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Globalisation Pressures: Trade Restrictions as Solution?

This discussion by Professor L. Alan Winters from University of Sussex explores the impact of globalisation on trade restrictions, manufacturing's role in exports and productivity, effects of labour market regulations, productivity drivers, Mexican firms and Chinese exports, competition effects, and the resistance to trade policies. The presentation touches on industrial policy, externalities, subsidies, practical challenges, and distribution of growth increments.

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Globalisation Pressures: Trade Restrictions as Solution?

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  1. Pressures from globalisation: are trade restrictions the answer? L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN

  2. Manufacturing does matter for exports and productivity LAC-EU ECONOMIC FORUM 2013

  3. Manufacturing Share of Economy Share % GDP pc PPP, 1990 $10K PPP, 1990 LAC-EU ECONOMIC FORUM 2013

  4. Share of Manuf. in Economy LAC-EU ECONOMIC FORUM 2013

  5. Share of Manufactures in Merch. Exports LAC-EU ECONOMIC FORUM 2013

  6. Competition: Global • E.g. Wood and Mayer (2009) • China implied a 8-15% increase in world unskilled labour abundance • Everyone else’s comparative advantage changed • Their Manufactures/primaries ratios fell by: • 7-10% for output • 10-15% for exports LAC-EU ECONOMIC FORUM 2013

  7. Who is affected? • Consumers (Broda & Romalis) • Inflation for lowest 10% 6ppt lower than average • Correlates with imports from China • Producers: • Competition for incumbents – static and dynamic responses • Intermediates for all (incl. potential) • Outsourcing and value chains (new opportunities) • Aggregate output (growth) LAC-EU ECONOMIC FORUM 2013

  8. Conditional Effects • Heterogeneity of country studies • Chang, Kaltani & Loayza (2009, JDE) • Interactions of openness with • Weaker effects in poorer countries; middle-income countries strongly positive effects LAC-EU ECONOMIC FORUM 2013

  9. Effects of Labour Market Regulation(Bolaky-Freund; JDE 2008)Less regulated half More regulated half LAC-EU ECONOMIC FORUM 2013

  10. Productivity • Selectivity • Competitive pressure • Imported inputs (Amiti & Koenings (2007, AER) and AER P&P 2009 • Learning by Exporting (Fernandes & Isgut, 2005, WB; Blalock & Gertler, 2004, JDE) • Learning to Export (Iacovone, 2009, WB) LAC-EU ECONOMIC FORUM 2013

  11. Mexican Firms – Chinese Exports(Iacovone, Rauch and Winters – JIE 2013) • Firm sales and existence • Huge growth of competition 1994-2004 • Impact via both domestic and export markets • Effects strong but highly unequal • At plant…as well as at product level • Larger (more productive) plants less hurt…“core” products less impacted than “marginal” ones LAC-EU ECONOMIC FORUM 2013

  12. Heterogeneity of Competition Effects LAC-EU ECONOMIC FORUM 2013

  13. Why the Resistance? • Trade is heavily redistributive • There will always be losers; as always • Even gains unevenly distributed • Losses may not be randomly assigned • Special interest groups • Hence the politics are difficult • Time periods long • Distribution - internally and relative to foreigners • No guarantees → risks LAC-EU ECONOMIC FORUM 2013

  14. Where do we go from here? Vast majority of growth policy is not trade policy; don’t obsess about it But trade policy is relatively simple technically Treat trade policy as decision, not a hypothesis test No guarantees, Balance of evidence and priors Costs of different errors Cost of uncertainty LAC-EU ECONOMIC FORUM 2013

  15. Distribution of growth increments Kneller et al (2008) Sample of 47 events LAC-EU ECONOMIC FORUM 2013

  16. Cost of error • ‘We know of no credible evidence … that suggests that trade restrictions are systematically associated with higher growth rates’ Rodriguez and Rodrik (2001, p.317) LAC-EU ECONOMIC FORUM 2013

  17. Industrial Policy: Traditional • Support for specific sector • Initial losses balanced by future gains? • Need super-normal profits in future • i.e. out-compete existing producers • Why not private capital markets? • Capital market failure? • Product or factor market failure – i.e. an externality LAC-EU ECONOMIC FORUM 2013

  18. Externalities • Dynamic (static externalities require permanent policy not temporary relief) • Firms can’t appropriate benefits of: • Learning • Others copy techniques (hard or soft), market research, export market development • Training (firm-specific training excluded) • Workers, once trained, move to rivals • Establishing national reputation LAC-EU ECONOMIC FORUM 2013

  19. Subsidies do not solve Externalities • Increase incentive (speed and effort) to innovate but also to imitate – net effect uncertain • Similarly for training workers • Does not reduce incentive to cheat on national quality reputation • Information required huge for any intervention • Support relaxes pressure for scale (excess entry) and/or efficiency LAC-EU ECONOMIC FORUM 2013

  20. Industrial Policy: Rodrik (2007) • ‘stimulate specific economic activities and promote structural change’ ; ‘not about industry per se’ • Horizontal vs. vertical policies LAC-EU ECONOMIC FORUM 2013

  21. Aims • Curing pervasive market failures e.g. • Credit markets (micro-finance) • Spillovers in technology adaptation • Agglomeration • Human capital policy • Tradables hardest hit by these or institutional failures LAC-EU ECONOMIC FORUM 2013

  22. Practical Challenges of Industrial Policy • Informational requirements • Rent-seeking, corruption • distort decisions • waste resources • But these afflict other policies too and we still pursue those - LAC-EU ECONOMIC FORUM 2013

  23. Guiding Principles for Industrial Policy • Knowledge about constraints and spill-overs is widely diffused • Business will ‘game’ any system • Beneficiary is society, not government or business LAC-EU ECONOMIC FORUM 2013

  24. Responses • ‘Embedded autonomy’ for bureaucracy • i.e. close relations with business, but independent • Processes of revelation and discovery required • Sticks and carrots • Performance/behaviour criteria; use market • Failures are natural; let them fail • Accountability • Of business to bureaucracy, bureaucracy to politicians • Monitoring, transparency, autonomous agencies LAC-EU ECONOMIC FORUM 2013

  25. To sum up: • Big changes are afoot • Openness boosts income on average • Productivity effects seem strong • Policy governed by balance of probabilities and costs – no guarrantees • Traditional industrial policy – flawed • ‘Horizontal’ policies may be useful, but hard to implement – politically and practically LAC-EU ECONOMIC FORUM 2013

  26. THANK YOU LAC-EU ECONOMIC FORUM 2013

  27. What’s special about now? • Growth and consumption aspirations • Global media • Cheaper trade → higher returns to success • Correspondingly lower to failure • Global value chains • Trade is central • Competition to get investment • Only very large can afford to stand aloof LAC-EU ECONOMIC FORUM 2013

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