3 The WTO can ... stimulate economic growth and employment
The relationship between trade and jobs is complex. It is true that trade can create jobs, but it is equally true that
competition from imports can put producers under pressure and lead them
to lay off workers.
The impact of competition from foreign producers varies across firms in a sector, across sectors of the economy as well as across countries. So does the impact of new trade opportunities.
Achieving higher living standards, full employment and sustainable development is the aim of the WTO’s member governments, as expressed in the WTO’s founding Marrakesh Agreement. The means for achieving this include the “substantial reduction of tariffs and other obstacles to trade”.
This process of trade opening takes place in the framework of WTO rules, which take into account the fact that some countries are better equipped than others to open their markets widely. Some countries, for instance, have a more advanced legal, regulatory and physical infrastructure than others. Generally speaking,
it is easier for developed countries to open their markets than for many developing countries.
As a result, average tariffs (import duties) in developed countries, at least for manufactured goods, are much lower than in developing countries — although this is not true in every case or for every product.
Open economies tend to grow faster and more steadily than closed economies and economic growth is an important factor in job creation. Profitable companies tend to hire more workers than those posting a loss. Trade can also be a catalyst for greater efficiency and productivity. This is because companies
have access to a wider range of high-quality, affordable inputs. They also have access to technology and know-how they could not obtain in a closed economy. Access to technology and quality inputs can boost innovation and creativity in the workplace.
Moreover, competition in the marketplace can be a powerful stimulus to companies seeking new ways of making things better and more cheaply. An infusion of new ideas from other countries can make companies more productive. So can enhanced access to export markets. But doing things more productively often means doing more with less and that can mean using fewer workers. Inevitably, this means that some workers in some industries will lose their jobs.
This is part of what economists call “churn” and what the Austrian-American economist Joseph Schumpeter termed “creative destruction”. It has been part of economic life for centuries and it can bring pain. But history
tells us that countries seeking to block incoming goods, services or ideas often find their economies stagnating.
It is important to acknowledge that while trade holds real benefits for most people, most of the time — consumers as well as producers — there are people who are hurt by trade. Recognizing that trade can be a threat is important socially and politically. Workers who have lost their jobs need support and polls strongly suggest that people are far more likely to favour trade opening if they know that such support will be available.
This is why governments need to maintain effective social programmes that can protect workers who lose their jobs through trade and help train them to find new jobs.
In Sub-Saharan Africa, those
working in export-oriented
companies collect a 34% wage
premium over the average wage.
In 1975, 60% of the people in Asia
lived in absolute poverty. Today,
that number is less than 20%.
The 23 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany and West Germany (until 1991), Iceland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, UK, US.
Source: Newfarmer, R. and Sztajerowska M. (2012), “Trade and Employment in a Fast-Changing World”, in OECD (2012), Policy Priorities for International Trade and Jobs, Douglas Lippoldt (ed.), OECD, Paris
But if the link between trade and jobs is complex, one thing is straightforward: protectionism does not protect jobs, or does so at a very high cost which can adversely impact employment elsewhere in an economy. This is particularly true today in our ever more interconnected global economy.
The proliferation of global value chains means that production and sourcing now take place across many frontiers. Products are rarely made in a single country but rather are assembled using parts and services from many countries.
Participation in these chains would be seriously undermined if the goods and services needed to make these products were rendered more expensive or harder to find.
Moreover, there are many jobs in all countries that are directly related to imports, particularly in industries like retail, shipping, express delivery and logistics. The adage that exports are good and imports are bad has always been a dubious one and today this is more clear-cut than ever before.
In the information and communications technology sector, developing countries such as Malaysia, Mauritius and Egypt have benefited enormously from opening their markets, achieving high levels of employment in this area. Developed countries such as Finland, Sweden and Ireland have followed a similar approach, leading to economic growth and new job opportunities.
While trade can put some jobs under threat, most economists believe technological advances contribute far more than trade to job loss, particularly for low-skill jobs. When the automobile was invented, it was bad news for blacksmiths and horse breeders. The electric light was problematic for candle makers. But of course these innovations created millions of jobs in the automobile and lighting sectors.
The OECD has charted the impact of imports on the jobless rate in 23 countries. While the correlation between the rate of import penetration and unemployment may have suggested a linkage between the two during the period 1970-90, the last 20 years have been a different story. Beginning in 1990, these lines diverged sharply and today any linkage between the two has faded.
Governments need to maintain effective social programmes to protect workers who lose their jobs.
Jobs that are tied to trade tend to pay better than those that are not. In Western Europe, those working in export-oriented companies collect a 10% -20% wage premium over the average wage. In the United States, the premium is 6% and in Sub-Saharan Africa the figure is 34% .
Overall, wages in economies that are open are higher than in closed economies. Workers in the manufacturing sector in open economies earn three to nine times more than those in closed economies.
But as with most things, the picture is neither all black nor all white. Trade promotes greater productivity, and higher productivity leads to larger salaries. But there is also strong evidence suggesting that wages in some sectors in advanced countries are suppressed when those sectors are exposed to competition from lower- wage countries. There is research that shows,
as well, that in some cases trade can contribute to greater income inequality in some sectors.
As we said at the beginning, the relationship between trade and employment is complex and the impact of trade on employment cannot be assessed in a vacuum. Many other factors are tied to sustainable job creation. In some cases, rapid opening of trade may be the wrong policy. Without adequate physical, institutional and legal infrastructure, the benefits of more open trade can be lost.
And yet greater openness has helped many countries in reducing poverty. In Asia today, less than 20% of the people live in absolute poverty. In 1975, it was 60% . In Africa today, for the first time, fewer than half the people live in such poverty. Trade has been an important component in the development and poverty alleviation in both regions.
Trade is an important tool and we know that without it, growth, job creation and development are more difficult to attain. But trade is not a panacea.