Is Globalization worth saving?

17 October 2016
ITC News
Speech delivered by ITC Executive Director Arancha González
J. Douglas Gibson Lecture 2016
Queens University
Kingston - Canada - 17 October 2016

Thank you for inviting me to deliver the J. Douglas Gibson lecture. It is a great honour to follow in the footsteps of those who have stood here before me.

‘Globalization’ is a term so overused that it can seem devoid of meaning.

But one thing is clear today about cross-border flows of goods, services, capital, people, technology and even ideas: they are more controversial, and more contested, than they have been at any point since the fall of the Berlin Wall in 1989.

In the United States, one candidate vows to tear up trade deals, slap Chinese goods with tariffs, and build a wall on the Mexican border.

At the opposite end of the political spectrum, millions of Americans were thrilled by a very different vision for solving the economic woes of the poor and middle class – albeit a vision that regarded trade deals from NAFTA to the still-unratified Trans Pacific Partnership with similar disdain.

Across the Atlantic, the United Kingdom decided in June to secede from the European Union, as a majority of voters were convinced by calls to ‘take back control’ of migration, trade, and regulatory policies from the supranational institutions in Brussels.

From Finland to France, Denmark to Hungary – even in Germany – Eurosceptic parties are on the rise. What they have in common is their contempt not just for immigrants and refugees, but also for a globalism that they cast in opposition to the nation-state.

Mainstream parties too have become less enthusiastic about trade and investment. You have probably heard about Europe’s political difficulties with finalizing the Comprehensive Economic and Trade Agreement (CETA) with Canada.

A trade deal between Brussels and Japan, which shares many of the EU’s sensitivities on agriculture, may yet happen. But the Transatlantic Trade and Investment Partnership, TTIP, between the EU and the US is not expected to be concluded any time soon.

Back in 1748, Montesquieu promised us that commerce cured ‘the most destructive prejudices’, and that ‘wherever there is commerce… we meet with agreeable manners.’ And for most of the post-1945 era, he was right.

What went wrong?

If we look back to the turn of this century, a backlash against globalization was not difficult to imagine. The World Trade Organization’s Seattle conference had just ended amid chaos in the streets, and North-South discord in the ministerial meeting rooms. Financial crises were reverberating from Thailand to Russia to Argentina.

Few would have guessed then that the arrow now pointed at the heart of the open global order would come not from Asia, Africa, or Latin America, but from within the electorate of the United States.

A billion cases for globalization

I have started to spell out why globalization might need saving. But this talk is supposed to be about whether globalization is worth saving.

I am going to argue that it is, and that the case is so straightforward that it can be summed up in only fifteen words.

Before I tell you what those fifteen words are, however, I want to take a straw poll, by show of hands, on recent trends in global poverty. I will ask you to choose among five options.

So: how many of you think that the share of the global population that lives in extreme poverty has, over the past twenty years, increased by 50% or more? Remember, I’m asking about the share, not the number of people, because the global population is growing. (Pause.)

How many of you think that the proportion has gone up by more than 25%? (Pause.)

That it’s stayed about the same? (Pause.)

How about a 25% decrease in the share of people living in extreme poverty? (Pause.)

And finally, who thinks that there’s been more than a 50% decrease? (Pause.)

The actual figure: a 67% decrease. The share of humans living in extreme poverty has declined by about two-thirds over the past twenty years.

Within my lifetime, extreme poverty was seen as a scourge that would be with us forever. Now it is something that the world’s governments have pledged, through the United Nations Sustainable Development Goals, to end by 2030.

This brings me to my 15-word elevator pitch for why globalization is worth saving: The open global economy has helped lift over a billion people out of extreme poverty.

I will substantiate this argument. And I will also address why something so positive is – at least in some circles – so unpopular.

In doing so, I will focus primarily on trade and investment, for three reasons.

One: trade and investment are subject to an array of legally defined international rules, with important implications for business and domestic policy. By the same token, policy decisions can curb trade in goods and services.

Two: the organization I head, the International Trade Centre, works to expand the reach and the benefits of global commerce to some of the world’s most marginalized countries and communities.

And three: international trade and investment have been central to the fast growth that has reduced poverty sharply across large swathes of the developing world, most spectacularly in China.

But as I do so, I want to emphasize that an essential component of globalisation is technology, which is very much here to stay and which is responsible for an incredible pace of economic and societal change.

Why open global markets matter for poverty reduction

Let’s examine this final point. Think about what developing economies look like: lots of people in low-productivity activities like subsistence farming or petty services and a huge informal sector. A critical part of the development process is what economists call ‘structural transformation’, which is basically about getting people and resources out of subsistence work and into more productive activities.

Trade comes in here because in developing countries, internationally tradable sectors tend to be much more productive than the rest of the economy. As a result, getting people and capital out of non-tradable sectors and into firms dealing in tradable goods and services makes for a more productive economy overall.

Predictably open global markets make it possible for countries to hitch their wagon to the world economy, and use it to drive this structural transformation process. Imagine what would have happened if trading partners slammed the door shut the second influential sections of domestic industry started to get nervous about competition from West Germany, Japan, Korea, or China. First: no growth miracles, and much slower poverty reduction. And second: the money in your pocket would go a lot less far, because everything, from cars to clothes, to phones, would cost substantially more.

Trade agreements, starting with the GATT/WTO system, are fundamentally about keeping markets predictably open. They are about governments setting clear rules of the game, and working together to identify and discipline policies that impose negative externalities on their trading partners.

A Canadian economist, Brian McCaig, has looked at what happened in Vietnam after 2001, when a bilateral trade deal with Washington cut the tariffs its goods faced in the US market. In the three years after the agreement, which paved the way for Vietnam’s accession to the WTO, Vietnamese clothing exports to the US nearly quadrupled. Poverty rates fell twice as fast as in the four years leading up to 2001. Seven million people were lifted out of poverty. A relatively modest number of new export-oriented factory jobs – around 250,000 – stimulated the creation of many other local jobs, with ripples felt as far as higher productivity on farms as they adapted to less labour. That’s how trade can contribute to structural transformation.

Vietnam is hardly alone. A few years ago, Nobel-winning economist Mike Spence’s Commission on Growth and Development looked at countries’ postwar growth record. They found that the countries that had managed to sustain high growth for long periods of time had all made active use of the world economy as a source both of demand and of knowhow. In their phrase, “they imported what the world knew, and exported what it wanted.” Both sides of this equation are important: value-addition and diversification are necessary to sustain growth through the commodity price downturns that are a fact of life, as Canadians know too well.

Trade agreements have helped make trade-led growth possible. United Nations Development Programme research points to a clear positive correlation between countries’ trade performance and their progress on health, education, and reducing inequality.

It is in fact the countries and the communities that have been most marginal in international trade and investment – or connected only as suppliers of raw minerals – that present the most pressing development challenges.

That said, tonight, a lower share of children will go to bed hungry than ever before. Inequality across the global population as a whole is narrowing, and poverty rates have never been lower. And trade, like economic globalization more generally, is part of that story.

Canada has some lessons for the world

I hope that I have started to convince you that globalization is worth saving. I will now to turn to how we might go about saving it.

First, though, I want to talk a little bit about Canada. Not because I want to flatter a Canadian audience (though you all seem very nice). As it turns out, Canada offers more than a few lessons for our discussion.

Think back to the dismal picture of politics in many advanced economies that I drew at the start of this speech. Now think about Canada and Prime Minister Justin Trudeau’s advocacy for the merits of open societies.

To be sure, these beliefs are not universally shared within the country. While many Canadians think that an open hand is the best way to help newcomers integrate, others disagree.

And it is hardly as though Canadians are unthinking cheerleaders for trade agreements. This country has produced some of the most perceptive critics of the rights that NAFTA and similar accords give to private investors to sue governments over regulatory measures.

In the 1988 election, more than half of Canadians voted for parties opposed to a new free trade agreement with the US, though the vagaries of the electoral system meant that Brian Mulroney’s FTA-supporting Conservatives carried the day.

A generation on, however, Canadians know that first deep integration agreement with the US didn’t wipe away the border. Neither did NAFTA. Medicare hasn’t vanished, nor has water been piped across the 49th parallel as Canadians watched helplessly. In fact, surveys suggest that for much of the past two decades, Canadians’ values have diverged in significant ways from those of Americans, despite the greater trade and investment ties.

So why, in this difficult autumn for liberal societies, is economic populism in Canada conspicuous by its relative absence? Bob Wolfe would probably tell you that a stack of PhD theses will be written on this.
My hunch is that a recent lecture at the London School of Economics by Trade Minister Chrystia Freeland contains some instructive hints about the Canadian exception.

In a talk called ‘Growing Trade the Progressive Way’, Freeland first dwelt at length on the importance of reinforcing the purchasing power of the middle class. She then turned to the combination of secure borders and proudly multiculturalist policy that have made Canada almost uniquely welcoming to immigrants.

Only after that did Freeland turn to the nitty-gritty of trade agreements. She talked about steps the government had taken to ensure that CETA did not limit the ability of governments to regulate in the public interest. And she talked about the importance of ensuring that businesses of all sizes are able to benefit from trade agreements, a point I will come back to.

Because Canada has always had to balance its need for access to the giant market next door with the exigencies of national politics, it gained a head start on other countries when it comes to thinking about how to balance trade deals with domestic priorities.

In 1854, even before Confederation, the Elgin-Marcy treaty liberalised trade between British North America and the United States for a range of raw materials. In fact, Washington’s unilateral termination of this treaty helped motivate politicians here to form the Dominion of Canada in 1867. After a decade of failed attempts to negotiate reciprocity with the Americans, Sir John A. MacDonald introduced the high tariff regime called the National Policy.

And, if you thought 1988 was the first Canadian election to turn on a trade agreement, think again. Sir Wilfrid Laurier’s Liberals were thrown out of power in 1911 when voters rejected his proposed mutual tariff-cutting treaty with Washington, fearing it would pave the way for annexation.

The US remained Canada’s biggest trading partner, of course, and the relationship with the US market preoccupied Canadian business and policy elites for decades – as it still does.

In 1949, J. Douglas Gibson, for whom this lecture is named, edited a collection of essays by eminent Canadian economists, called Canada’s Economy in a Changing World. Canada’s relationship with the United States was a major concern for contributors to the book. They proposed options that ranged from discriminatory tariffs against the US – which Gibson rightly observed would violate the principles of the infant GATT system – all the way to a free trade agreement, a customs union, and even full-fledged political union.

Lester Pearson once likened Canada’s position alongside the US to “living with your wife”: “At times it is difficult to live with her. At all times it is impossible to live without her.” He was not kidding. In 2014, Canada’s exports to the US alone amounted to about 20% of GDP.

More and more countries can now understand what the former prime minister meant. Trading partners have become something they, too, cannot live without. And the tensions between external interests and domestic politics are intensifying.

There are two big lessons that I think they can draw from Canada:

The first lesson is that governments have choices about the kind of integration they pursue.
The second lesson is that within the choices they make, governments have considerable scope to pursue domestic policy. They should make the most of this space, and use it to safeguard key national priorities.

Canada has done so, sometimes in pioneering ways: back in the 1950s, when fixed exchange rates were the norm, Canada chose to float its currency against the US dollar, giving itself greater monetary policy flexibility to cushion the effects of cross-border capital flows that it could not realistically control. Floating exchange rates and unrestricted capital movement are standard practice today.

And let’s be absolutely clear: nothing in Canada’s trade obligations has prevented it from maintaining more progressive rates of income tax than the US, allowing it to fund the somewhat larger basket of public services and goods that Canadian voters prefer.

Think global, but act domestically, too

Stagnating incomes for large sections of society in many advanced economies have given rise to growing unease, as people fear declining prospects for themselves and their children.

Much of this has little to do with trade. Ever since the first power looms did the jobs of weavers in the late 18th century, technology has increased productivity but threatened jobs for humans. Automation in recent decades has wiped out millions of relatively low-skilled factory and clerical jobs in developed countries. And now increasingly intelligent robots look like they have the potential to replace entire classes of workers, from truck drivers to lawyers. I am still waiting to see the first referendum against technology!

In the meantime, domestic policy decisions have cut taxes on the wealthy and discouraged unionization, exacerbating inequality and putting downward pressure on wages even in non-tradable sectors.

But trade has also been a factor. Even though economists estimate that technology ate up more than four jobs for every one lost to trade, those factory jobs that lifted millions out of poverty in Vietnam probably did put some mill workers in North Carolina out of work. In tradable sectors, the prospect of offshoring, whether real or not, has weakened labour’s negotiating hand with respect to capital.

The fact is that during the heyday of globalization optimism in the 1990s and early 2000s, political and business elites did not think enough about the distributional consequences of the multilateral and regional trade agreements they were signing. My former boss, WTO Director-General Pascal Lamy, was an early and honourable exception. This happened even though trade theory clearly predicts that market-opening will harm some people even while leaving society as a whole better off.

Inclusivity is now firmly on the agenda, from Davos to the IMF. It demands action both at the level of international trade and on domestic social policy.

International first. A big part of making trade more inclusive, whether in places like Canada or in developing countries, lies in extending the benefits of trade to small and medium-sized enterprises, and to women entrepreneurs. The Canadian government, as I said earlier, has been emphatic about this. In all countries, SMEs are the backbone of the economy, accounting for the vast majority of businesses and jobs. And a large amount of them are women owned enterprises. Firms that trade tend to grow faster, become more productive and pay higher wages. If more SMEs trade, these benefits are spread over a larger section of the labour force.

When negotiating trade agreements, governments should, to the extent possible, prioritize issues that promise to yield broad-based benefits. A lesson from this past year is that political capital for trade deals must be deployed very judiciously.

Reducing fixed costs related to trade by definition yields disproportionate gains for smaller firms. Implementing the WTO Trade Facilitation Agreement would cut trade-related red tape and costs associated with getting goods across borders.

International cooperation to reduce the regulatory burden and costs arising from product standards and other non-tariff measures would also be disproportionately beneficial for SMEs. Recent ITC research shows that increased regulatory burdens associated with product standards and regulations hit SMEs twice as hard as larger firms, in terms of export performance. There is a lot of room for governments, multinationals, and standard-setting organisations to reduce costly duplication without compromising on product quality or public health and safety concerns.

SMEs often struggle to connect to international market opportunities, for want of information, financing, and business networks. Complementary investments on the supply side can play a critical role in enabling them bridge the gap between making trade possible, which is what negotiated agreements do, and making trade happen.

It is why ITC maintains free-to-use trade intelligence tools, shedding light on tariff and non-tariff measures that companies would face in target markets. It is why we help policymakers understand how best to improve the business environment for trade. And it is why we work with companies and trade and investment promotion agencies to help SMEs, especially those in the most marginalized developing economies, enhance their competitiveness and link up to international value chains.

Earlier this year, Ottawa launched a programme called CanExport, which offers financial support for SMEs to conduct market research, visit potential markets, participate in trade fairs, and retool marketing materials for new targets.

Let’s just say this agenda sounds very familiar to us at ITC! We hope it will help Canadian SMEs make inroads in fast-growing new markets in Asia and Africa, and reverse the recent downward trend in the number of Canadian SMEs that export. Our experience in developing countries demonstrates that comparable measures can and have helped SMEs connect to new markets, contributing to employment and income growth.

Now for domestic social policy. To soothe protectionist anger in advanced economies, it is this front that is probably more significant.

As we have seen, technology, policy, and to a lesser extent, trade are all contributing to job and income insecurity. Governments need to respond across the board to address the disruptions and the distributional effects. Much of what is needed are investments in human capital, in education, in skills as well as vocational training to better match people with job opportunities. This area will be key to support citizens to cope with the impact of trade opening but more importantly, to cope with technological change.

Active labour market policies will need to be coupled with measures to soften the blow of unemployment, including, why not, exploring universal basic income, as Canada, Finland and Utrecht in the Netherlands are doing.

Income-related policies such as wage insurance, higher minimum wages, and wage top-ups are other options to consider. Innovation policies and investment in research and development will be crucial. Taxes may need to go up. And while on the issue of taxes, international cooperation to curb corporate tax avoidance might help governments raise revenue.

All of this points to the need to better synchronize domestic policies with trade to ensure greater competitiveness and social progress.

In short, governments need to be prepared to spend money to keep citizens on board with globalization. And they need to spend it intelligently to help citizens progress with globalization.

Political honesty of this kind is brave. And more of it is needed to reinforce the increasingly fragile social license on which open markets rest. Leaders need to be up front with electorates. Trade, like technology, is good for most people, but not everyone, so more market opening needs to come with more redistributive social policy. A retreat behind protectionist barriers cannot bring back manufacturing jobs in any meaningful numbers. In rich countries, it would hurt the purchasing power of the poorest consumers. And in the developing world, it would derail growth and poverty reduction.

In sum, globalization is worth saving. An agenda based on pro-inclusion trade opening, leveraging technological change, more redistribution, and political honesty could help save it. And if you think that this agenda is unrealistic, or expensive, well, consider the costs of a backlash.

Thank you for your attention.