Around the world, more and more people are questioning the merits of trade and investment. Why do you think this is the case?
Trade and Investment liberalization contribute to the well-being of nations, but these gains are not evenly distributed and there may groups of people who lose out because they face increased competition from imports or greater exposure to technological change. If there aren’t effective polices to address the needs of these groups – such as adequate skills programs and income support – they will naturally oppose trade and investment. These questions are not new. They have been with us for decades. What is new is that we are seeing an increase in opposition to trade and investment in major advanced economies that have historically benefited from liberalization efforts and indeed have been the major leaders of such initiatives. The obvious example is the US, where both presidential candidates held positions that were to varying degrees hostile to trade.
There are both cyclical and structural reasons behind this uptick in hostility in advanced economies. The cyclical one is the lingering effects of the global financial crisis and the subsequent recession. Recovery has been slow and has been even slower in its effect on wages. Hostile attitudes to openness in trade and investment usually harden in such times. The structural reasons include the effect of technology, particularly on lower-skilled workers. And because the effects of technology also combine with the emergence of cross-border supply chains, lower skilled workers face multiple sources of pressure. Moreover, empirical evidence suggests that higher skilled and more productive workers command a wage premium a more open an economy is, increasing wage inequality and therefore hostility to trade and investment.
None of these should represent insuperable obstacles to progress in trade and investment. What they show is a lack of suitable policy frameworks that take care of the distributional impacts of trade and investment liberalization. To put it simply, while progress in these areas has increased the size of the pie, not enough attention has been paid to how the slices of the pie have been distributed. By common consent, programs in most advanced countries on trade adjustment and re-skilling are inadequate. This needs to change.
I would also nuance the premise of the question by pointing out that while more people are questioning trade and investment in some of the more advanced industrialized countries, this is not necessarily a global phenomenon. Indeed, the emerging markets, because they depend on trade and investment flows so much for their growth, are more positive on these matters.
The ICC has always stood up for open markets. You yourself are a strong supporter of trade and investment. What would you tell a person on the street why open markets are good?
Open markets contribute to our daily well-being in a number of ways. At a very basic level, they increase choice and quality by stimulating innovation. Many of the products and services we depend on a daily basis depend on trade and investment flows, and cross-border supply chains that emerge as a consequence. This is true of cars and smart phones, of financial services and healthcare. At a broader level, the boost that trade and investment give to productivity via the diffusion of ideas and technology, notably, increases incomes nationally, which is good, through clearly there need to be policies to ensure that everyone benefits.
Finally, at a very broad level, all of the main challenges faced by us collectively depend on trade for their resolution to some extent or another. Addressing climate change, both through emissions reductions and by adapting to unavoidable climate change, require the diffusion of technology and products. It is for that reason that countries have been busy trying to negotiate an agreement on liberalizing trade in environmental goods and services. The links between poverty reduction, trade and investment have long been understood. Finally, there is a large body of empirical evidence that measures the impacts of trade flows in reducing the likelihood of countries going to war with each other.
In many countries we see an increasing income gap. Not everybody has benefitted from globalization. What can we do about it?
The increased income gap follows from the fact that as nations trade more, their more skilled and productive workers earn a premium relative to lower skilled workers. The latter are also exposed to the effect of technology, and compete either explicitly (through migration) or implicitly (through cross-border supply chains) with foreign sources of labour. As noted in response to the first question, the answer does not lie in restricting trade and investment – which would make everyone worse off and do nothing for those losing out – but rather to think more pro-actively about redistributive policies.
These redistributive policies that are needed are wide ranging. They could involve general social safety nets such as ensuring healthcare coverage is not linked to employment. They would also need to ensure labour market mobility and upskilling.
Trade and investment have always been important topics for the G20. However, the track record regarding implementation of G20 commitments is mixed as also the ICC scorecard underlines. What is the reason for this?
The main reasons the ICC G20 Business scorecard provides a downbeat assessment on trade is the slow progress achieved on trade at the multilateral level, as well as at the regional level (witness the uncertain future of the TPP, and stalling negotiations under TTIP). This has been aggravated by persistent backsliding on G-20 commitments made, in the aftermath of the financial crisis to avoid a re-emergence of protectionist measures. Because trade commitments prevent a generalized increase in tariffs, much of this protectionist pressure manifests itself in trade remedies (anti-dumping) and in non-tariff barriers. The latter can be as opaque as their effects can be costly. This is particularly true in a world of cross-border supply chains in which countries increasingly specialize in particular tasks rather than a particular good. The persistence of such barriers is analogous to erecting a barrier in the middle of a factory.
Much of the reason for this back-sliding is to be found in the political pressure emanating from cyclical and structural factors described above. The difficulty is that these responses may bring political capital, but only at the expense of economic prospects over the longer term. A more sound response to dealing with the distributional aspects of trade and investment liberalization is required, and until this happens progress on both is likely to be slow.
On investment, the G20 has made little attempt to address multilateral investment policy coordination, meaning that investment flows are subject to a spaghetti bowl of bilateral and regional agreements on investment that differ in scope and application. The adoption in Hangzhou of the G20 Guiding Principles for Global Investment Policy-Making is an important first step toward bridging unhealthy differentiation among inter-state investment policies, hopefully laying the groundwork for an eventual multilateral framework on investment.
What would you like the German G20 to do regarding trade and investment?
There is a real danger to the global architecture for trade and investment from an increased tendency by politicians to see trade and investment as zero-sum game that justifies beggar-thy-neighbour policies. This is the sort of approach that has brought untold economic hardship in the past. It is therefore essential that the G20 commit itself to maintain openness in trade and investment regimes, and also to the primacy of a rules-based framework for sorting out disputes. The world as a whole would lose out from a system in which larger powers try to coerce each other into cutting deals that ultimately probably benefit only limited political constituencies at home. Because Germany has long benefitted from open markets, and also has strong domestic policies in areas such as skills, it can act as a leader on these issues.