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Trade cycles

May 31, 2012

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In The Third Policeman, Flann O’Brien describes the first All Irish Bicycle, 100% locally sourced and made of cast iron. Including the tyres and pump. Given the state of Ireland’s roads at the time, the riders’ atoms got all mixed up with the saddle’s and they gradually turned half-bike themselves, even having to lean against the wall outside the pub so as not to fall over.

O’Brien had a wonderful imagination, but you can guess where he got some of his ideas from. In 1932,  a few years before he wrote his masterpiece, the Irish government imposed 43 new tariffs on imported goods, including bicycles from Northern Ireland, then as now part of the UK. A reporter from The Irish Times (where O’Brien published a kind of forerunner to blogs) described how people covered their new bikes with mud to make them look old, and as Joe Joyce remarks, the main impact of the measures was to “boost an emerging smuggling industry which proved more durable than many of the protected manufacturers of the day”.

That conclusion is similar to a point made by US Trade Representative Ron Kirk last week when, with several other ministers and WTO chief Pascal Lamy, he was presenting a report just published by the OECD-led International Collaborative Initiative on Trade and Employment (ICITE): protectionism doesn’t protect anybody, it only puts up prices. Those Irish bike buyers didn’t want to pay more for protected bikes, and nobody apart from O’Brien’s mad protagonists would buy a bike on the basis that it contained no imported rubber and metals. Quite the contrary. The site of one manufacturer I looked at when preparing this article boasts that it “sources from the best suppliers around the world”, having just explained a couple of lines higher that it’s “home of some of the UK’s most famous bicycle brands”.

These days, it would in fact be hard to find a manufactured product that was made entirely by local firms from local components in any country. At last week’s meeting, New Zealand trade minister Tim Groser pointed out that in the space of 20 years, the import content of exports (the Japanese gears on those British bikes for instance) had doubled to 40%. So if you want to export, you have to import, and if you want to encourage domestic production, you need access to competitively priced intermediate goods from around the world – microprocessors, steel, cloth, whatever.

That doesn’t just apply to manufacturing. Services form the greatest share of most countries’ GDP and are increasingly being traded internationally. To stick with Ireland, it is the world’s second biggest exporter of business services after India according to the report, but it also has the world’s highest share of imported business services in output (along with Luxemburg).

What about the workers? As the title suggests, Policy Priorities for International Trade and Jobs focuses on employment, looking at the impacts of international trade on employment and working conditions, as well as growth more generally. It says that openness pays. Another minister attending the meeting, Canada’s Ed Fast, said that abolishing 1800 tariffs had helped his country create 12,000 new jobs during his government’s time in office so far. The report itself looks in detail at a dozen OECD and non-OECD countries and also includes results from a broad sample of 30 open and closed economies around the world over a 30-year period.

It concludes that whatever the criterion, trade is beneficial overall, and the effects can be felt quickly. In Africa, for instance, a one percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of around 0.5% per year. Some arguments in the report are probably familiar to people interested in globalisation issues, but the scale of the impacts may not be. For example, between 1970 and 2000 workers in the manufacturing sector in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region.

The conclusions concerning offshoring and outsourcing are encouraging too. Studies for the UK, US, Germany and Italy suggest that off-shoring of intermediate goods has either no effect or positive effects on both employment and wages. And with so much talk of sweatshops and other negative impacts, another surprise is that trade tends to improve working conditions whether the measure is injuries on the job, child labour, informality, or effects on female labour.

So, should countries just open up to international influences and all will be well? Pascal Lamy argued that globalisation makes labour markets more volatile and many jobs more precarious. In reply, OECD Chief Economist Pier Carlo Padoan reminded everybody that the benefits of an open trade policy depend on a whole series of other policies, starting with labour market measures to aid those negatively affected, but also covering investment, governance and social protection.

Useful links

You can find a four-page summary of Policy Priorities for International Trade and Jobs here

OECD work on trade and jobs

OECD work on trade liberalisation

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