Exports, Trade Policy and Economic Growth in Eras of Globalization

Edward M. Feasel

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780415372190
• eBook ISBN: 9781351864800
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This book provides an excellent resource for understanding the forces in international trade liberalization over two centuries that have brought us to this point, where the successes, setbacks and the countervailing forces now vie for the public's mind and support: the outcome of which will determine the future progress of increased globalization, or lack thereof.

The book also examines whether trade policy has indeed promoted exports in the vast number of countries which increasingly look to trade agreements to gain a competitive edge, and to what extent export-driven growth has been an important force in advancing economic development around the world. In doing so, the book examines one of the most controversial issues in economic development: the promotion and significance of export-led growth.

1  Introduction

The first era of globalization was a period where the expansion of the global economy supported the process of nation-state formation. In many regards, the second era of globalization served a similar function, as newly independent nations emerged from colonization in the aftermath of World War II in Asia and Africa, and the newly liberated post-Communist countries were formed with the demise of the Soviet Union in the 1990s. The role of the multinational corporation increased dramatically, and the production process evolved and expanded across borders, eroding some of the regulatory authority of nation-states. These are the types of factors that have been at play in both eras of globalization, but one of the central driving forces and motivation is the attempt to expand exports to support economic growth in the home country. Trade policy is the vehicle to accomplish this goal.

What is attempted in the following pages is a comprehensive examination of the evolution of trade, namely exports from destination countries, and trade policy and their relationship to economic growth and development in countries in the two eras of globalization covering the nineteenth century and early twentieth century, and the last half of the twentieth century and beginning of the new millennium. The book is designed to cover different aspects of this in each successive chapter, and thus, chapters can be used independently depending on the dimension of interest of the reader. Of course, the chapter ordering does matter in terms of a comprehensive examination of the subject, and each leads to a fuller understanding of all the dimensions of globalization in both eras. A word should be said here about the use of the term globalization. While all agree globalization is a fact of current day life, it is a vacuous term to some extent as it has come to encapsulate almost anything that matters beyond the nation-state. In economics, globalization is best understood by the linkages between nation-states in the three dimensions of people, goods and money. These are examined in the discipline through the three areas of migration/immigration, international trade and international finance, respectively. As such, one can actually measure the degree of globalization and even compare one period to another. The focus of this book will be international trade and, in particular, exports. This is based on the belief, as mentioned earlier, that a prime motivation of globalization is to promote exports to support domestic economic growth. In this regard, it is exports that bring the additional demand from external sources that allow the domestic economy to expand beyond what would otherwise be supportable by domestic demand alone. If nations could achieve the same results simply by closing borders and focusing internally, we would see exclusively what economists call “autarky” states: nations that don’t trade.

Chapter 2 begins the exploration into exports role in economic growth by reviewing both the theoretical and empirical economic literature on exports and economic growth. It is only recently that exports have been acknowledged, at least in the theoretical literature, as playing a potential role in economic growth. This is a result of new growth theory and new international trade theory which both emerged in the 1980s. The timing of the emergence of this new literature with the emergence of the fast-growing newly industrialized countries (NICs) in East and Southeast Asia is no coincidence. A focus on the importance of increasing returns to scale, emphasized by some in earlier writings, was also incorporated into growth and trade models. There is still not wide agreement on the role of exports in the growth process and the channel by which it can impact growth, but the chapter provides the necessary background of possibilities, including the possibility that exports are simply a reflection of the Say’s Law: the idea that supply creates its own demand and that exports are just one dimension of demand for domestically produced products. Whether exports cause growth or are induced by growth, the chapter introduces a simple accounting framework to determine what fraction of increase in real gross domestic product (GDP) over long periods of time can be attributed to domestic demand and external demand. Data limitations make it difficult to do an exact accounting exercise as proposed across both eras of globalization, but the chapter outlines how currently existing data can be used to get some indication of the importance of exports in the growth process.

The first era of globalization classified as the period between 1820 and 1913 is examined in Chapter 3. An overview of the economic environment and forces of the time are discussed. The entire period is marked by the spread of the production techniques from the new industrial revolution in the United Kingdom to the rest of Europe and to the United States. The early part of the era also sees new independent states emerge from colonization in the Americas and, later, other new states, including Germany and Italy. Expanding economies and trade helps to support these nation-states solidify their position and the role of the nation-state as the main institutional force. The chapter highlights based on the nineteenth-century trade agreement database (Pahre, 2008b) the astounding number of trade treaties established in the period. This is a vehicle of trade policy to expand exports in the nineteenth century not often mentioned and is similar in many regards to current practices in the world. The chapter also uses three separate datasets to examine export expansion in countries during different periods of the first era of globalization and in the interwar years after 1913. The interwar years provide an excellent comparison, as it is a period when trade protectionism increased. An important feature of growth in the nineteenth century was the beginning of countries moving up the value-added chain of manufacturing exports to promote trade and growth. Focusing on exports in textile products in the first phase, which seems natural given the industrial revolution started in this industry, and then expanding into metal products and machinery with electricity becoming the new energy source, the chapter highlights this development process followed by leading nations of the time. The chapter concludes by examining the role of exports in the transmission of the Great Depression around the world, serving as a case study on the importance of exports in supporting economic activity, in this case, how its decline has adverse impacts on the level of economic activity.

In the aftermath of World War II, the advanced nations led by the United States desired to avoid the protectionist practices that led to economic decline in the interwar years. The Bretton Woods system was established along with the new General Agreement on Tariffs and Trade (GATT) framework to lower trade barriers between countries around the world. Chapter 4 examines trade policy in the postwar era, highlighting the similarity with the earlier era of globalization in engaging newly emerging independent colonies in the global trading network after World War II in Asia and Africa and then from West Asia and Eastern Europe with the end of the Cold War. One of the most significant changes in trade policy occurred in the 1990s when there was a shift to an emphasis of regional trade agreements (RTAs) as the preferred vehicle to expand trade liberalization rather than GATT, and later the World Trade Organization (WTO), which replaced GATT in 1995. Since the early 1990s, there has been an explosion of RTAs. The chapter discusses forces behind this, including the early establishment of a mega RTA with the European Community in 1958, and also the lack of success of later rounds of multilateral trade negotiations, mostly due to the belief that advanced nations were prospering at the expense of developing nations as a result of multilateral trade liberalization. The emergence of more successful and powerful large developing nations referred to as BRICS, including Brazil, Russia, India, China and South Africa, and their willingness to disagree and oppose proposals from advanced nations, was another force. Controversial topics show the changing nature of trade over time as advanced nations look for agreements on trade in services, local content agreements in terms of what portion of final product must be produced in a country, and government procurement contracts with equal access to foreign companies, to name a few. These issues also highlight the increasing role of the multinational enterprise (MNE) in the global trading network. There is a collaboration between advanced country governments and MNEs in setting the trade policy agenda. Chapter 4 concludes with a close look at RTA proliferation in different regions of the world, including proposed ones that were not successful (the Trans Pacific Partnership Agreement, led by the United States), ones close to completion (the Regional Comprehensive Economic Partnership, involving China and large past of Asia and Oceania), and the expanding interests of bilateral RTAs among countries and especially the European Union (EU).

With the background on trade policy and the major economic trends in the current era of globalization given in Chapter 4, Chapter 5 turns to the data to examine the export expansion in the postwar era. Two sets of data are used, one based on gross exports available widely in the postwar period in real dollar terms and value-added exports in nominal terms. Gross exports are not ideal in that they include the value of intermediate products used to produce the export, and as the main interest is in the impact of exports in supporting expanding domestic production, imported inputs have no contribution. Nevertheless, the export expansion measures presented using gross exports can give indication of the expansion of a country’s export market relative to the increase in production that occurred in the domestic market. These are the same expansion measures that are presented for countries in the nineteenth century in Chapter 3. The final section provides the same measure, but now called export contribution measure, as they are based on value added and thus represent increased final demand within the country due to exports, where the value of inputs have been removed. Overall, the chapter’s results point to and confirm the export oriented-growth approach of the East and Southeast Asian Economies. However, equally focused on an export orientation and on a much wider scale is the EU, with export expansion measures across countries rivaling the fast-growing nations of Asia. The successful economies in East Asia have served as a regional force in supporting other developing nations in the region to pursue a similar outward-oriented approach to development by moving up the value chain of manufacturing exports over time. It is clear that the EU is playing the same role in Europe, now with its members that were former Soviet satellite economies. Some have referred to the Asian model as the flying-geese model of economic development. Evidence here suggests Europe has been the most extensive and successful application of this model. There is no evidence of the United States serving such a role in the Americas. There is the question if the EU will serve a similar role in Africa and the Middle East, as Chapter 4 shows its trade policy has great interest and efforts in the region.

Chapters 6 and 7 are econometric studies on two important questions regarding exports that arise from the previous chapters: does trade policy, namely GATT and the WTO and more recently RTAS, lead to increases in exports across countries? And, do increases in exports cause economic growth? Chapter 6 addresses the first question using bilateral trade from the postwar era. Individual country regressions for over 180 countries provide mixed results on the impact of GATT and the WTO in increasing exports. There are strong positive effects for East and Southeast Asia, North America and Europe, to a lesser degree for South Central and West Asia, but mixed results for Central and South America. There are more widely negative results for the Pacific Islands, Caribbean and Africa. The results support the often-stated negative view of some of these developing nations who are skeptical on the benefits of WTO negotiations. RTAs are shown to be more universally successful in promoting increases in exports in countries around the world and can explain their proliferation since 1990 and the lack of success of WTO multilateral negotiation rounds. The chapter also examines crossover effects of RTAs of competing nations on one’s own trade partners. Evidence for Japan is an example where RTAs from China, Korea and the EU diverted exports away from Japan, and its own RTAs have been able to somewhat counterbalance the effect. This would explain Japan’s heated pace of RTA formation after 2005 as presented in Chapter 4; its willingness to enter TPP negotiations as it was always reluctant to enter multilateral RTA negotiations and its decision to complete negotiations after the US withdrawal; and its recent conclusion of an RTA with the EU in 2017.

Chapter 7 examines the effect of exports on real GDP fluctuations over time using the time series and panel data estimation technique. The main results are that exports do play a role in explaining movements in real GDP over time, but a modest amount of perhaps 20–30 percent in the short run and less in the long run based on a wide sample of countries. Supply shocks representing traditional growth theory factors such as technological shocks account for the greatest fraction of real GDP movements. A closer panel examination of the Four Asian Tigers shows that their experience lies in stark contrast, where demand is the main driver of GDP changes. However, it is not necessarily export demand. A final detailed econometric case study of Korea’s experience shows that investment demand is the main driver in explaining the increases in real GDP over time. Both investment demand and supply shocks in turn lead to increases in exports, which further lead to increases in investment feeding back into the system. It’s not the case that exports aren’t important in the growth process, but they are not the driver of growth. Instead, evidence shows that export growth facilitated economic growth in the postwar period by providing the necessary external demand to support the “economic miracle.”

The concluding chapter looks at two important challenges to globalization. The first is the increasing role of the MNE. MNEs for advanced countries have collectively become so large that they resemble the size of national economies. They also often operate outside the realm of regulatory authority of nation-states, while at the same time coordinating and asking nation-states to advance trade liberalization, given their need for access to cheap inputs and markets to expand into. The evolution of the production process into specialized portions has allowed different parts of the production of goods to be located across the globe creating a global value chain. The MNE has become the main driving force in the expansion of globalization. To the degree that globalization is viewed negatively, it is surprising that there isn’t more anger expressed at MNEs. The US elections in 2016, however, is where a backlash against globalization did have real consequences, with the eventual winner making a major focus of his campaign the negative consequences of RTAs for the United States and the role of MNEs in taking jobs away from the country.

The second issue examined is inequality in all its varied dimensions, within countries and between countries, and the efforts to achieve greater equality beyond the income dimension in advanced nations. Many of these issues revolve around immigration matters, which also impacted the US election. This is the other area where the backlash against globalization had real consequences: in the UK referendum on the EU. The EU’s requirement for free movement across borders, especially in light of the refugee crisis Europe faced in 2015, played a large role in the United Kingdom deciding to pull out of the EU. These issues need to be addressed if globalization is to continue to thrive in years ahead. The EU provides one model of addressing income inequality in a nation through its welfare state, but it’s not clear if its insistence on nations giving up sovereign rights to join the group is a model of integration others will follow. As the United States retreats, Asia and Europe try pick up the mantle of leadership in expanding globalization. These countries too have experienced backlash though, and for the near future, protectionist and nationalist sentiments are on the rise globally. This was the mood in the world during the interwar years, when the export growth stagnated, and national self-interest dominated. It’s not that there wasn’t growth – the roaring 1920s led to a steep rise in the US stock market, despite increasing protectionist practices. We are once again in uncertain times, old leadership retreating and lesser selves rising. It is hoped that providing a comprehensive examination of the importance of exports as linkages between nations and their role in economic growth during both eras of globalization will lead to a deeper appreciation of what has been accomplished through trade policy in expanding and deepening these linkages, perhaps providing a glimpse at what possibilities lie ahead and, in so doing, lead to more well-informed world citizens.

2 Exports, trade policy and economic growth

Demand side growth accounting and an overview of theoretical and empirical evidence

While there is wide recognition of the increasing importance and impact of globalization around the world, one area where its role has not been widely understood or even recognized is in explaining economic growth. One of the main reasons for this is that the economic growth theory has a long-established tradition in economics, and even with the developments in new growth theory, these new insights have largely been incorporated into growth accounting in the context of the traditional framework, a supply side accounting framework in which exports play no role, except perhaps indirectly through impacts on the factors of production or through technology. This chapter introduces a demand side growth accounting framework to measure the relative importance of domestic demand and external demand in facilitating the growth process over time. Before presenting estimates of this measure for countries during different eras of globalization and for different periods of time in later chapters, this chapter first highlights the increasing importance of trade agreements between countries in this current era of globalization and reviews the theoretical and empirical evidence on the relationship between trade and economic growth.

Trade policy in the current era of globalization

That we are in an era of globalization is a fact widely accepted across the world. It would not be a mistake to trace the beginning of this current era of globalization to the end of the World War II, when 44 nations agreed to the Bretton Woods monetary system, which established the International Monetary Fund (IMF) and the World Bank in 1944, and just as important, in 1947, when 23 nations signed the General Agreement on Tariffs and Trade (GATT). One very important change that has taken place over this period is the emphasis on trade policy from multilateral coordination under GATT, and later taken over by the World Trade Organization (WTO) beginning in 1995, to a movement across nation-states toward a regional focus in fostering trade agreements and relationships.

Figure 2.1 shows the number of regional trade agreements (RTAs) that have gone into force by year in the post-World War II era. The solid line represents the cumulative number, while the bar chart shows the actual number for each year. Perhaps the most consequential RTAs, and the one which opened the door to following RTAs, were the two initial ones that came into force in 1958 and 1960: the Treaty Establishing the European Economic Community (EEC), signed in Rome in 1957, and the European Free Trade Area (EFTA), established by the Stockholm Convent...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
• 1 Introduction
• 2 Exports, trade policy and economic growth: demand side growth accounting and an overview of theoretical and empirical evidence
• 3 Exports in the first era of globalization and interwar years: trade policy and export expansion measures
• 4 Exports, trade policy and economic trends in the postwar era
• 5 Exports and economic growth: a new assessment of the postwar era
• 6 Regional trade agreements and their impact on exports
• 7 The importance of export-led growth: time series and panel data evidence
• 8 Challenges confronting globalization
• References
• Index