manufactured goods. There are also a large
number of workers involved on the import side of trade. In Australia,
for instance, 1 in 10 workers were involved in import related activity
in 2008.
Going forward, preliminary estimates suggest
that exports could contribute to about 40 million jobs in China and
manufacturing exports could create about 160,000 jobs in the United
States in 2010.
These findings appear to be particularly
relevant in the current situation as trade has the potential to pick up
strongly and lead to new hiring, particularly in export-oriented
sectors.
Of course, one must remember that not all the
jobs created in export-oriented sectors will go to previously unemployed
workers. Some will go to previously employed workers who are
transferring to the export sector because of better opportunities.
Even so, this re-allocation is economically
valuable. It means that workers are moving from sectors where their
marginal product is lower to those where it is higher. This results in
productivity gains to the economy and hence increased output and
unemployment. But given the current high rates of unemployment the world
over, it is likely that many of those getting these jobs in the export
sector will be from the ranks of the unemployed.
It must also be acknowledged that with import
competition and outsourcing, trade may lead to job loss in certain
sectors of the economy. This is where domestic programmes to train
workers and foster greater mobility in labour markets can enable those
displaced to find jobs in the more efficient, expanding sectors of the
economy. And this is also where social safety nets can help them bear
the burden of transition in the short-run.
So what can we say in terms of the role of
trade policy during this period of recession? The key point is that
trade can have a positive impact on incomes or output and job creation
during this economic downturn. But for this, international markets must
remain open and countries must continue to trade on the basis of
comparative advantage.
Keep trade open and keep opening trade
Specialization of production and export
structures on the basis of comparative advantage is at the very heart of
European economic integration. A free-trade area enables countries in
the region to reap the efficiency gains of trade opening that arise from
comparative advantage, scale economies, increased competition, access to
a variety of intermediate inputs and intra-industry resource allocation.
Furthermore, given that the EU represents an even deeper form of
integration with free movement of factors across its constituent
countries, it can facilitate adjustment in the face of an asymmetric
country-specific economic shock.
We must therefore ensure that trade remains
open. But we must also work to keep opening trade through the conclusion
of the Doha Round. A Doha deal would provide new market opportunities
through the reduction of tariff barriers and domestic subsidies. But it
would also reduce the fixed costs of trading by addressing, for example,
customs procedures and red-tape in the part of the negotiations devoted
to “trade facilitation”.
Finally, and very importantly, the DDA [Doha
Development Agenda] will provide for more certainty in trading
arrangements by securing binding commitments from member countries. This
is especially important for economic growth to create jobs, as
experience from past recessions suggests that employment growth will be
sluggish in the aftermath of the crisis even though output expansion may
have resumed.
During the “dotcom” crisis, for example, the
US economy stopped contracting in November 2001 and began growing again,
in terms of output. But the US unemployment rate continued to climb
until June 2003, a full 19 months later.
One reason commonly advanced to explain this
“jobless recovery” is the uncertainty faced by employers about whether
the economic expansion they are witnessing is sustainable. Only if they
are convinced that demand growth is durable will they be willing to
commit to new hiring. A successful Doha Round will greatly reduce
uncertainty relating to protectionism, the spectre of which may hinder
new hiring, especially in the export sector, since it is the most
vulnerable to trade restrictions.
Of course, opening markets may expose
countries and individuals within countries to greater volatility. But
the response cannot be to turn away from openness. It must be to ensure
that market opening is accompanied by international rules and
international and domestic policies, such as Aid for Trade, that ease
any potential adverse impacts during the transition period.
If there was a geopolitical sense in launching
the Doha Development Round in 2001, another year when the world was put
to the test, it is today economically imperative to conclude it.
Thank you very much for your attention.
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