Discussing global trade policy with Robert Koopman

CFO

Mr Robert B. Koopman is the Chief Economist and Director of the Economic Research and Statistics Division at the World Trade Organisation. Prior to this post, he served as the Director of Operations and Chief Operating Officer for the United States International Trade Commission. Bob’s research interests include measuring the economic effects of trade and trade policy changes, measuring global value chains, and the application and validation of large scale economic simulation models. In this exclusive interview he shares his executive insights into the world of global trade policy.

Q: Why is there so much consternation around trade policy?

Trade policy is an important tool that countries use to help manage their commercial relationships with other countries. Trade policy is often a very visible policy set, and one that governments can often change relatively easily as historically many domestic constituents often favoured use of trade policy to manage those relations.
However in an increasingly linked, globalized world where production AND consumption can occur across many borders those policies can now often hurt domestic producers. At the same time many companies, and increasingly specific kinds of jobs, can be affected by these globalization forces.
Put simply, the world has changed.

Historically trade policy negotiations at the multilateral level, or between two countries, often worked to balance exporter interests against import competing firms. But with more and more global production processes the clear distinction between export interests and import competing firms can be harder to discern.
Technology and low cost, much improved transportation now allows firms to fragment their production across the globe. It generally does not make sense to stop the evolution of this kind of technology. But now workers and firms from across the globe can compete with parts of a production process that had historically never faced such competition.

At the same time, and this is very important, the same kind of technological advances that affect economic relations BETWEEN countries are forcing major transformations WITHIN countries.

This has often been described as the great hollowing out of middle skill jobs, jobs that appear to be replaceable with software and advanced technology. Further, that technology increasingly results in manufacturing sectors that require little labour to produce large quantities of high quality goods and services cheaply.

In many ways we have an industrial technology revolution similar to the agricultural technology revolution that allowed fewer and fewer farmers to produce ever greater quantities of food cheaply. This has major disruptive effects on domestic labour markets. The service sector is a growing share of most countries’ GDP, and that is where most employment gains are occurring.

But the transformation of economic activity is being fairly disruptive and occurring at about the same time. In the mid to late 1980s, we saw the Former Centrally Planned Economies of Europe, China, and India move from isolation focused economic development paths, to ones that integrated increasingly into the global economy.
Thus in addition to major technological change, literally hundreds of millions of workers formerly disconnected to the global economy joined it.

This technological transformation and integration of formerly isolated economies and their workers have effects working through the global economic system. In many ways this change has been a very good thing. Global poverty has declined, quality of life for many previously poor people has improved, advanced technology and medicines are more widely available. There has been a burst of global economic convergence almost unprecedented in history.

But these forces have not benefited everyone, everywhere. While global incomes have been converging we have seen incomes within many countries diverge with growing income inequality in developed and developing countries alike, and more recently a slowing of overall economic growth globally.

A series of recent studies by Autor, Dorn, and Hanson have tried to isolate the effect in the United States of two broad forces, technological change and increased imports from China after China joined the WTO. These researchers find that increased imports from China appear to explain about a quarter of the manufacturing job losses in the United States.

Thus 75 percent of the job losses are due to other reasons. Interestingly, the United States did not lower tariffs on goods imported from China, but only guaranteed to not raise them as part of the normal WTO membership benefits. The authors do not ask the question what if China had not joined the WTO? Or what if the US had applied tariffs on imports from China to slow the import increase?

Many economists acknowledge that instead of increased imports from China the US would have imported from other countries, thus not really changing the outcome on employment very much, if at all.

My research has shown that much of the value embedded in US imports from China, particularly in fast growing sectors such as information technology consumer goods, originated in other countries, such as Japan and Korea, as well as value from the US itself.

Going back to trade policy. Trade policy is a visible policy tool, and there is, I think, a tendency of most governments to allocate more blame for economic disruption to trade and other countries than to domestic challenges. A big challenge is sorting out the various effects of these, and other, forces. Sometimes it is just easier to tell your constituents that the fault lies elsewhere. This approach then makes it difficult for countries to come together and reduce trade barriers such as tariffs, and for countries to actually agree on what approaches to global trade policy will actually improve their economic growth.

“Put simple, the world has changed.”

Q: You’ve said there needs be greater coherence between trade policy and domestic policy.Can you please explain that for our readers?

Many of the challenges that countries face seem to involve significant domestic technological change and increased global integration. Trying to stop these forces is not likely to improve the overall economic outcome for most economies.

If your economy is facing faster technological change and rapid changes in business models (you can think of the disruption of e-commerce vs brick and mortar stores), workers are likely to be subjected to more economic uncertainty than they have been used to. Increasing uncertainty affects their ability to consume and invest, and their willingness to support government policy.

Developing domestic policy sets that recognize the rapidly changing domestic economic environment and reduces that uncertainty can allow constituents to consume and invest with greater confidence. A well designed domestic safety net would help address the effects of BOTH domestic and international forces raising that uncertainty. But a well-designed policy is also not necessarily an easy thing to develop, nor to gain political buy-in for. Trade policy tends to be relatively easy to change compared to domestic policy, hence trade policy is often used to try and address issues that need domestic policy approaches
Q: What are the top three challenges to achieving a better global trade environment?

I think the first challenge is weak global economic growth. The second challenge is for governments to recognize that lowering the cost of trading goods, services, and ideas is in their own interest and the interest of their constituents. The third challenge is to increase transparency and certainty for trade and regulatory policies.
Q: What are your immediate fears for the global economy?
We face a complex economic environment where economic growth faces numerous headwinds. We have observed that recovery from the 2008 financial crises has been slow as many economists predicted, developed country growth has been tepid, a number of emerging markets are slowing (China by design, but others due to external factors), and unfortunately, geopolitical risks are high.

Global investment demand remands extraordinarily weak, probably due to heightened uncertainty and views that some economic fundamentals such as demographic and debt trends are unfavourable. Coordinated action on both domestic and international policy fronts could send very important positive signals and help improve investment demand through reduced uncertainty.

Q: How has technological change improved and challenged the world trade environment?

Technological change has dramatically improved the world trading environment. Information technology and improved logistics have significantly reduced costs and improved information flows. In terms of “trade costs” these forces have helped reduce very real and known costs of doing business for many firms, and improved consumer access to a wider variety and better quality of goods. But like all technological trends there are unknown developments that can negatively affect the cost of doing business. The Japanese tsunami illustrated some of the downsides of widely dispersed supply chains that proved a choke point for a number of sectors when the supply chain was disrupted.

Q: You talk about regional trade agreements carrying WTO DNA, has the Trans-Pacific Trade Deal got the capability to achieve the boost in growth the region seeks?

TPP represents an effort by its members to reduce trade costs and barriers both within the traditional WTO agenda and beyond. Reducing those costs and barriers is very likely to spur economic growth, particularly in countries that have high trade barriers that will be reduced, such as Viet Nam.

In countries such as the US and Australia, with trade costs between them already low, the gains will likely be smaller, but still in a period of slow growth, an important source of positive momentum. As countries like Viet Nam lower their barriers and increase transparency this will stimulate both trade and investment from other members, but since Viet Nam is relatively small its impact on US and Australian
exports and FDI is not likely to be big.

In areas that go beyond traditional WTO disciplines there could be bigger effects between the big, open economies. These are hard to measure, and how the agreement is implemented will be very important. Economists and policy makers will watch closely to see if the agreement has big or small impacts. The outcome could prove an important lesson for future trade negotiations.

As someone who has spent much of my career analysing the economic impact of trade agreements I found that many people confuse some of the broader economic forces at play with the specific outcomes of trade agreements. Most economists feel the immediate effects of trade agreements are small but positive, particularly if traditional barriers are already small and if trade flows are small compared to GDP.

Also most analysis can identify sectors of economies that gain and those that lose. Economists like to say that those more immediate gains generally outweigh the losses and that the gains are big enough to compensate the losers and leave the economy better off overall. But any compensation to losers relies on domestic policy, and often there is no explicit domestic policy to make such compensation.

Many observers question whether these immediate effects occur. They are often hard to see because usually when countries sign free trade agreements many other economic forces and policies are playing out. We economists try hard to isolate the effects or at least sort them out from other factors.

Economists disagree on many things but there is a pretty strong consensus on the positive effects of trade agreements, but also probably consternation that policy makers seem to overlook the fact that there are winners and losers.

But there appear to be much bigger effects over the longer term compared to the immediate effects. Trade agreements tend to increase the exchange of knowhow and capabilities, and many of the traded goods tend to be higher quality capital/ investment or intermediate goods that help boost overall productivity growth.
These effects are often hard to discern from other factors affecting economic growth, but we have some natural experiments in the global economy where economies have decided to isolate themselves from global integration and we observe that they have much slower economic growth compared to those that integrate.

“We face a complex economic environment where economic growth faces numerous headwings.”

Q: The pattern of trade negotiations centred on global trade rounds has been supplanted since the failure of the Doha Round by a large number of regional and countryto-country trade deals…

A. How big a change is this?

Trade negotiations have always proceeded on multiple fronts. Multilateral agreements often get significant attention, and economists believe they have much bigger impacts as more countries are affected and the rules apply to nearly everyone improving transparency and consistency. But history is replete with country-to-country trade deals, many of which have then served as potential models for multilateral negotiations.

B. How is it working out?

The last two major WTO ministerials, Bali and Nairobi, resulted in important agreements. The Trade Facilitation Agreement at Bali, which aims at reducing trade costs through improved border procedures, is likely to have a big impact on global trade, and particularly for developing countries, if implemented quickly. The recent Nairobi agreement to end export subsidies is an important move forward, bringing discipline to an area that was a historic source of trade distortions.

C. What have we learned from what’s happened?

Negotiating complex commercial agreements and new rules is hard. But reducing barriers and increasing transparency and certainty for cross border commerce is an important source of economic growth and improving the quality of life for citizens across the globe. But one needs coherence between international and domestic policies to ensure support for these kinds of gains.
Q: Globalilsation indicators seem to have plateaued starting around the year 2000…

A. Why do you think this is?

We believe that cyclical and structural factors have contributed. Cyclical in that the global business cycle combined with increased integration from previously relatively isolated economies led to a rise in those indicators that was probably unsustainable in the long term. There was likely to be a move to them returning to more normal levels.

They perhaps have even overcorrected given the recent end of the Commodity Super cycle. Structural in that China is purposefully changing its growth model from investment and manufacturing led to consumption and services led. New technologies have affected the volume of energy trade. Further many companies may have found they overextended their fragmented supply chains beyond the optimal level.

B. And should we worry about it?

Yes, we should. We should aim to reduce trade costs so that trade can flow as freely as possible. Factors may contribute to trade growing much faster than GDP or at more normal historical levels at about 1.4 times GDP growth. Right now trade in volume terms is growing at about the same level as GDP, and in value terms, due to weak commodity prices, slower than GDP.

C. Have we simply wrung all of the easy gains out of global trade reform?

No, many non-traditional, behind the border, measures remain that are likely more costly than necessary to achieve their domestic policy objectives. Many countries remain well below the global production frontier and trade and FDI can help bring them to the frontier. Many countries still have high traditional barriers and remain relatively isolated from the global economy. There remains much to do and significant gains to be had.

 

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