TWN Info Service on UN Sustainable Development (Oct18/03)
10 October 2018
Third World Network

Trade wars a symptom of unbalanced hyperglobalized world
Published in SUNS #8762 dated 28 September 2018

Geneva, 27 Sep (Kanaga Raja) -- The world economy remains in a fragile state, and a sharp escalation of tariffs and heightened talk of a trade war will only add to the underlying weakness in the world economy, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its Trade and Development Report 2018 (TDR-2018), UNCTAD said that in the absence of strong global demand, trade is unlikely to act as an independent engine of global growth.

Because tariffs operate in the first place by redistributing income among several actors, gauging their impact is not as straightforward as some of the more apocalyptic trade pundits are predicting.

Still, they will almost certainly not have the desired effect of reducing the current account deficit in the United States; will raise uncertainty if tit-for-tat responses ensue; and will cause significant collateral damage for some developing countries, adding to the pressures already building from financial instability.

This is not, however, the start of the unravelling of the "post-war liberal order". That order has been eroded over the past 30 years by the rise of footloose capital, the abandonment of full employment policies, the steady decline of income going to labour, the erosion of social spending and the intertwining of corporate and political power.

"Trade wars are a symptom of an unbalanced hyperglobalized world," said UNCTAD.

At a media briefing, Richard Kozul-Wright, Director of UNCTAD Division on Globalization and Development Strategies and lead author of the report, said: "We have a fragile global economy."

He said that this time last year the IMF was extremely confident about the state of the global economy, with synchronised growth and recoveries everywhere.

However, UNCTAD had warned in last year's Trade and Development Report (TDR) that this was much more of a complicated situation.

"And we think the situation is even more fragile today than it was 12 months ago. The world economy is walking a tightrope between debt-fueled growth and financial instability."

There has certainly been a recovery in the United States, said Kozul-Wright. "The question is whether that is an economic sugar-rush driven by tax cuts and military spending or whether there is a sustainable growth path behind that. We tend to think it is the former."

He said 10 years after Lehman Brothers collapsed we see a multilateral system in crisis. "This town [Geneva] is momentarily the centre of that crisis, that we see trade tensions as a symptom of larger causes."

"Some of those causes are failed policies. We have been through ten years of saving banks, pushing austerity, encouraging mergers and banging relentlessly the drum of free trade."

He said as emphasised in last year's TDR, that has been a cover for a rise in the rent-seeking economy and a "Medici vicious circle" in which economic and political power has become reinforcing to the detriment of large parts of the global system and citizenry within countries.

In particular, as a consequence of that kind of agenda, many of the underlying problems that caused the crisis - footloose capital, precarious jobs, persistent inequality and rising debt - have not been addressed.

Kozul-Wright said that trust was sucked out of the financial system with the crisis in 2008 and trust is now being sucked out of the political crisis as a consequence of the failure to deal with these problems.

And the trade war in many respects is a reflection of that lack of trust across the political system.

"However, we do not see this as the end of the 70-year-old liberal economic order which is how much of this discussion is currently being framed. That order died thirty years ago when policymakers ditched full employment as a goal, when capital became deregulated, when mixed economies became a dirty phrase. That was the end of the liberal economic order that was created in 1945."

"What we are seeing now are the tensions and problems of hyperglobalization and there is no doubt that trade is caught up in that," said Kozul-Wright.

He said that UNCTAD is "less apocalyptic than many people writing about this although we are worried, but our worries are not so much from the direct impact of trade which we don't think will be very significant but through a whole series of demand-side and distributional effects that will come in response to the tit-for-tat tariffs that is now taking place essentially between the United States and China."

According to Kozul-Wright, in a fragile world economy, uncertainties of this kind will have ramifications and the ramifications could be significant particularly for those countries that are financially vulnerable, and that may not be the people involved directly in the tariff war itself but the collateral damage from that war could be significant.

Asked to comment on the meeting at the Canadian mission on 20 September where some 13 countries including the European Union discussed proposals for WTO reform that target the developing countries, in particular China, including denying the consensus principle and doing away with special and differential treatment, Kozul-Wright said that as far as he can tell it is an attempt to prevent China from doing more of what it has done successfully to develop over the last 25 years.

"To me it's shocking. I would use the word shocking actually - the attitude of the advanced economies towards what is the one success story from the developing world of the last 25 years," he said.

"If you look at the list of things that the countries want to outlaw, it's all the things that the Europeans were doing when I was a kid in the 1950s and 1960s. State ownership was part of the normal discourse on how you ran a successful economy in the advanced world in the first 30 years of the post-war period."

"Technology transfer and finding ways to access the technological frontier, relatively soft intellectual property rules, all kinds of ways of trying to get at technology was part of the story. Finding the right balance between the public sector and the private sector was part of the story."

"Now these are the things that it seems are no longer acceptable because one country has used these policies very successfully to create its own firms," said Kozul-Wright.

He said that firms have so much influence over the policymakers in the advanced economies, and that despite the policymakers' talk about China being a mercantilist economy, the biggest mercantilist economies are in the West.

The US and the European economies are mercantilist economies, i. e. policies are made in support of, and in some cases by, their largest players, he added.

He said if you want to eliminate poverty, "we have a model that eliminates poverty. It is one thing that China has done that no one can dispute is a model that has eliminated poverty. Why in the world would you not want to think of ways of generalising that model, rather than finding ways to clamp down on all the measures that were used as ingredients to make that model successful?"

"To me it makes no sense other than to explain it as part of a rent-seeking world which has become a serious source of not only economic problems but of political tensions as well," said Kozul-Wright.

BACKLASH AGAINST HYPERGLOBALIZATION

According to TDR-2018, the backlash against hyperglobalization is gaining momentum with the international trading system on the frontline.

As discussed in previous TDRs, the roots of the heightened insecurity, indebtedness and inequality that are hallmarks of the current era stem more from the workings of the financial system than the trade regime; and that regime proved robust in the face of the economic fallout from the global financial crisis.

Moreover, using tariffs to mitigate the problems of hyperglobalization will not only fail to do so but runs the danger of adding to them, through a vicious circle of retaliatory actions, heightened economic uncertainty and slower growth.

Still, it would be foolish to dismiss the constituency in advanced economies worried about trade shocks as simply ignorant of the subtleties of Ricardian theory or misguided victims of populist politicians. Indeed, in addition to discontent in the North, there are numerous and long-standing concerns that developing countries have been raising about the workings of the international trading system which have also intensified in this century.

In reality, the lived experiences of each and every constituency at the local level reflects the intertwining of trade, financial and technological forces operating through national, regional and global markets and managed by policies, regulations and institutions designed to govern those markets and interactions.

The dominant narrative of the current era equates globalization with the growing reach (and porosity) of markets and an accelerating pace of technological change. It employs the language of "free trade" to promote the idea of a harmonious (win-win) world governed through clear rules and greater competition.

But hyperglobalization has as much to do with profits and mobile capital as with prices and mobile phones and it is governed by large firms that have established increasingly dominant market positions.

"Indeed, while trade and technology, through both destructive as well as creative impulses, have, no doubt, had an impact on the way we go about organizing our lives, in the end it is social and political initiatives in the form of rules, norms and policies that matter most for the outcomes of an interdependent world."

And, as described in previous TDRs, the hyperglobalized world is one where money and power have become inseparable and where capital - whether tangible or intangible, long term or short term, industrial or financial - has extricated itself from regulatory oversight and restraint and muted the voice and influence of other social stakeholders with an interest in the direction of public policy.

As a result, said UNCTAD, it is hardly surprising that heightened anxiety among a growing number of casualties of hyperglobalization has led to much more questioning of the official story of the shared benefits of trade. Trade sceptics now have substantial political constituencies across the world, in both developed and developing countries.

Mainstream economists bear part of the responsibility for the current state of affairs. Ignoring their own analytical nuances and the subtleties of economic history, they remain biased in favour of unqualified free trade when it comes to communicating with policymakers and broader audiences.

The mainstream narrative pitches "comparative advantage" as a "win-win" boost to economic efficiency and social welfare, without specifying the conditions under which such beneficial outcomes can occur or how any negative effects could be abrogated.

There is no doubt that the new protectionist tide, together with the declining spirit of international cooperation, poses significant challenges for governments around the world.

However, the call to double down on "free trade" provides a cover for a regime of footloose capital, concentrated market power and the capture of public policy by powerful economic interests. Fighting isolationism effectively requires recognizing that many of the rules adopted to promote "free trade" have not promoted a rules-based system that is inclusive, transparent and development-friendly.

Reviving optimism about trade and multilateralism must go beyond simply promoting trade for trade's sake and pitching multilateralism as the last line of defence against an autarchic Hobbesian dystopia. A more positive narrative and agenda is required, said UNCTAD.

TDR-2018 said that the governance of international trade in the era of hyperglobalization has contributed to increasing domestic inequalities in many countries.

This has in part reflected the way in which trade is governed in global value chains (GVCs), which has heightened the bargaining power of footloose capital, including through job offshoring to poorer countries (or simply the threat of that), as well as market concentrating and rent-seeking practices of large firms that effectively weaken competition.

This is partly because international trade is increasingly governed by "free trade" agreements that empower global firms. For example, services derived from intangible assets whose geographical location can be determined by firms almost at will - such as financial assets or intellectual property rights (IPR) - can now be "traded" more freely between higher-tax and lower-tax jurisdictions and within transnational corporations (TNCs) themselves.

Overall, these processes have tilted the distribution of value added in favour of capital, especially transnational capital, whose owners remain mostly headquartered in developed countries.

Between the end of the Second World War and the global financial crisis (GFC), the growth of world trade consistently outpaced that of global output albeit with significant differences in the gap across sub-periods. The gap has persisted since 2008, just as both trade and output growth have been low by historical standards.

Between the mid-1980s and 2016, the share of world exports to developing and transition economies rose from roughly one quarter to one half. South-South trade accounted for more than 50 per cent of this increase, from a base of only one quarter of exports to the South in 1986. Since these data include trade in intermediate goods, these changes partly reflect the expansion of GVCs, which have had significant impacts on the geography of production of manufactured products.

While gross trade data show that developing countries' gross revenues from manufacturing as a share of their total exports increased from about one half in 1995 to two thirds in 2016, this may overestimate the rise of the manufacturing in developing countries' exports, partly because of double-counting problems arising in the context of GVCs.

Trade under hyperglobalization, and the associated expansion of GVCs, is often pitched as widening the opportunities for inclusive growth and shared prosperity. The underlying assumption is that because GVCs allow developing countries to focus on individual links in the chain, their firms can integrate with the world economy "on a shoestring" without facing the large risks (and costs) incurred by investing in all the tasks required for producing the finished product or services.

According to this view, developing countries can thereby more easily reap the benefits of their major comparative advantage: abundant cheap labour. Following this logic, such integration in the global economy should lead to a reduction of inequality in the South as demand for unskilled labour increases.

Reality is, unfortunately, less obliging. Indeed, it is now increasingly acknowledged that trade patterns under hyperglobalization contributed to polarizing domestic income and wealth distribution not only in the North, but also in the South, thus exacerbating domestic economic inequalities. Recently-released data that enable the disaggregation of the value added along GVCs support this view. They suggest that these outcomes are partly the result of the proliferation of GVCs and partly due to the behaviour of lead firms, mostly large TNCs that are today the most significant players in international trade.

TDR-2018 highlighted new evidence that GVCs and the spread of low-productivity assembly lines in export processing zones (EPZs) across the South have not just contributed to suppressing the wages of manufacturing workers in the North, but have also exacerbated the income gap between manufacturing workers and owners of capital in developing countries.

In analysing the rise of export market concentration under hyperglobalization, and the associated increase in the ability of large firms to extract rents, UNCTAD said much as was argued in TDR-2017, the evidence is that increased rents have largely resulted from newer and more intangible barriers to competition, reflected in heightened protection for IPR and abilities to exploit national rules and regulations for profit-shifting and tax-avoidance purposes.

The consequent increase in returns from monopolies generated by IPR as well as a reduction in the relative tax costs of larger companies creates an uneven playing field. The empirical exercises carried out for TDR-2018 suggest that the surge in the profitability of top TNCs - a proxy for the very large firms dominating international trade and finance - together with their growing concentration, has acted as a major force pushing down the global labour income share, thus exacerbating personal income inequality.

In developing countries, the negative impact of international trade on inequality was partly the result of the proliferation of special processing trade regimes and EPZs. Many countries created regimes favouring exporters, with the objective of attracting or preserving investment, production and jobs on their shores. The associated risk, however, is that such regimes merely subsidize labour-intensive assembly work or, more precisely, subsidize the organization of low-cost and low-productivity assembly work by large exporters or foreign TNCs in control of GVCs.

"Evidence accumulating in recent years, particularly from experiences in China, points to the limited benefits of such policies for the broader economy and their negative effects on income distribution," said UNCTAD.

The mixed outcomes of policies to promote processing trade often reflect the strategies of TNCs to capture value in GVCs that are designed on their own terms, with high-value added inputs and protected intellectual property content sold at high prices to processing exporters, with the actual production (fabrication) in developing countries accounting for only a tiny fraction of the value of exported final goods.

The ongoing success of China at bolstering its productive capacities - thus slowly breaking out of the trap of processing trade and moving up the value ladder - has crucially relied on its capacity to claim and use policy space to actively leverage trade through targeted industrial and other policies aiming at raising domestic value added in manufacturing exports. It has also relied on the ability of the Chinese authorities to develop independent financing mechanisms and acquire control over foreign assets, which are being perceived by developed countries as a threat to their own business interests.

To an even larger extent than domestic markets, global exports today are dominated by very large companies, most of them TNCs. Large firms have become the most relevant actors in international trade, although their dominance is hard to quantify precisely, because of data limitations and obstacles to combining country-level trade data with transnational firm-level data.

Nevertheless, recent evidence from aggregated firm-level data on goods exports (excluding the oil sector, as well as services) shows that, within the very restricted circle of exporting firms, the top 1 per cent accounted for 57 per cent of country exports on average in 2014. Moreover, while the share of the top 5 per cent exceeded 80 per cent of country export revenues on average, the top 25 per cent accounted for virtually all country exports. The distribution of exports is thus highly skewed in favour of the largest firms, especially in G20 emerging economies and in developed countries.

In sum, said TDR-2018, the evidence describes a widening gap between a small number of big winners in GVCs and a large collection of participants, both smaller companies and workers, who are being squeezed. Rising export market concentration and intangible barriers to competition, both of which have increased the rents of top TNCs (the largest players in international trade and finance) have exacerbated other impacts of trade on inequality.

Furthermore, as large TNCs have increased their weight in rulemaking at all levels, they have become ever less accountable from a social perspective as well as with respect to environmental concerns.

This is one of the main reasons why trade liberalization under hyperglobalization did not deliver the promised shared prosperity in the North or the South. Rather, it promoted debt-fuelled market concentration dominated by a relatively small number of top TNCs, deepened the financialization of the global economy and vastly increased the influence of transnational capital over national and international policy decisions that affect global production, employment and income distribution.

The belief that international trade can be an "engine for development" and help establish an inclusive growth path, as recently affirmed in the 2030 Agenda for Sustainable Development, is neither new nor unreasonable. Yet, these objectives should not lead to simplistic advocacy of untrammelled free trade.

When UNCTAD was convened for the first time in 1964, policymakers from the South were concerned that their countries were increasingly being marginalized by an international trading system that added to polarizing pressures in the global economy. This was not seen as the ineluctable consequence of market or technological forces but the outcome of institutions, policies and rules, at the national and global levels, that always and everywhere animate and channel these forces in both creative and destructive directions, and could be changed if the balance was seen as unfair and undesirable.

"More than half a century later, and despite myriad changes in the volume, direction and governance of cross-border trade, such concerns have surfaced once again, in advanced economies as well as in developing economies."

It is evident that increased trade under hyperglobalization has created opportunities for structural change, but only in very limited parts of the Global South. Besides the first-tier NIEs and more recently China, only a few countries have managed to leverage trade as a means for mobilizing and reallocating productive factors away from primary commodities towards higher value added manufacturing and service activities, and even then in a sporadic manner. As global trade has decelerated since the GFC, underlying structural weaknesses have been revealed in many countries.

In many cases, the growth spurts that occurred were on the back of unsustainable booms in extractive industries, which in turn further entrenched patterns of hyperspecialization, when what was needed was to move towards more diversified structures. In developing countries that did increase manufactured exports via the offshoring of production, the underlying shift in corporate strategy to minimize costs and maximize the capture of rents has, in combination with the indiscriminate application of neoliberal policies, exacerbated the unequalizing impact of trade.

These outcomes pose several macroeconomic risks and development challenges, which are starkly evident today, said UNCTAD.

The main concern is probably the negative impact that trade under hyperglobalization has had on aggregate demand.

Global financial markets and major transnational financial institutions have, with some justification, become the principal villains in this story but it is now evident that non-financial corporations cannot remain immune from criticism. Facing weaker prospective sales in a context of weak aggregate demand and compounded by the post-crisis turn to austerity, large corporations have cut back on investment, further depressing aggregate demand and contributing to slower trade in recent years.

In an interdependent world characterized by financial instability and low growth, trade risks becoming a zero-sum game. Unilateral actions by governments to reinvigorate their own economy by trade protectionism, currency depreciation or wage restraint risk increasing tensions between countries and ending in a self-defeating spiral. But simple-minded calls for more trade liberalization are no substitute for development strategies either.

It is true that trade has been successfully leveraged for promoting structural change by some countries, most recently China. But without policy interventions to generate structural change, channel profits into productive investment and bring better quality employment, trade can nurture more economic, social and environmental damage, at odds with the Sustainable Development Goals.

The various pieces of evidence examined call for a more evidence-based and pragmatic approach to managing trade as well as to designing trade agreements. Crucially, it is important to address trade with a narrative that departs from unrealistic assumptions, such as full employment, perfect competition, savings-determined investment or constant income distribution, which underpin mainstream computable general equilibrium trade models and the associated policy discourse on trade policy. Instead, the insights of new trade theory that acknowledge the impact of trade on inequality need to be combined with an assessment of the causal relationship between rising inequality, corporate rent-seeking, falling investment and mounting indebtedness.

REVISITING THE 1948 HAVANA CHARTER

According to TDR-2018, as UNCTAD has argued consistently in the past few years (TDRs 2011, 2014, 2017), a new international compact is required - a Global New Deal - that would aim for international economic integration in more democratic, equitable and sustainable forms.

Specifically, with reference to strategies for international trade and the architecture that sustains it, there is a strong case for revisiting the Havana Charter 1948, which emerged, albeit ephemerally, from the original New Deal and still provides important insights for our contemporary concerns.

First of all, the Charter (chap. II, art. 2.1) looked to nestle trade in the appropriate macroeconomic setting, noting that: "the avoidance of unemployment or underemployment, through the achievement and maintenance in each country of useful employment opportunities for those able and willing to work and of a large and steadily growing volume of production and effective demand for goods and services, is not of domestic concern alone, but is also a necessary condition for the achievement of the general purpose ... including the expansion of international trade, and thus for the well-being of all other countries."

This focus on employment has largely been lost in the period of hyperglobalization, and also finds little reflection in the "trade" and "economic cooperation" agreements that have dominated the landscape. Yet it must be revived if the widespread backlash against trade is not to gather more strength, said UNCTAD.

Second, the Charter recognized the links between labour-market conditions, inequality and trade, calling for improvements in wages and working conditions in line with productivity changes. It also sought to prevent "business practices affecting international trade which restrain competition, limit access to markets or foster monopolistic control" (chap. V, art. 46.1) and dedicated an entire chapter to dealing with the problem of restrictive business practices. Revisiting these goals in light of twenty-first century challenges should be a priority.

Third, the Charter insisted that there were multiple development paths to marry local goals with integration into the global economy and that countries must have sufficient policy space to pursue pragmatic experimentation to ensure a harmonious marriage. This need for policy space also brings to the forefront the matter of negotiating trade agreements that have in recent decades privileged the requirements of capital and limited the possibilities for development in line with social priorities.

A decade after the collapse of Lehman Brothers, the global economy has been unable to establish a robust and stable growth path. Instead, weak demand, rising levels of debt and volatile capital flows have left many economies oscillating between incipient growth recoveries and financial instability. At the same time, austerity measures and unchecked corporate rentierism have pushed inequality higher and torn at the social and political fabric.

As the drafters of the Havana Charter knew from experience, tariffs are treacherous instruments for dealing with these problems and if a vicious cycle of retaliation takes hold it will only make matters worse. But trade wars are a symptom not a cause of economic morbidity.

"The tragedy of our times is that just as bolder international cooperation is needed to address those causes, more than three decades of relentless banging of the free trade drum has drowned out the sense of trust, fairness and justice on which such cooperation depends," said UNCTAD.

UNITED STATES PROTECTIONISM AND TRADE WARS

According to TDR-2018, one factor intensifying uncertainty is the protectionist turn in the United States. From January 2018 the United States Administration has announced various measures that have come close to triggering what many are calling a "trade war", beginning with quotas and tariffs on solar panels and washing machine imports from China, and then moving onto steel and aluminium for a wider set of countries, as well as investigating United States car imports.

The tariffs were imposed under a World Trade Organization (WTO) clause relating to imports that threaten national security, though the idea is to curb competition from "cheap metal that is subsidized by foreign countries", which amounts to a "dumping" charge.

Subsequently, further trade sanctions were imposed on China, on the grounds that it was using unfair tactics such as hacking commercial secrets and demanding disclosure of "trade secrets" by United States companies in return for access to the Chinese market.

According to TDR-2018, the impact of such a wave of protectionism is uncertain. It is true that the United States aggregate trade deficit increased by close to 13 per cent to $568 billion in 2017. Of that, around $375 billion was on account of the deficit between China and the United States.

The point, however, is that imposing these unilateral tariffs, is not going to help in reducing these deficits, which reflect macroeconomic imbalances, and things could get even worse with retaliatory action. Moving in this direction would likely disrupt prevailing global value chains around which much of trade is now built.

Such disruption would, in the first instance, affect the profits of multinational operations rather than national output, but with a likely adverse knock-on impact on investment given the heightened level of uncertainty. However, over time it could encourage relocation or "reverse" relocation in some areas in order to jump tariff barriers, thereby partially arresting the process of globalization.

On the other hand, to the extent that it increases government revenues and therefore expenditures in individual nations, it could drive growth based on domestic demand with reduced leakages in the form of imports. So the effect on global growth and its distribution is not easily predicted. But so long as trade continues, which it would since factors other than tariffs drive trade, trade deficits and surpluses would persist.

In sum, said UNCTAD, while unilateral protectionist actions by the United States may or may not help strengthen its domestic producers, they are unlikely to make a significant difference to the size of its external deficit. Moreover, they are likely to introduce disruptions to trade patterns and add to uncertainty, which in the absence of expansionary macroeconomic measures will probably damage world trade.

"They will also have distributional consequences which are likely to weaken growth. The Trump Administration sees its protectionist actions as a way of escaping the long years of relative stagnation. What it may actually get is more of the same," it added. +