””

By Invitation

Global trade takes a beating

As protectionist sentiments gain ground, countries are losing sight of how trade flows have transformed the world for the better

In America and Britain, inward-looking protectionist policies draw growing support. With that, an era of globalisation may be drawing to a close, akin to the shift that took place at the start of the 20th century when World War I ended a time of open trade, and protectionist policies came to the fore during the Great Depression of the 1930s.

PROTECTIONIST SENTIMENT

United States Republican Party presidential candidate Donald Trump has attacked the proposals for trade and investment liberalisation in the Trans-Pacific Partnership (TPP) signed by 12 states. He is also against current negotiations between the US and European Union for the Transatlantic Trade and Investment Partnership (TTIP).

After a strong challenge by Senator Bernie Sanders in the Democratic primaries, the party's presidential candidate, Mrs Hillary Clinton, has been forced to disavow her support for the TPP in its current form. She has also hinted that she will not back the TTIP.

Votes are at stake, with strong reactions in the Rust Belt of America's mid-West against the loss of manufacturing jobs. That has outweighed the benefits to America's services sector, especially in tech-savvy Silicon Valley, Manhattan's finance sector and those cities that are home to American companies with global value chains that have enjoyed rapid growth in recent years.

This "push-back" was also seen in the Brexit vote in June. With concerns in Britain over immigration trumping the desire to retain access to the European single market, Britain looks set for a hard Brexit. The growing uneasiness over immigration and the resettlement of refugees is also having a toxic impact on politics within the EU. German Chancellor Angela Merkel has been forced to retreat from her open-door policy towards refugees.


ST ILLUSTRATION : MIEL

Even in Singapore, which has benefited from open markets as an entrepot, is an immigrant society and has an ageing population with a declining birth rate, there is resentment of new immigrants and foreign workers. They are seen as competing for jobs, causing overcrowding and reducing opportunities for locals. This has forced a cutback in the employment of foreigners and the setting of more modest targets for GDP growth. Surprisingly, for an economy whose trade is three times its GDP and which has benefited from market-opening measures, at campaign rallies during the general election last year, the opposition Singapore Democratic Party rejected the TPP and criticised free-trade agreements, such as the India-Singapore Comprehensive Economic Cooperation Agreement (CECA), for leading to an influx of foreign workers, a view frequently articulated on social media.

EAST ASIA'S TRANSFORMATION

Over the past 30 years, merchandise and services trade has increased by about 7 per cent annually on average, with the growth in services playing a larger role. World trade increased twice as fast as world production. Particularly significant was the shift away from autarchic policies by China, India and many developing countries, which moved away from policies of the 1970s and 1980s promoting self-sufficiency, protection of infant industries, nationalisation of the industrial and commodities sectors and the promotion of state-owned enterprises.

According to the World Trade Organisation (WTO), exports of developing countries have grown fastest since the 1990s. While developing countries accounted for 34 per cent of world exports in 1980, by last year, their share had risen to 43 per cent. China's share of world exports grew from 1 per cent in 1980 to 14 per cent last year. The US, Japan and the EU recorded declining shares of world exports. An interesting and often overlooked aspect is that trade between developing countries has increased significantly. The share of such "South-South" trade increased from 8 per cent in 1980 to almost 25 per cent last year.

The rapid economic growth in this period also reflected the impact of international supply chains. The importance of logistics and efficient supply chains meant that companies such as Hong Kong's Li & Fung, which managed the entire supply chain for global brands, earned US$4 for every US$1 earned by original equipment manufacturers. Similarly, branded luxury goods companies in the US and the EU increased their earnings by outsourcing production to manufacturers in a range of emerging economies.

In East Asia, the rise of distributed manufacturing resulted in the growth of electronics as well as the textiles and garments industries throughout the region.

These industries were the key to the initial economic transformation of the region. Beginning with simple "screwdriver" electronics assembly operations, manufacturers in the region upgraded their skills and capabilities over time, with simpler assembly operations moving to other parts of the region. While domestic manufacturers were significant, especially in South Korea and Taiwan, openness to foreign ownership facilitated the entry of multinational corporations (MNCs) into the region.

In textile and garment manufacturing, the existence of quotas in the US, the EU and other developed countries up to the beginning of 2005 resulted in Singapore, Taiwan and Hong Kong retaining significant manufacturing capabilities, even though their labour costs had risen significantly. WTO agreements protected their exporters from competition by lower-cost producers such as Bangladesh, Vietnam and Indonesia that were latecomers to manufacturing textiles and clothing for export.

At the same time, East Asian exports were supported by the rapid upgrading of infrastructure. World-class airports, ports and highways were constructed. State-of-the-art telecommuni- cations and IT infrastructure were built while schools and universities aspired to reach the standards set by leading institutions in their fields. As latecomers, they benefited from the innovations that had taken place in the developed countries.

By contrast, the US faced the challenge of creaky legacy infrastructure in a period where there was a push for lower taxes and smaller government, leaving the state and federal authorities with a reduced capacity to imple- ment major infrastructure projects.

East Asia has been a major beneficiary of open global markets. Today, China has emerged as the world's leading exporter and has the capability to participate in the entire manufacturing value chain, from simple assembly tasks to sophisticated skills and research-based innovative solutions. The newly industrialised economies of South Korea, Taiwan, Hong Kong and Singapore have been followed by Malaysia, Thailand, Vietnam and Indonesia. After being a laggard for three decades, the Philippine economy has performed well in recent years and recorded the highest growth rate of 6.9 per cent in Asean in the first six months of this year.

'PUSH BACK' IN U.S., EUROPE

Such trends, which have been replicated in Mexico, Brazil and elsewhere in developing countries, have resulted in the "push back" seen in the American election and the British referendum. The losers in international trade are upset that high-paying jobs requiring minimal skills have now moved to distant shores where the same product can be manufactured at a much lower cost. Mr Trump has won support in the Rust Belt by claiming that he will "Make America Great Again" by raising tariffs and bringing back manufacturing to the American heartland.

It has also had an impact on European politics. Chancellor Merkel has stressed that the EU accounts for 7 per cent of global population, 25 per cent of world production and 50 per cent of social services. Such levels of social services are not sustainable. But democratically elected governments in the EU face pressures for the continued provision of social services as well as demands for increased benefits such as free university tuition and inflation-linked pensions in countries where such benefits are not provided.

The risk of rising trade protectionism has increased. The failure of the Doha Round has highlighted the impasse in global trade negotiations. Trade negotiators emphasise that agreements can only be reached through such negotiating rounds where "nothing is agreed, until everything is agreed". With the admission of Afghanistan in July this year, there are now 164 WTO members. Many have no significant role in international trade. With every member having a veto, it is impossible to reach agreement.

The problem is compounded by developing countries that see the WTO as a social welfare agency. As for developed countries, many push the envelope in seeking "behind the border" agreements on issues like the environment, labour standards, intellectual property, competition policy and state-owned enterprises, which have an impact on domestic governance and are contested by developing countries.

That has led to a flight to bilateral and regional preferential trading arrangements, often mistakenly termed "free trade agreements". However, these agreements have generally had minimal impact in expanding trade and have often been dominated by political considerations.

While the TPP is intrusive, it has the potential to increase regional trade, although it is unlikely that the US will obtain ratification by its Senate before the inauguration of the new president.

By contrast, the current negotiations among the 10 members of Asean and six partner countries (Australia, New Zealand, China, Japan, South Korea and India) for a Regional Comprehensive Economic Partnership (RCEP) have stalled. RCEP is likely to codify existing agreements reached on a bilateral basis but it is unlikely to achieve major breakthroughs in expanding regional trade.

Like the TPP, it runs the risk of being politically unpopular as the mood turns away from open markets and freer trade.

The writer is a distinguished fellow at the S. Rajaratnam School of International Studies, Nanyang Technological University.

A version of this article appeared in the print edition of The Straits Times on October 18, 2016, with the headline 'Global trade takes a beating'. Print Edition | Subscribe