Ministra
Profesores
Señoras y señores
I am delighted to be here this evening on the occasion of the
inauguration of the Academic Year at the Barcelona Graduate School of
Economics. You will not be surprised if I say that the WTO follows with
great interest a lot of what you do here.
Let me share a small secret with you. Our economists were largely
inspired by your work on the relationship between trade and growth in
preparing our 2008 World Trade Report on “Trade in a Globalizing World”.
The Report looks into the role of trade in an interconnected world and
the challenges facing governments to ensure it results in greater
prosperity for its citizens. You may want to check the number of quotes
of your faculty in this now famous publication!
It will come as no surprise to you, therefore, that I shall focus my
remarks this evening on international trade, its economic underpinning
and its political realities. Two sides of the same coin.
I have recently read that the financial crisis and the economic downturn
have become such central preoccupations of policymakers and the public
at large that there is no room to worry about trade any more. This kind
of compartmentalization, I think, reflects a narrow view — one that
disregards the inseparability of all aspects of international economic
governance.
We already see how financial difficulties are squeezing trade
opportunities as trade financing dries up in respect of far too many
potential trade transactions. We can also see the lay-offs of thousands
of workers in factories in China as demand in developed countries
contracts.
Managing these linkages effectively and devising multi-faceted solutions
is at the centre of today’s policy challenges, truly testing the
capacity of governments to cooperate effectively with one another, as we
saw at this weekend's leaders summit in Washington. And it is therefore
no surprise that in addition to a stimulus package, and laying the
foundations for better global financial governance, leaders also sent a
powerful message on trade and the importance of rapidly concluding the
WTO Doha Round.
Gains from trade: old and new theories
The case for open trade has a long and rich intellectual history. David
Ricardo's intuition that the gains from international trade are rooted
in the law of comparative advantage has provided the backbone for 200
years of trade theory and practice.
Traditional theories taught us that countries — like people — gain from
trade because they are different, and that it is relative rather than
absolute differences in production costs that make trade profitable.
This last insight provides the vital intellectual underpinning for the
argument that all countries can gain from trade — you only have to be
more competitive in relative, and not absolute, terms across production
activities to gain from trade. Understanding this reality has been
indispensable to the efforts of many over the last six decades and more
to build a more open and inclusive multilateral trading system.
David Ricardo linked the comparative advantage of countries to
technological differences. Later theorists, such as Heckscher and Ohlin,
emphasized differences in factor endowments — such as labour, land and
capital — as the driving force of comparative advantage and gains from
trade. These differences in emphasis embody no contradiction. They
merely emphasize the rich opportunities offered by diversity.
Notwithstanding the robustness and continued relevance of traditional
propositions that explain the advantages of trade, theory has continued
to move on, and we have seen important innovations in quite recent
times. For instance, from around the 1980s onwards trade analysts
focused on exchanges of products within the same industries.
Intra-industry trade is largely explained by economies of scale and
associated market imperfections, and it accounts for a big part of
increased prosperity and enriched choice, especially in high-income
countries. I might also add that Paul Krugman’s contribution to this
thinking, often referred to as the new trade theory, was part of what
earned him this year’s Nobel Prize.
Even more recently, new data sets with information on production and
trade revealed considerable differences among firms, challenging the
standard assumption that we could treat producers as identical and think
in terms of ‘the representative firm’. The theoretical formulations
resulting from these new insights demonstrate that opening up to trade
does not just offer new opportunities to specialize productively. It
also raises the average level of productivity of domestic industries.
These insights have been dubbed the “new new” trade theories — surely
evidence that economists' ability to give names to their theories does
not match their intellectual achievements!
Another challenge to traditional trade theories has arisen on account of
the international fragmentation of production processes resulting from
the break-up of supply chains — a phenomenon that has accelerated in
recent times. Off-shoring, or trade in tasks, whether in goods or in
services, is in reality a new application of the traditional comparative
advantages. It has been made possible by a powerful combination of new
technology in information, communication and transport, and increasingly
open trade policies.
This rapid journey through the history of trade theory is a useful
reminder of the diverse sources of gains from trade, including increased
efficiency, the realization of economies of scale, greater product
variety and higher productivity.
But trade theory, just like trade, is not much use as an end in itself.
Theory is useful if it informs policy and trade is useful if it enhances
the human condition. And on both these counts, realism and intellectual
honesty require that we consider the costs and the politics associated
with trade. If the beginning and end of the story was that trade was
unconditionally beneficial to all and that the more we had of it the
better, then governments would surely embrace it unilaterally and
without question. And there would certainly be no need for the WTO
Agreement to manage international trade relations!
The costs and politics of trade
As far back as Ricardo, we have understood that trade creates winners
and losers. It affects the distribution of income within societies. For
example, traditional theories predict that when industrialized countries
import labour-intensive goods from emerging economies that are abundant
in low-skill workers, the result is lower demand and therefore lower
wages for low-skill workers in the industrialized world.
More generally, Paul Samuelson reminded us in an important article
written in 2004 — using a standard Ricardian framework — that
productivity growth in one country can undermine the export success of
another country, thus reducing income in the latter. This argument, and
certain variants of it, have spurred renewed interest in the evolution
of inequalities in industrialized countries and the role of trade in
this evolution.
While the recent literature appears to have converged to the view that
other forces — most prominently technological change — have been rather
important in changing income distribution, there is no doubt that trade
can contribute to rising wage inequality. This does not, however, offer
an argument for protection, or for turning our backs on openness.
Rather, it makes a powerful case for attending to the social tensions
arising from inequality, be this through public provision of basic
services, better education and training opportunities or fiscal reform.
A second source of costs is the inevitable structural adjustment
associated with trade opening. Some sectors, firms or individuals gain
from trade, while others have to adjust into alternative activities, if
they can, in the face of new competitive realities. Moreover, trade — especially that associated with off-shoring
— can increase uncertainty.
This has no doubt further raised concerns about the virtues of
globalization in general and trade in particular.
On the other hand, countries that miss out on international production
opportunities risk being marginalized from globalization. Firms'
decisions to off-shore are strongly influenced by the quality of the
institutional framework, the costs of setting up a business and the
quality of infrastructure. Not addressing these issues is likely to
limit the participation of low-income countries in production networks
despite their advantage in terms of factor prices. Being left out is
surely much worse than trying to manage change and localized losses
against a background of generalized gains.
It is clear that the politics of trade have to be properly managed if
societal gains are to be realized. Anthony Downs, in his theory of
democracy, shows that political competition will lead politicians to
propose and enact the policy preferred by the voter with median policy
preferences. The application of this theory to trade policy suggests
that increasing inequality will be associated with an increase in
opposition to trade and, ultimately, with more restrictive trade
policies. Greater inequality will lead to increased calls for
protectionism.
A second political issue concerns a ‘collective action’ problem. The
gains from trade opening tend to be distributed widely within societies
and individual gains from trade opening may be relatively small. But the
losses from trade reform tend to hit relatively small groups, and are
often heavily concentrated. The losers from greater trade opening have a
higher incentive to lobby against trade reforms than the winners. This
may slow down or reverse the process, even though overall gains exceed
overall losses.
A third issue relates to uncertainty. Voters tend to prefer the status
quo — that is, they will vote against trade reform — as they may not
know in advance whether they will be among the winners or losers from
reform. The fragmentation of production implied by off-shoring
intensifies uncertainty and public reticence to embrace change that is
beneficial overall.
My final point touches upon domestic policies in an economically
integrating world. Today the economy is more and more global, but
politics is still local. This discrepancy may lead national governments
to choose domestic-oriented policies, which reduce the likelihood of
further economic integration at a global level. But globalization is
moving international interdependence to a level never seen before. And
this process creates new and stronger forms of policy considerations
that cross national borders, be it in the area of social choice,
environmental standards, financial market regulation, or elsewhere.
There is, therefore, a need for more and better global rules. But there
is also need for domestic policies which are coherent and complementary
to the global ones.
As I mentioned during my recent visit to Berkeley University, I am
convinced that restoring the confidence of Americans in trade requires
ensuring that the right health and pension systems are in place through
domestic tax and spending policies. Equally, boosting domestic
consumption in China, which today is limited by its high saving rate,
will also necessitate greater spending in social policies in areas such
as health or education.
Conclusions
The policy challenge I have outlined this evening is that of balancing
the significant economic — not to mention socio-political — advantages
of international engagement through trade with social justice and a
perceived sense of legitimacy. This is not a new challenge, it is just a
more intense and pressing one.
After 60 years of multilateral trade cooperation in a dramatically
changing world, the case for an open trading system is as strong as
ever. But as technology improves and intensifies global interdependence,
national policymakers and the global community are confronted with an
increasingly pressing need to demonstrate imagination, leadership and a
willingness to face up to new demands.
For national policymakers in the industrialized world, disregard for
rising public concern about some aspects of globalization would threaten
to undermine the legitimacy of governments and imperil social support,
as would neglect of the gains from trade. The answer to this tension
lies in a balance between open markets and complementary domestic
policies, along with international initiatives that manage the risks
arising from globalization.
As for the global community, integrated economic markets need good legal
and political institutions. Without these institutions, markets lack the
basic regulatory framework to function properly. Our changing global
realities, punctuated dramatically by the current economic crisis, call
for a re-think of many aspects of international governance.
I have dwelled somewhat on the nexus between theory and the practical
policy challenges facing governments precisely because I believe that
institutions such as Barcelona Graduate School of Economics have a vital
role to play in maintaining strong links between conceptually
disciplined thought and the challenges of every-day decision-making. I
look forward to developing these exchanges with the Barcelona GSE in the
future.
Thank you very much for your attention.
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