PARADOXES OF GLOBAL TRADE

Outline Three Key Questions: Has Globalization been good for Growth Has Globalization Reduced Inequality? Are there still substantial barriers to Trade and Investment?

Globalization, Growth and Inequality Anti-Globalizers: For developing countries recent period of globalization and liberalization worse than earlier period with more protection. Inequality is rising everywhere as well. Pro-Globalizers: For developing countries recent period of globalization and liberalization is better than earlier period. World is becoming less unequal. They Are Both Right!

Is the World Flat? Yes: Transportation costs have declined, Communications have improved and linked the world. Global markets are integrated. No. Distance matters, Borders matter. They are both right!

Trade and Growth: Miracles

Miracles (cont)

Debacles

Miracles

Debacles

Debacles continued

Debacles

The Global System: 2000 View A New Economy based on Information technology and finance 2000 View: Globalization good for Industrial countries but inadequate for development in Africa and Latin America (besides China and India). WTO Response: Doha Development Agenda: Growth through higher farm prices. Cut subsidies and reduce agricultural barriers in developed countries

A real change from the past!

Developing Countries Just Keep Growing

Correlation between trade and growth need not imply causation! Economists try to unravel the relationships, and some do find evidence of trade causing growth. And there are good reasons. (Comparative advantage, scale economies, inducements to innovate) But problem is that others also find strong (and even more compelling evidence of an association between “high-quality” institutions and both trade and growth. As paper co-authored by Rodrik notes “ Institutions Rule” So trade plays a key role, but domestic institutions and policies are vital as well. Indeed high quality institutions play an important role in promoting both trade and growth Some obviously: Customs administration, Regulations, transportation, Others less obviously, Corruption, business environment, quality of the rule of law.

US Share in World GDP :1980 to 2007

Divergence: Expected to continue! IMF October 2009

Growth: How Widespread ? 1960s and 1970s: 33 Miracles “per capita growth > 3.0 percent: total pop 357 million. 14 Debacles 69 million (loss of incomes) 1980s and 1990s 26 Miracles pop: 2.1 billion. 65 debacles pop 621 million. 2000's: Widespread Growth

Trade and Growth: What explains the association Links between growth and trade. Key role of investment-equipment and imported inputs require imports. To pay for imports you must export. Links between exports and imports. To export you must import. Export promotion leads to import promotion. E.G. Free Trade Zones. Converse is true too: A tax on imports is a tax on exports.

Growth and Inequality: Global versus National Perspectives. Growth: Over the past two decades growth has become more concentrated nationally but more people have been affected. Inequality: The emergence of the middle class in India and China may increase inequality in these countries but actually decrease inequality in the world as a whole.

Inequality in 59 Developing Countries (late 80's to 2000)

Growth Incidence in China

But imagine there’s no country! World income inequality is falling. Mean Logarithmic Deviation; From Xavier Sal-i-Martin

Explanation When a poor person becomes “rich” in India or China it could increase inequality in those countries but reduce inequality in the world because in global terms it’s a poor person entering the global lower middle class.

Poverty Reduction:

III: Barriers to Trade & Investment (1): "The World Is Flat" Transportation costs have fallen. Communications costs have plummeted. The combination of common software and the internet create new opportunities for trade and investment. Policies have liberalized trade and investment. Everything has become tradable. The Indian Challenge.

C) Is the World Flat?

The world is not flat—there are big hills separating even the liberalized countries—prices are not equalized Source: Bradford and Lawrence, 2004

Distance Really Matters ! Disdier and Head summarize 78 studies with 1052 observations from 1870 to 1999 mean impact is (median (.850) Implies if distance doubles trade declines by 89% And it has risen over time! < s s s 0.941

Distance Matters Beyond Transportation Costs Pecuniary Costs Transportation. Communication. Non-Pecuniary Costs Information: Search and Deliberation. Time. Risk and Uncertainty. Requires ordering in advance, holding inventories etc.

And Borders Matter!

Why do Borders matter? Tariffs and quotas. Customs. Regulations. Permits. Currencies Legal systems. Language. Culture. Habit

Policy Implications Trade depends on more than trade barriers. Trade Facilitation is important: One stop shopping for permits. Rapid processing of goods. Investments in infrastructure.

Conclusions. Strong evidence of positive association between trade and growth. Inequality rising within many countries but falling globally. The world is not flat! (So potential for more gains, but challenges remain)

Prospects Developed/Developing contrast. China/India as center of global growth. Impacts on commodity prices. The challenge of development: diffusion of best practices and lots of room below the frontier

Conclusion: Keys for Growth Macroeconomic: Fiscal discipline to ensure competitive exchange rates. Microeconomic policies to improve policies and institutions. Export success in diversified activities

The Crisis and the Future of the Trading System

Major Concern: Global Imbalances Big Questions: Were borrowers solvent? Was US spending beyond its means? Could lenders accumulate? Could the world add $ claims on US? Worry: Dollar Crash!

The Critical Weakness: Made in the USA Not the lending or borrowing but the intermediaries. Financial Markets in the United States! Thought by Many to be one the great strengths of the US. Global Savings Glut Created a Permissive Environment But Not Sufficient. The lenders wanted lower risk and higher yields and the financial system manufactured these. A pigs ear was turned into a silk purse! Turning BS into AAA

The debacle The financing of US housing Housing prices started to fall and exposed questionable practices Sub-Prime Mortgages issue to unqualified borrowers. Loans put into securities. Securities divided into tranches. Risk was mispriced using mathematical models in custom derivatives that few understood. In particular the difference between uncertainty and risk Interdependence and system risk was not recognized – perhaps due to moral hazard. Activities escaped regulation: Banks created structural investment vehicles off their books. AIG sold insurance through credit default swaps!

Why Did No-one Stop It? Ideology of Free Markets: Plausible success and profitability. Things were going well. Bankers and financiers were getting rich, poor people were getting loans and houses, and consumers were more wealthy. Incentives were misaligned: Ratings Agencies were earning fees. Securitization allowed originate and distribute. Wall Street Had Political Clout.

Globalization of the Crisis No Country Spared. Some direct Bank linkages and instability. But others: Commodity Prices Fall: Producer earnings fall. Financial Flows: Deficit countries exposed as flows reverse, flight to safety. Trade Links. Exports and Trade Plummets.

Trade flows plummeting

Global Financial Crisis.

Faster than the Great Depression!

Response to Shock Capital flows dry up. Commodity prices plunge. Trade Flows falling faster than great depression. Almost no country is spared; Interdependence proven!

Will Mistakes of 30s be repeated? Fiscal Policy. Monetary Policy and Financial System Rescues. International Cooperation. Smoot-Hawley.

Government Responses G20: April 2009 we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010;

Did They Keep Their Promise? WTO and World Bank track how well countries are keeping to their pledges. The World Bank found that despite the pledge as of March 2009, 17 of the 20 G20 countries had actually taken actions that inhibit trade. Most of these may not have violated the letter of international trade law but they all do constrain trade

Bad News: Loopholes that matter in the WTO Difference between applied and bound rates for tariffs and subsidies. Some countries –Russia – not even a member. Government Procurement Agreement is plurilateral. So buy America provisions can be applied to developing countries. And developing countries, especially China, don’t have to adhere in the first place – and this is happening. Many subsidies are not per se illegal but also require evidence (and sometimes cases) to show injury.

Good News About Trading System Widespread intellectual understanding about the dangers of protectionism. Almost every leader has pledged to avoid it. An established system based on enforced rules is in effect. Some may still break them but at least there are clear disciplines that are in place. A here regional agreements also help to impose disciplines. In general the danger is more a slow murky erosion of the system.

WTO Response. Track and Publicize. Conclude Doha Round.

Global Trading System Doha: Can it be done? Some good signs. India, US, A more valuable agreement.

WTO Future. Can the WTO Continue with “Single Undertakings?” Or Would it be Better Served with a Variable Geometry? Will Regionalism undermine the Trading System? Does the Crisis Reduce the Relevance of the WTO? Does the crisis mark the end of the era of globalization?