Trade in an era of growing populism

2 November 2017
ITC News
Speech delivered by ITC Executive Director Arancha González at Keio University, Tokyo, 2 November 2017

It is always a pleasure to be back in Tokyo, and a great honour to be here at Keio University.

I understand that this university and its founder, Yukichi Fukuzawa, played an important role in the development of modern Japan’s culture of public speaking and debate. That sets a high bar for me today: I hope I’ll live up to it!

To help us think about the threat that populism poses to world trade and the open global economy today, I want to sketch out how we got to where we are today. I’ll also talk about where my organization, the International Trade Centre, fits in.

The fact is that there is a strange dichotomy in how we look at trade these days. We have a lot to be satisfied with in the role trade has played in our collective prosperity. And yet skepticism abounds, especially among countries that were once great proponents of free and open trade. Skepticism about trade, about trade agreements, and about the multilateral trading system itself.

But first, why do we have cause to be satisfied? Well, because by most objective measures of human development, things have never been better. According to the World Bank, 2016 was the first time in recorded history that less than 10% of the global population was below the $1.90 a day poverty threshold. As recently as 1981, over 4 out of 10 of us were living in extreme poverty.

We humans are today healthier, more educated, and less likely to die in childbirth or childhood than any previous generation. And these improvements have happened incredibly fast: it took the newly industrialised United Kingdom a full century after the 1820s to achieve comparable reductions in poverty.

The primary cause of this sharp decrease in deprivation has been rapid economic growth, especially in populous developing countries like China, India, and Brazil. And while much of the pickup in growth had to do with the adoption of market-oriented domestic policies, the open global economy was an essential factor in making rapid growth possible.

What we now think of as the modern trade-led growth model was in fact more or less invented by Japan during its postwar economic renaissance.

In the 1960s, Japanese exports grew at an annual average of nearly 17%, as the country diversified out of silk and cotton textiles and other light manufactures into cars and electronics. Japanese companies acquired a reputation for pioneering innovations in assembly line management, together with a commitment to continuous upgrading. The ‘Made in Japan’ brand evolved from signifying low-cost imports to an assurance of high quality and attention to detail.

The power of Japan’s example helped inspire a number of developing countries to try to trade their way out of poverty. For many of them, it worked. By allowing countries to ‘import what the world knows and export what it wants’ open markets make it possible for them to supercharge the ‘structural transformation’ at the centre of the development process.

Countries across Asia, from Korea to Singapore to Thailand, followed by China, and later still, India, have been able to use international demand to pull people and capital out of subsistence agriculture and into firms dealing in more productive tradable goods and services. Growth skyrocketed. Poverty rates plummeted.

I’m going to come back to this point, but I want you to remember it: international rules played an important part in keeping markets predictably open. After Japan joined the General Agreement on Tariffs and Trade in 1955, it had access on clear, progressively more open terms, to the world’s biggest economies. Japanese businesses could commit money to investing in factories, secure in the knowledge that their products would not be shut out of export markets.

We know that Japan’s growing export prowess made competitors nervous, in the United States and elsewhere. So-called ‘voluntary export restraints’ did become an issue several years later. But by and large, markets remained open to Japan’s exports, and the door didn’t slam shut on its growth miracle.

So far, at least, international markets have remained broadly and predictably open. In 1995, the GATT became the World Trade Organization, expanding the coverage of global trade rules.

Together with falling transport and communication costs, open markets have enabled a revolution in the nature of industrial production. Instead of producing goods start-to-finish in a single factory, companies can now locate each step of the manufacturing process wherever in the world production costs are most advantageous. And we have moved very much to trade in components rather than trade in final finished goods.

Back in the 1970s, Japanese companies helped lay the foundation for today’s ‘Factory Asia’ when they invested in low-cost transistor radio production in Hong Kong for example. Today, multi-country value chains connect American, Japanese, and Korean companies to factories near Ho Chi Minh City and office parks in Bangalore.

Open markets for goods and services, embedded in the rules-based multilateral order, are key enablers of rapid ‘catch up’ growth.

That doesn’t mean that all countries or sections of the population have been part of this trade-led growth story. Many developing countries, and even some groups in developed countries, have been left on the margins. Far from catching up, they have fallen further behind in relative terms, leading them to be described as the bottom billion. Even in faster-growing developing countries, many people and communities at the bottom of the pyramid – disproportionately women – have not shared fully in rising prosperity.

The International Trade Centre - the trade capacity building arm of the WTO and the United Nations - seeks to enable businesses in these countries and communities to connect to international markets. We focus on micro, small and medium-sized enterprises, or MSMEs, because they employ most people. We partner with governments to help them improve the policy environment. We work with national and regional trade and investment promotion agencies to help them get better at enabling MSMEs to do business abroad. And we work directly with MSMEs themselves, from silk weavers in Cambodia and Bangladeshi tech companies to soybean producers in Togo, to help them meet export market requirements and connect to foreign buyers.

Other things ITC does include creating online tools to help businesses understand market trends and trade barriers, while conducting original research and analysis on MSME competitiveness. In all of our work we place special emphasis on working with businesses run by women and young people. This is because when they are able to take advantage of international trade, the socioeconomic benefits are especially high and long-lasting.

We’ve seen how trade is useful for developing countries. But what about countries that are already caught up? Does trade matter for countries that are already at the technological frontier?

It does, even though the effects might not always appear to be be quite as visible. Trade is a tool for greater productivity, because it allows increased specialization and scale. Thanks to open trade, the money in our pockets goes further. Without the international value chain that made it, your phone would not exist, or if it did, would cost a lot more.

So, where are we today? The open global economy has enabled the fastest reduction in worldwide poverty ever. It has increased your purchasing power and mine, widened consumer choice, and made new inventions both possible and affordable. And increasingly we are now trading in ideas and creating an ecosystem for the jobs and skills of tomorrow.

But as I said at the start, skepticism abounds, particularly across the North Atlantic epicenter of the financial crisis of 2008-09.

Brexit was many things, but at one level it represents a decision by the United Kingdom to leave the world’s largest common market. The current US President’s winning campaign was openly critical of rules-based trade and its effects on American workers.

To be fair, we have also seen political momentum in favour of trade – a sort of backlash to the backlash. The European Union’s trade agreement with Japan is one example of this. So are efforts by the remaining members of the Trans-Pacific Partnership to take that agreement forward, even without Washington.

In Asia, where support for trade has remained generally higher, talks continue on a Regional Comprehensive Economic Partnership that would link the ten ASEAN countries with Japan, China, India, Korea, and Australia. Even in Asia, it’s worth noting, the governments most enthusiastic about trade tend to run current account surpluses: we all seem to be more eager to export than to import. This can’t add up at the global level, unless we as a planet manage to open up a lucrative export trade with some unknown distant planet!
Nevertheless, the populist threat to trade is real, especially on both sides of the Atlantic, and must be reckoned with by governments and businesses everywhere.

Trade is by its very nature a positive-sum activity: I trade with you, and you with me, because we each think we are left better off by the transaction. But populists believe in winners and losers, not in positive-sum exchanges.
While we have not seen widespread recourse to protectionist measures, rhetoric alone is starting to affect trade and investment patterns. Imagine you’re a company about to sign contracts to invest in Country X. If the trade agreement guaranteeing its market access to neighboring countries Y and Z looks like it might get torn up, you might think twice before signing.

Why is anti-trade politics proving so popular? A big part of the answer is that there have been not one but two great exclusions from globalization’s benefits.

The first exclusion is the one I just talked about: the poor countries and communities that have languished on the margins of the world economy.

The second exclusion - as I hinted at earlier - occurred not in the world’s poorest countries, but in its richest. In advanced economies some people and communities have not shared in the gains and opportunities from trade. Because of their collective electoral clout, and the power of the countries they are from, it is this second exclusion that is behind the uncertainty over the future of the open global economy.

The fact is that for the past generation in several advanced economies, political leaders failed to acknowledge that trade would hurt some workers, even while enriching countries overall. A few of those factory jobs in Vietnam probably did come at the expense of workers in northern England or France. Instead of using tax, labour, and education policies to remedy the negative effects, governments too often did the opposite. Instead of equipping displaced workers with skills and safety nets, the effect of policy was to heighten their exposure to income and job insecurity.

The result: some groups have borne the worst of the pain of economic adjustment, while the biggest gains have accrued to a fortunate few. What I call the 99:1 ratio. They are now voting their discontent. Even though technological change has caused many more job losses, trade has become a scapegoat, since it is easier to blame foreigners than to argue against better machines.

Unfortunately both for the populists and their supporters, protectionism cannot deliver on their promises. Slow productivity growth is already a matter of concern in most advanced economies. Closing markets would make this problem worse. It would become harder, not easier, to respond to voters’ aspirations while paying the rising health and pension bills of ageing societies. Meanwhile, for developing countries, closed markets mean diminished development possibilities.

Protectionism is an intellectually lazy response to the challenges of globalisation and technological change. Closing ourselves off to the world can work no better for us today than it did for the Tokugawa bakufu.

Looking ahead, Japan has several lessons to offer the rest of the world on both types of exclusion.

Japan has worked for decades to bring excluded countries into the international economic mainstream. In order to share its domestic institutional expertise in fostering technological learning and greater productivity, Japan set up the Asian Productivity Organization in Manila in 1961. And in 1978, just as China began to pursue its market reforms, the Japan Productivity Centre opened a China Office. There is scope today for Japanese companies to work with the government and with international agencies like ITC to foster outward-oriented production and value-addition in Africa and elsewhere.

On inclusive growth within advanced economies, Japan also has lessons to offer.

This might sound surprising to some of you. As you prepare to enter the job market, you are undoubtedly aware of the gap in prospects for people who get good permanent jobs right out of university, and those stuck with a career-long succession of short-term jobs. While as Keio graduates you will probably do just fine, these are real challenges requiring real policy responses.

We at ITC have a selfish interest in more mid-career hiring by Japanese firms: it would make it easier for young Japanese people who are passionate about MSMEs and trade-led development to come work with us for a while!
But coming back to Japan’s lessons for advanced economies, compare this country’s growth and inclusion performance to other countries at similar levels of development. Even post-1990, per capita output has held up fairly well.

Japan stands out for its relatively equal distribution of income. The fruits of Japan’s postwar economic miracle were very widely shared, and income inequality remains relatively low. Importantly, this relative equality is achieved mainly through market wages, and not, as in Canada and parts of Europe, through taxes and transfers. Profits at small and medium-sized businesses are at record highs. In big, publicly-listed companies, Japanese CEOs earn about 67 times more than rank-and-file workers. The ratio in the US is around 347 to 1. Japanese corporations pay a higher share of total tax revenue than their counterparts in many other large advanced economies.

Greater gender equality in the economy would bolster growth here and just about everywhere else. And while the women in this room might raise their eyebrows at the idea of Japan as a policy leader on gender issues, the fact is that it has made very real progress in recent years.

According to OECD data, Japan’s female labour participation rate rose three percentage points between 2011 and 2014, helping to offset the effects of the country’s fast-ageing workforce. There is much room to improve: Japanese women are still vastly underrepresented at the managerial level. The culture of long hours of overtime does not favour parents of either gender. But there are signs of political willingness to improve: after his recent re-election, one of Prime Minister Abe’s first promises was free pre-school.

Inclusion at home and inclusion abroad are two ways to combat trade populism. Both require time.

In the meantime, Japan can continue to be an active advocate for open trade, and as importantly, for institutionalized, rules-based cooperation on trade relations. At the World Trade Organization ministerial conference in Buenos Aires this December, for instance, Japan could support the adoption of a proposed declaration on trade and women’s economic empowerment. At the regional and bilateral level, it could work to ensure that trade agreements are complemented with targeted support to ensure that MSMEs are able to tap into new market opportunities.

Both in Japan and around the world, growth and job creation finally seem to be picking up in earnest. Protectionism is one of the biggest potential threats to the economy, and to international cooperation on other issues, such as climate change. We can’t afford to let multilateralism and global governance fail.