Info Service on WTO and Trade Issues (Oct18/07)
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
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
"Trade wars are a symptom of an unbalanced hyperglobalized world,"
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
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
"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
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
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
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
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,"
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
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
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
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
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,"
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
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
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. +