Challenges to the Global Trading System

Adjustment to Globalization in the Asia-Pacific Region

Sumner La Croix, Peter A. Petri, Sumner La Croix, Peter A. Petri

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134086481
• Edition: 1
• Topic: Économie
• Subtopic: Exportations et importations

Examines the problems that confront trade policy today from a range of perspectives

Number 30 in the PAFTAD series

Includes prominent international contributors from academia, trade, industry and politics

1 New challenges to the global trading system

Sumner J. La Croix and Peter A. Petri

The opening line of Charles Dickens’ great novel, A Tale of Two Cities, that ‘it was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity …’ might well have been written about the global trading system in 2006. It is the best of times, as international trade is robust, many countries are opening their economies to trade and foreign investment, and it is now a commonplace that countries, companies and individuals are destined to compete in markets that span the globe. And yet it is also the worst of times, as multilateral trade negotiations have seemingly collapsed, a growing welter of regional and bilateral trade agreements are bypassing the central GATT rules banning non-discrimination in trade, and interest groups, academics and the press are broadly engaged in vitriolic attacks on trade.

This book presents revised versions of several papers presented at the 30th Pacific Trade and Development conference held in Honolulu, Hawaii in February 2005. The conference participants examined the broad array of problems that confronts trade policy today, especially the criticism levelled against free trade. Is the criticism justified? Even if it is not, has it nonetheless influenced trade policy across a spectrum of countries?

There are two principal threads to the criticism. One thread is that trade policy is flawed because negotiations in the ‘real world’ are unduly influenced by the larger economies and the stronger interest groups within their borders. As a consequence, trade agreements are not structured to create a level playing field, but rather simply create rules that favour these powerful countries and their well-organized producer interests. A second thread is that globalization itself is the villain, rather than trade in particular. Globalization is considered to be problematic because its well-known achievements are thought to give rise to adverse social side-effects such as greater income inequality, environmental degradation, violations of labour and human rights standards, and the destruction of older long-established cultures by an all-encompassing global popular culture.

These arguments are being made in increasingly sophisticated ways and have captured significant popular attention. As segments of the public have come to accept some of these arguments, the public has also begun to view ‘regulated trade’—as portrayed in the popular press, in many academic discussions, and by government policy reports—as the reasonable, middle ground between protectionism and the ‘religion’ of free trade.

What can we say about this shift in public opinion against free trade? Does it reflect new insights from trade economists into the relationship between trade and economic welfare? Is the mounting criticism of free trade providing new insight into the contentious and drawn-out world trade negotiations and the changing distribution of trade’s benefits and costs, or is it a cover for protectionism, or merely a collection of errors and misconceptions?

The authors in this volume, representing a dozen major trading economies, were asked to address the various dimensions of the academic and popular criticisms of trade. They have responded to this challenge by providing both theoretical and econometric analyses of the changing patterns and structure of trade and foreign investment flows in the Asia-Pacific region over the last decade; by pondering the effectiveness of international economic institutions; by considering the present and future impact of Asia’s new rising giant on regional trade and investment; and by searching for the formula that might lead trade negotiators to announce a successful conclusion to the Doha Round. The authors typically used their analysis to develop critical evaluations of trade and investment policies and, in some cases, to suggest policies for reducing adverse domestic spill-overs from changes in trade flows, for balancing innovation and access to pharmaceuticals, and for reducing protectionist backlashes to surging trade flows.

GLOBALIZATION AND TRADE POLICY

The book opens with a set of essays designed to probe the depth and character of opposition to the further opening of multilateral trade. Dr Supachai Panitchpakdi, who was the Director-General of the World Trade Organization when he addressed the 30th PAFTAD Conference in February 2005, provides an overview of the international political issues that were slowing the Doha Round of trade negotiations. His concerns for the future of the Doha Round centre on his perception that the governments of leading developing and developed countries lacked the will to make the politically risky commitments needed to bring it to a successful conclusion. His essay is understandably couched in careful language, but Dr Supachai leaves the reader with little doubt that the preoccupation of the large trading powers—Europe, Japan, and the United States—with their narrow domestic interests made it impossible for them to focus on the critical global public good: markets that are open to trade, entry and investment. The potential losses of powerful domestic interests increasingly deflected these governments from searching for comprehensive agreements—which most initially believed to exist—that would be welfare-enhancing for all WTO members.

Douglas A. Irwin addresses the same issues from a historical perspective. His review of the protectionist backlashes in the United States and Europe induced by the globalization of capital and product markets in the late nineteenth century led him to conclude that recent concerns regarding the potential for a broad-based political backlash are largely unjustified. This conclusion stems partially from his sense that the opponents of globalization represent a wide range of political positions and have been unable to organize effectively within the political systems of their home countries. Moreover, Irwin sees many of the recently developed arguments against trade and investment liberalization as poorly articulated and unlikely to convince voters and officials to attempt to slow globalization. He finds that the extensive trade liberalization achieved in the second half of the twentieth century has been coupled with considerable technological change. He argues that this combination increased the importance of trade to most countries and their businesses. At the same time, Irwin finds that many countries have been slow to undertake the large adjustments—say, in educational investments—required to respond to such rapid changes. Rather than backlash, he believes that the trade policy environment is characterized by ‘globalization fatigue’, or a lack of desire to undertake additional changes in institutions and individual choices until adjustments to current developments are more fully completed.

Yung Chul Park, Shujiro Urata and Inkyo Cheong take a deeper look at the trade policy objectives of East Asian countries and find a more specific problem: the lack of multilateral trade initiatives is tied to the widespread interest among East Asian governments in regional trading arrangements. The motives of individual countries differ, but East Asian countries are concerned about competition from products produced in North American and European regional trade and investment zones. Park et al. find that the trade policies of East Asian countries are related not only to their long-term economic interests but also to their efforts to achieve greater influence in the global economy. This is spawning smaller free (preferred) trade areas and might eventually lead to larger regional groupings. There is, however, some evidence that East Asian governments are not firmly committed to this path. The authors find that the regional free trade agreements in place have done little to improve economic performance, primarily because they have generally been unambitious, in the sense that they regularly provided full or partial exemptions for politically sensitive products. The authors conclude that current regional agreements serve more as placeholders for potentially more effective future agreements than as effective mechanisms for stimulating current trade.

An even more detailed view of the political mechanisms at work is provided by Chad P. Bown and Rachel McCulloch, who address America’s specific concerns and actions against important East Asian trade partners. They show that the United States has discriminated against Chinese exports by its widespread use of antidumping actions and safeguard measures, and by establishing stringent quotas on Chinese exports in many product markets. As a result, China has established export taxes to ward off US pressure to restrict Chinese exports of low-quality clothing and textiles, which are labour-intensive products. These events are similar to those involving Japan two decades ago, even though Chinese products have not yet achieved the penetration of American markets that Japanese products had reached in the late 1970s and the 1980s. Bown and McCulloch suggest that policy makers operate with a ‘conservative welfare function’ that serves to prevent or slow change. Their chapter highlights the many unintended consequences of such interventions, including the deflection of Chinese exports to third-country markets where they create unintended competition for American products exports to these markets.

Together, these authors offer insight into how domestic interest groups in large countries influence trade policy both by countering liberalization efforts and by deflecting policy initiatives away from global negotiations. They further argue that, given the decline in the hegemonic power of the United States, no country or institution is currently providing the ‘public good’ of access to a large market open to trade. The authors are unsure whether the decline in the provision of this public good is temporary or permanent, but they do see the reduced provision of this public good as negatively affecting the Doha Round.

EXTERNALITIES

The book’s second major group of essays addresses criticisms of trade from the perspective of maximizing the welfare of society. Yumiko Okamoto deals with perhaps the most common criticism, that trade skews the income distribution in favour of individuals with skills that are in demand in international labour markets, at the expense of many others who are less well equipped to compete internationally. However, her evidence does not fully support this view. She finds that the growth in trade today is driven by a new kind of trade that is not associated with the expansion of income differentials. She calls this trade ‘intra-mediate trade’, to reflect the fact that the fragmentation of production increases both exports and imports of intermediate goods. She notes that intra-mediate trade is generally associated with increases in growth and productivity, and finds that countries that globalize through intra-mediate trade experience more modest income differentials than countries that do not. Indeed, Okamoto’s concern is that the least developed countries may be too slow to adopt this new kind of trade, because it requires relatively high investments in human capital.

Erlinda Medalla and Dorothea C. Lazaro provide a clear look at environmental issues in the Philippines and other developing countries. Does trade shift the production of pollution-intensive products to poor countries? Does the competition for products among such countries lead to a ‘race to the bottom’ in environmental regulations? Medalla and Lazaro find no evidence for this hypothesis. If anything, developing countries tend to produce somewhat fewer pollution-intensive products than developed countries. Measures of environment quality appear to improve earlier today than they did in developed countries at similar income levels in the 1980s and 1990s. They argue that the production processes of products that have had the largest increases in trade volumes are not particularly pollution-intensive, and stress that environmental concerns are often motivated by protectionist interests, and may ultimately result in more harm than good, even from an environmental perspective. In general, they favour addressing environmental concerns with appropriate environmental regulation rather than with more general trade policies.

The effects of ‘outsourcing’ and related wage impacts are addressed in a novel joint product of Mainland Chinese and Taiwanese researchers, Justin Lin and Ying-Yi Tsai. The authors note that in some cases outsourcing may be due to the presence of economies of scale in intermediate goods production. In other instances outsourcing may simply be due to the operation of the principle of comparative advantage in highly competitive industries. Outsourcing occurs when production technologies permit production chains to be divided into finer segments and to be located—barring massive transportation costs—in relatively distant geographic areas. Economists have generally found the effects of outsourcing to be relatively modest and, as for any trade based on comparative advantage, generally positive. Whether or not outsourcing reduces the wages of unskilled labour in developed countries or the overall welfare of unskilled workers has still not been settled. However, the authors do find an interesting difference between the division of labour that now characterizes the manufacturing process in East Asia and earlier forms of comparative advantage. They argue that the new trade patterns involve a high degree of risk-sharing along the supply chain, presumably to offset the greater volatility of markets, and to provide high-powered incentives to critical producers in the product’s supply chain.

The essay by Sumner J. La Croix and Denise Eby Konan examines the global intellectual property (IP) rights regime and its implementation in the Asia-Pacific region. The authors note that the global IP regime is regularly criticized from two different perspectives: developed country producers, who complain about the poor protection of IP in developing countries, and developing country consumers, who argue that they are denied access to essential medicines—in some cases life-saving medicines— in order to enrich large pharmaceutical firms in developed countries. Both sides have argued passionately for their viewpoints, each of which has some merit from the viewpoint of important stakeholders. La Croix and Konan argue that a strong and efficient global IP regime would only be adopted by WTO members if it were part of an overall deal that provides adequate compensation to poor- and middle-income countries for paying the higher prices on patented products. The authors argue that compensation agreed to during the Uruguay Round was the phase-out of the Multi-Fiber Arrangement (MFA), which created—in principle at least—a major export opportunity for developing countries. In the event, the gains from dismantling the MFA have been concentrated among just a few developing countries, and Europe and the United States have pursued antidumping actions and imposed safeguard measures on particular categories of textiles and clothing. Thus, many developing countries have been dissatisfied with the outcome of the IP–MFA deal and the global IP regime remains in dispute.

In the final essay of this group, Rong-I Wu, Chyuan-Jenq Shiau and Chi-Chen Chiang explore the connections between trade and security issues. Here there is a potentially positive externality: greater interdependence should raise the value of cooperation and therefore should diminish the prospect of conflict. The authors find, however, that the relationship is more complex—several causal mechanisms are at work, and they operate in both directions. For example, economic interdependence has also generated new possibilities for conflict through the transmission of economic volatility, and by creating new channels for the spread of disease and terrorist activities. The authors argue against complacency; nations must consciously intensify international political cooperation to manage the implications of increased contacts, which include both positive and negative externalities.

POLITICS OF TRADE AND ADJUSTMENT

In a series of shorter essays, policy makers, business leaders and academics proceed to translate these academic insights into the context of ‘real world’ trade policies. Richard M. Rosenberg, the former CEO of Bank of America, summarizes how major trade policy issues play out in California—a state with an economy similar to that of a large country in both scale and complexity. California has strong interests in open trade because of its exports of agricultural products, high-technology goods, and entertainment products. Still, even this internationally oriented economy cannot escape conflicts among competing interests. In fact, California’s ‘trade policies’ are not as open as one might predict. Environment, immigration and national security concerns all overshadow trade relationships. Another leading executive, Arthur L. Goldstein, notes that business management finds it particularly troublesome that there are large differences across borders in the enforcement of intellectual property rights, in environmental regulations and in the prevalence of corruption. Countries and companies that maintain high and effectively enforced ethical, environmental and IP standards frequently find themselves at a disadvantage when they compete for sales in many parts of the world. Similarly, they face unfair competitive pressures from countries that manipulate their exchange rate to improve the positions of their export businesses. Such frustrations help to explain, according to Goldstein, why support is weakening for free trade, even among market-oriented executives, and in trade-oriented economies such as the United States.

The adjustment requirements of global economic integration are significant, including in the private sector. Pang Eng Fong observes that nations need to make difficult choices to take advantage of global markets—he expects success in countries, like Dubai, that have invested heavily in defining their international competitive position, and worries about others, like Georgia, that are still mired in political conflict. Kim Song Tan explains that even successful globalizers like Singapore need to adjust—in this case with additional investments in technology and greater receptivity to foreign workers. David McClain examines interesting examples of adjustment to globalization within the institution he leads, the University of Hawaii. The university is taking new steps to focus on its comparative strengths, such as oceanographic research, and professional and academic disciplines that take advantage of Hawaii’s unique ‘island culture’ in their research and teaching.

The essays of government leaders and policy analysts provide insight into how these economic and political pressures translate into trade policy initiatives. In frank and detailed comments, Mari Pangestu, the Minister of Trade of Indonesia, explains that while her government recognizes the benefits of fostering increased globalization in Indonesia, it must also control the risks stemming from globalization. More liberal trade policies open opportunities for increased overall welfare, but Pangestu believes that a responsible government must also develop complementary policies to raise the productivity of groups harmed by increased imports (such as farmers and SMEs). Dr Hadi Soesastro calls such complementary policy measures ‘second order’ liberalization and argues that they must accompany ‘first order’ trade liberalization to ensure that the first-order reforms are politically acceptable to a country’s legislature. Geir H. Haarde, then Finance Minister and now Prime Minister of Iceland, notes that important domestic industries (for example, the fishing industry in Iceland) often have a profound influence on the course of a country’s trade policies, even in advanced countries. Lisa Coen, a senior official in the US Trade Representative’s (USTR) office, notes that the executive’s US trade policy also depends on close cooperation with the US Congress, and with industry and non-governmental organizations. In this complex setting, the USTR pursues a multi-track policy by conducting both regional and global negotiations. Doug Bereuter, the President of The Asia Foundation and a former US Congressman who participate...