Growth, jobs, development and better international relations: how trade and the multilateral trading system help

Some facts:

• Since 1948, world trade has consistently grown faster than world output.
  
  
• Trade in goods has grown by an average 6 per cent a year in real terms, whereas world merchandise output has increased by 3.9 per cent a year.
  
  
• In 1998, world merchandise exports were worth over five trillion dollars ($5,235 billion). In volume or real terms, that represents an 18-fold increase over 1948. Within that total, exports of manufactures were 43 times larger than 50 years earlier. Over the same period, world output grew eight-fold, and world production of manufactures ten-fold.
  
  
• Although world population has more than doubled, reaching six billion this year, exports per capita are eight times as high in real terms as in 1948.
  
  
• All countries are now far more dependent on trade with one another than they were. More than a quarter of national output of goods and services in 1998 was sold abroad, against just 8 per cent in 1950. In the United States, a continental market in its own right, exports now account for 11.3 per cent, against 5 per cent in 1950. US regional figures can be much higher: the share of the state of Washington in total US merchandise exports is about three times higher than its share in US output.
  
  
• Evidence from studies shows that economies embracing open trade and investment policies have done better on average than more closed economies.

World trade and output, 1948–98
Selected Indicators

						Average annual change %
	1948	1950	1973	1990	1998	1948 –73	1973 –98	1948 –98	1990 –98
World merchandise exports
Billion current $	58	61	579	3,438	5,235	9.7	9.2	9.4	5.4
Billion constant 1990$	304	376	1,797	3,438	5,683	7.4	4.7	6.0	6.5
Exports per capita, 1990$	123	149	466	651	951	5.5	2.9	4.2	4.9
World exports of manufactures
Billion current $	22	23	348	2,390	3,995	11.7	10.3	11.0	6.6
Billion constant 1990$	93	112	955	2,390	4,015	9.8	5.9	7.8	6.7
Exports per capita, 1990$	38	44	244	454	672	7.8	4.1	5.9	5.1
World output (Indices, 1990=100)
Commodity output	17	19	65	100	116	5.5	2.4	3.9	1.9
Manufacturing output	11	13	60	100	117	7.1	2.7	4.9	2.0
GDP (Billion, 1990$)	3,935	4,285	13,408	22,490	27,615	5.0	2.9	4.0	2.6
GDP per capita (1990$)	1,591	1,700	3,420	4,271	4,623	3.1	1.2	2.2	1.0
GDP (current $, market rate)	…	…	4,908	22,490	29,236	…	7.4	…	3.3
Trade-output ratio
Exports of goods and services, to GDP, at constant 1987 prices	…	8.0	14.9	19.7	26.4	…	…	…	…
World population (million)	2,473	2,521	3,920	5,266	5,973	1.9	1.7	1.8	1.6

Source: WTO, with historic data from IMF, UN, World Bank and GATT

This greater interdependence allows countries to specialize in areas where they are competitive, providing opportunities for their working population to put their skills and talents to the best use, and providing their consumers with the widest choice of goods and services at the best possible prices.

In some aspects, however, openness and interdependence can bring a sense of discomfort. Competition from foreign imports, and changes in export markets, demand an extra effort of adjustment, even beyond the constant and sometimes painful adjustments needed to meet domestic competition, technological advances and changing consumer tastes. Economic difficulties in one part of the world can affect exports and jobs in other countries.

But the difficulties are far outweighed by the gains from trade, and the evidence is strong that countries, developed and developing, that are most open to trade also benefit the most.

The gains from exporting are obvious enough: better jobs and higher earnings, and bigger markets that allow greater efficiency, spread costs and achieve greater profitability. No wonder everyone wants other countries to lower their trade barriers.

But in fact, economists agree that the greatest gains go to the country that slashes its own barriers. Readiness to open up to foreign suppliers of consumer goods and of inputs to production improves choice as well as competition in price and services offered. Protection that gives special favours to one sector or another of the economy distorts the way a country uses its productive resources. Removal or reduction of distortions allows resources to be used more efficiently.

And the payments made for imports are not lost: directly or indirectly, they come back. The additional purchasing power put in foreign pockets is used to buy other countries’ goods and services, to meet debt obligations, to invest abroad, or to save.

Exports and imports: we gain from both 

The gains are not just economic. Trade helps to make the world a safer and better place, by reducing poverty, and creating shared interests in stable international relations.

And trade leads to better jobs. Because open trade encourages countries to specialize in producing the goods and services for which they are best suited, jobs in export industries tend to be those with the best prospects.

It is no coincidence, for example, that the three fastest growing occupations in the United States today are database administrators, computer engineers and system analysts — all involved in information technology, an industry in which the United States is leader in world trade. One third of all new US jobs are export-related, and pay in those jobs tends to be above average. For young people, trade generates some of the best job opportunities around.

Imports play a vital role in creating opportunities and improving economic prospects. In the United States, for example, imports support at least 10 million jobs. Counting US distributors of foreign products, one in four Americans has a job that is closely linked to international trade.

Imports provide an incentive to innovate, to improve product quality and to be more efficient. Imports of capital goods and raw materials make industry more competitive. Imports also help to lower inflation and increase consumer choice. They make wages go further.

Trade and the developing countries 

Most developed countries have long been convinced of the gains from trade. They started cutting their trade barriers immediately after World War II. They now have generally low levels of import duties, and few quantitative restrictions on imports, although they have been slow to dismantle protection and subsidies for agriculture and for some declining industries, such as textiles and clothing, especially when these involve large numbers of workers.

Many developing countries and some developed countries, however, initially followed a different path in their trade policies, and have come late to trade liberalization. They put their faith in policies of import substitution, keeping imports to a minimum in the hope that this would encourage the growth of their own production capacity. Much effort, in particular, went into building up supposedly basic industries such as steel plants.

Overall, the results were disappointing. The favoured industries, handicapped by national markets that were too small and by other factors linked to their isolation, were not often successful. The diversion of resources to them, and the frequently high cost and low quality of their output raised the input costs of other more efficient sectors, distorted the national economy and discouraged ventures that could otherwise have flourished. Meanwhile, they failed to develop competitive export industries, and continued to rely on selling raw materials which faced shrinking markets and declining prices in developed countries.

In the late 1970s and 1980s an increasing number of these developing countries changed course. They adopted more market-oriented policies, reducing trade barriers, setting realistic exchange rates and often also welcoming foreign direct investment as a source of both finance and know-how. The results were striking. During the period 1970–89, 15 developing countries that had already made such changes before 1970 achieved per capita growth rates averaging almost 4.5 per cent a year, nearly double the rate achieved by the developed countries of OECD. Seventy-four countries that kept to the old policies for some or all of the period averaged annual growth of less than 1 per cent.

Some of the successful countries hit trouble in 1997–98, following the financial crisis in Asia. Three of them — Indonesia, Malaysia and Thailand — had been star performers, whose economies, export structure and per capita incomes had been transformed, with soaring exports of manufactures that greatly reduced their previous dependence on commodity exports.

In Indonesia, much the poorest of the three, the proportion of the population living in extreme poverty fell over 25 years from 70 per cent to 10 per cent. The share of undernourished people decreased from 26 per cent in 1979–81 to 6 per cent in 1995–97.

These countries, along with others such as Rep of Korea, have been hard hit, not least with a serious human crisis. They would have been in still greater trouble if their trading partners had not kept markets (particularly the booming US market) open to their exports. And they are recovering.

Of the world’s 25 largest trading countries, a third are now developing countries. Taken together, developing countries now account for about a quarter of world trade, compared with a fifth just 12 years ago. Their share of trade in manufactures has doubled, to 20 per cent. Two of them, Mexico and Rep of Korea, are now even members of the “developed-country” organization, the OECD.

More importantly, trade has been a crucial element in doubling the incomes of 1.5 billion people in 10 developing countries over the past 25 years. But there is a long way still to go. Three billion people live on less than $2 a day.

Most worrying of all is the position of the world’s 48 poorest nations, the countries classified by the United Nations as least developed. With 10.5 per cent of the world’s population, they account for one-half of 1 per cent of world trade, and this tiny share is still shrinking.

Many of these countries are saddled with enormous debts, lack infrastructure and are starved of investment. Most of their citizens still live on subsistence agriculture. The failure to begin liberalizing world trade in agriculture at an earlier stage gravely handicapped the ability of many of these countries to expand their exports.

In sharp contrast to the developed world, and to the experience of the most successful developing countries, the already low incomes in many least-developed countries, especially in sub-Saharan Africa, have fallen substantially over the past 20 years.

While shocking enough in terms of present living standards, this trend is also ominous for the future: an informal rule of thumb (cited by the World Bank) tells us that rapid reduction in poverty demands annual growth in per capita income of at least 3 per cent.

The desperate situation of these countries is a reproach and challenge to the rest of the world. Given the proven effectiveness of trade in accelerating the growth of national and personal incomes, the challenge is one to which the world trading community in particular must, and indeed could easily, respond.

As noted above, the exports of the least-developed countries account for 0.5 per cent of world trade — hardly a magnitude that would cause significant impact were these exports to be accorded free access to the world’s markets.

Access to foreign markets is important for all countries, including the least-developed, but other factors can sometimes be even more important. We should not lose sight of this. Human and physical capital formation, capacity-building, infrastructure development, sound macroeconomic policy and good governance all play a vital role.

Globalization: challenge or threat? 

The growth in world trade, and in our dependence on it, is part of the phenomenon of globalization: the increasing integration of the world economy.

Another aspect of globalization is the huge increase in world investment flows. Much of this investment is directly trade-related: it goes into export industries, or into infrastructure that helps trade. In 1998, foreign direct investment (FDI) reached $650 billion, seven times its level in real terms in the 1970s, and although 1998 was, so far, the peak year, flows are still running high. More than half of the total is going to developing countries, and is helping to build up their productive capacity and competitiveness.

Although the largest flows are going to developed countries, and to big developing countries such as China and Brazil, the far smaller amounts of FDI going to some other developing countries, such as Bolivia, Ghana, Lesotho and Peru, actually represent a bigger proportionate boost to their national output than FDI flows to OECD countries.

A further contributor to globalization is the spread of technology and improved communications, typified by soaring growth of the Internet and mobile telephony. Another is the huge expansion of air transport services, and the resulting movement of people between countries. All these developments are forcing the pace of economic and social change worldwide.

“Globalization”, President Clinton told WTO ministers in Geneva last year, “is not a policy choice — it is a fact”.

Not everyone welcomes that fact. Many feel insecure and worried in the face of such changes. They see the benefits of economic growth spread very unevenly, both between and within countries.

The richest fifth of the world’s people have 74 times the share in world income of the poorest fifth. Even in many wealthy countries, while the incomes of those in managerial and professional jobs have risen sharply, those of ordinary working people have increased much less, or not at all. The gains from globalization are not obvious when your job is at risk; still less, if you are actually unemployed.

As WTO Director-General Mike Moore puts it, increasing numbers of people “feel excluded, forgotten and angry, locked out and waiting for a promised train that may never arrive. They see globalization as a threat, the enemy, the reason for all their woes. A central policy challenge for governments is to make the prosperity that flows from globalization accessible to people.”

Part of that challenge, he warns, is international: “Governments must act cooperatively in the trade, investment and financial spheres to secure maximum benefits from international specialization, while at the same time leaving the necessary space to address the fallout from change that affects particular groups.”

In the sphere of trade, that cooperation will inevitably centre on what governments can agree in Seattle to do together in the coming years as participants in the multilateral trading system, the system embodied in the World Trade Organization.

How the WTO fits in 

The World Trade Organization (WTO) is still very young. Born on 1 January 1995, it is not yet five years old.

But the WTO is the direct result of a half century of international cooperation that has led to successive agreements, each building on what went before, and each freely entered into by all its member governments.

Today, the WTO has 135 member governments. Their countries, with a combined population of about 4 billion — 66 per cent of the world total — account for over 90 per cent of world trade.

Over 30 more countries, whose populations together account for a further 30 per cent of the world total, are knocking at the door: when they join, virtually all of world trade and all but 4 per cent of the world’s peoples will be within the multilateral trading system.

The origins of the GATT/WTO lie in the experience of the 1930s, and in the enlightened response of statesmen to that experience at the end of World War II.

During the 1930s, in the economic and social disaster of the Great Depression, countries turned inwards, and provoked a descending spiral of declining output and trade. In trade policy, they resorted to extreme protectionism, raising tariffs and other trade barriers to levels that choked off imports, and setting up discriminatory arrangements that favoured some countries and excluded others.

After the war, which the misery and dislocation of the Great Depression had helped to bring about, it was clear that a secure political future could not be built without establishing greater economic security too.

Part of the effort to find better instruments of international economic cooperation bore fruit at the Bretton Woods conference of 1944, with the International Monetary Fund and World Bank. For trade, the search took longer. A fully-developed answer was found only with the birth of the WTO. But much was achieved quite quickly, on the basis of two key insights.

The first insight was that, in trade policy, the road to economic recovery and growth lay in progress towards open markets and liberalized trade.

The second was that trade would not grow unless traders themselves could count on a degree of stability and predictability in the system, and that the best way of achieving this was to develop a mutually agreed system of rules, binding on all members and enforceable through dispute settlement. Central among these rules, and holding the system together, should be the rule of non-discrimination, to prevent the exclusionary deals and preferential blocs that had poisoned international relations in the 1930s, and had at the same time reduced trade’s efficiency in fostering economic growth.

Together, these insights have shaped the multilateral trading system, and been fundamental to its success. The fact that the number of countries that have chosen to be members of the system has risen from 23 in 1948 to 135 today, and that 32 more countries including China and the Russian Federation want to join, shows that governments see no alternative approach to their trade relations that could serve them anything like so well.

From 1948 to 1994, the multilateral trading system took the form of the GATT — the General Agreement on Tariffs and Trade.

The GATT was in some ways an unsatisfactory instrument, a provisional and makeshift arrangement pressed into service because the International Trade Organization, the permanent organization that was meant to be the trade counterpart to the IMF and World Bank, was stillborn. Its arrangements for settling disputes were ineffective if governments chose to disregard them, and its coverage did not go beyond trade in goods. Nevertheless, much was achieved.

Eight negotiating “rounds” under the GATT, each involving more countries than the last, resulted in dramatic reductions in tariffs on industrial goods. Average import duties among industrialized countries were cut progressively from high double-digit levels to less than 4 per cent.

Most non-tariff border restrictions were abandoned. The trade rules included in the original GATT agreement of 1947 were developed and elaborated in the light of experience, so that market-access gains achieved through tariff cuts could not be cancelled out by trade barriers and distortions introduced by subsidies, discriminatory technical standards and unreasonable regulations and procedures.

There were also setbacks, especially in the 1960s and 1970s. Proliferation of bilateral measures to block developing-country exports of textiles and clothing was halted only at the cost of accepting a multilateral arrangement that gave existing restrictions legitimacy.

Further “grey area” restrictions, not permitted by any GATT rules, affected trade in products of other industries under competitive pressure, including iron and steel, automobiles and consumer electronics. Efforts to open up trade in agriculture were largely unsuccessful. Agreements reached to allow positive discrimination (“special and differential treatment” ) in favour of developing countries had only limited effects.

By far the largest, longest and most productive round of GATT negotiations was the eighth, the Uruguay Round of 1986–94.

In some respects the Uruguay Round was just more — though much more, particularly because this time developing countries joined in fully — of the same efforts made in earlier rounds. Tariffs on industrialized products were reduced; defences against non-tariff barriers were strengthened.

But the Uruguay Round also reversed earlier failures. Member governments agreed to phase out restrictions on textiles and clothing and to ban “grey-area” measures. They made a start on a long-term effort to reform trade in agricultural products.

In addition, members negotiated a brand new set of rules, together with initial market-opening measures, for trade in services, a dynamic area of world trade they had previously left untouched. Another new agreement set out agreed rules on minimum protection to be given to intellectual property through patents, copyright and measures against counterfeiting.

The whole package of trade liberalization and rules was firmly tied together by putting it under the responsibility of the new World Trade Organization. In many ways, the WTO resembled the old GATT, particularly in its rule of working by consensus agreement among the member governments, none of whom could be bound by new obligations without their full consent.

Unlike the GATT, however, it was placed on a firm legal footing, and equipped with more effective arrangements for settling disputes.

With the entry into force of the WTO in January 1995, the multilateral trading system at last had adequate institutional arrangements, and a comprehensive set of agreed rules. In creating the WTO, its member governments had secured a more solid basis for their joint efforts to support world trade as an instrument for growth, better jobs, development and more harmonious international relations.

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