Achieving and sharing the benefits of globalisation

Catherine L. Mann, OECD Chief Economist, and Ken Ash, Director of the OECD Trade and Agriculture Directorate. Today’s post is also being published by OECD Ecoscope

Today’s OECD Interim Economic Outlook warns that trade growth is slowing, contributing to another slowing of global GDP growth in 2016 and with few signs of improvement for 2017. Does it really matter? If we believe the current anti-trade, anti-globalisation rhetoric, we might shrug our shoulders and say “no”. Trade has been so maligned and demonised, some might even be pleased.

But that would be the wrong answer. Open trade and cross-border investment are key vectors for diffusion of new technologies and competition, which are central to achieving productivity gains and improving well-being. New research published today by the OECD in conjunction with the Interim Economic Outlook suggests that a substantial part of the post-crisis slowdown in total factor productivity growth could be reversed if trade intensity were to recover. In short, weak trade is one of the factors that will keep the economy in a “low-growth” trap where sluggish trade and investment lead to diminished growth expectations and rising financial risks.

Over decades, trade has been responsible for drawing hundreds of millions of people out of poverty – and we mean one and two-dollar-a-day poverty – in emerging and developing countries. Trade could perform this same miracle for the many millions still living in abject poverty in poor countries in Asia and Africa, if other conditions are also right of course.  Salaries and working conditions are almost always better in companies that trade than in those that do not, and this is true in countries at all levels of development. Households gain hugely from trade because it increases choice and reduces prices.

The prospects of millions of workers in the global economy depend on their participation in global value chains, as highlighted by statistics developed by the OECD with the WTO on Trade in Value-Added (TiVA).  The main insight from these data is first, in order to export efficiently, a company has to also import efficiently. A second key insight is the importance of high quality services to support trade and trade-intensive activities.  It should be of great concern that there are signs that the development of global value chains appears to have gone into reverse in recent years.

The OECD paper published today looks at the reasons for the trade slowdown and back-tracking in the development of global value chains. Several factors are at play, some of them cyclical in nature, others structural like the changing role of China in the global economy. Increasingly murky protectionism is contributing to the slowdown, as is the failure to implement any really ground-breaking global new trade initiatives for more than a decade. Without entering into a rather futile debate about when the slowdown really started or the exact contribution of structural versus cyclical drivers, let us instead ask what governments can do to reverse it.

The OECD Interim Economic Outlook calls for implementation of a package of measures to boost demand, including through collective fiscal action focussed on raising investment and productive spending, and structural reforms. Removing barriers to trade and creating the conditions for people to reap the potential benefits of trade should be at the heart of the structural reform agenda.

First, governments should put their weight behind efforts to further lower trade barriers and unnecessary trade costs by implementing the Trade Facilitation Agreement, vigorously pursuing the reduction of restrictions on services trade, including by concluding the trade in Services Agreement (TISA), co-operating to reduce costly and unnecessary regulatory differences, concluding the Agreement on Environmental Goods, and by coming to the table to deliver a good result at the 11th WTO Ministerial Conference a little over a year from now.  They should reduce remaining barriers to foreign direct investment. There are unilateral, bilateral, plurilateral and multilateral channels available if governments want to provide those growth opportunities that are currently lacking.

Second, governments need to step in to ensure that the benefits of trade are fairly shared. Governments should help those affected by the churn and disruption caused by globalisation. Benefits from trade are diffuse and long-term in nature. Losses tend to be sharp and very concentrated on individuals and regions. The people most affected are sometimes those with the least capacity to adjust. An unemployed steel worker does not take much comfort from knowing that programmers in Silicon Valley are thriving, or that T-shirts and smartphones are cheaper. What he or she needs is a decent job, new training and skills, and a robust social safety net to help through the transition.

Making trade work better for more people is not just about persuading them, although clearer and more honest communication is important. It is about ensuring that the full panoply of structural policies is put to work to ensure that people are able to reap the benefits that more open trade, technology, and investment will bring. This means paying attention to infrastructure, well-functioning financial markets, education and skills, clear and transparent institutions and rule of law – all the things that make an economy nimble Trade policy cannot be made in a vacuum but rather must be part of the fabric of domestic policies.  If we are not able to do this, growing public scepticism, particularly in the most advanced economies, may mean that further market opening will be difficult, if not impossible. Such a result would impoverish many across the world.

Useful links

Trade Facilitation and Integrity Go Hand in Hand? More than you think

2016-Integrity-Forum-calloutEvdokia Moïsé, Senior Trade Policy Analyst and Silvia Sorescu, Trade Policy Analyst, Development Division of the OECD Trade and Agriculture Directorate

Good governance and streamlined procedures are essential features of an efficient border process. Cumbersome customs and other border procedures can directly raise trade transaction costs. Weak border governance can lead to hidden costs, resulting in time delays and uncertainties in the delivery of goods across borders. Non-transparent and burdensome procedures can continue to create incentives and opportunities for corruption in the movement of goods from one country to another, thus exacerbating integrity risks and deepening the vicious circle.

Is there a role for trade liberalisation and facilitation in zeroing in on corruption and supporting integrity in trade? Yes – and a greater one than you might think. Trade negotiations have pushed the boundaries of transparency and anti-corruption mechanisms through the inclusion of specific commitments in regional agreements, thus having a dual objective of increasing market integration and reducing market opacity. An OECD review of a wide selection of regional trade agreements (RTAs) showed that these reached new ground both in their scope and their potential for attacking corruption as a barrier to trade. Most of the RTAs signed by OECD countries over the last decade have been with economies outside the OECD area; WTO-plus and WTO-beyond transparency and anti-corruption mechanisms are thus increasingly being advanced in a North-South context.

Countries at all levels of development recognise that corruption distorts resource allocations and undermines the level playing field for businesses. Such provisions have the potential to reduce information asymmetries, enhance the enforceability and accountability of regulations, as well as minimize the opportunities for discretionary behaviour of government officials and institutions. This sets high-standard best practices for future regional integration initiatives.

In addition to pursuing such commitments at regional levels, multilateral and national trade facilitation efforts can create an environment conducive to clean trade and investment by eliminating the high transaction costs related to the complexities of border clearance procedures. The transparency, predictability and simplification of trade procedures have not only the potential to reduce trade costs and promote economic efficiency but also to remove corruption incentives and opportunities.

In December 2013 at the Bali Ministerial Conference, WTO members adopted the Trade Facilitation Agreement (TFA) which contains provisions for expediting the movement, release and clearance of goods. OECD estimates based on its 2015 Trade Facilitation Indicators (TFIs) show that a full implementation of the TFA could reduce worldwide trade costs by between 11.8% and 17.5%. The highest gains would accrue to low and lower-middle income countries. Areas such as the harmonisation and simplification of trade documents and procedures, the availability of trade-related information, or automation are key in reducing trade transaction costs. Implementing elements of good governance and impartiality in border administrations also has the potential to reduce trade costs by between 0.5 and 1.1%, depending on level of development.

One of the building blocks of modern and efficient border administration is integrity, which emphasises the fight against corruption and the enhancement of good governance measures. Trade liberalisation and trade facilitation can provide the best practices to support it.

The OECD is convening the global anti-corruption community to debate on most effective measures to enhance integrity in international trade at the 2016 OECD Integrity Forum “Fighting the Hidden Tariff: Global Trade without Corruption,” on April 19-20, 2016 in Paris, France. The Forum will provide a stocktaking platform for all sectors of society to debate best approaches to prevent, detect, and curb corruption in global supply chains.

Useful links

OECD (2015), “Implementation of the WTO Trade Facilitation Agreement: The Potential Impact on Trade Costs

Lejárraga, I. (2013), “Multilateralising Regionalism: Strengthening Transparency Disciplines in Trade”, OECD Trade Policy Papers, No. 152, OECD Publishing

OECD (2009), Overcoming Border Bottlenecks: The Costs and Benefits of Trade Facilitation, OECD Trade Policy Studies, OECD Publishing

Farmers’ markets: why international trade matters to agriculture

Ag trade policyHere are some things we started doing in the year 2000 and have been doing ever since: taking photos with digital SLR cameras; saving data to USB drives; watching Big Brother; and negotiating the WTO Doha Round. In fact the Doha Round, or the Doha Development Agenda to give it its full name, only started officially at the WTO meeting in Doha, Qatar, in 2001, but negotiations on agriculture had started a year earlier. As a new OECD book, Issues in Agricultural Trade Policy, Proceedings of the 2014 OECD Global Forum on Agriculture  puts it, “agriculture has proven to be a critical element in the effort to reach agreement”. Another way you could put it would be to say, as the WTO did, that talks collapsed in July 2008, because of the failure to agree on agriculture and NAMA (non-agricultural market access).

The failure came at a particularly bad time. When the talks had started, food prices were at historically low levels, but 2007/8 saw high volatility and high prices. Issues in Agricultural Trade Policy proposes both structural and more short-term reasons for this. Demand for food for humans and feed for animals was rising steadily as the world population grew and the economy expanded. Stocks were falling and biofuels production was increasing. The short-term shocks included key grain producing regions hit by droughts and other weather effects; exchange rate movements; and hoarding.

Governments have to take their share of the blame too. For a start, many of them encouraged biofuel crops, a measure that “contributes little to reduced greenhouse-gas emissions and other policy objectives, while it adds to a range of factors that raise international prices for food commodities” according to an OECD assessment. When the food price crisis hit, the trade restrictions and import measures, coupled with panic purchases by some governments, made matters worse. In fact a report by the International Food Policy Research Institute (IFPRI) concludes that “trade events were pervasively important in all of the major grain markets and arguably provide the most tangible explanation for the […] price series data.”

The price rises provoked food riots in a number of developing and emerging countries. The reaction in many cases was to adopt “a more defensive stance towards international markets”. Countries tried to become more food self-sufficient by for example subsidising production and penalising imports. One of the biggest changes noted by the new OECD report is the evolution of “agricultural support” – the subsidies, tax breaks and other ways governments help the sector. In 1995, the seven emerging economies for which the OECD collects information on agricultural policies accounted for just under 4% of the total support for OECD and emerging economies combined. By 2012, these seven countries accounted for over 45% of the total.

Even so, most countries comply with current WTO commitments and would have little trouble complying with what is proposed. Countries where the government is becoming more active in domestic markets are usually developing countries whose agricultural sector has a large number of poor farmers, low productivity and lack of access to well-functioning markets. Their main policy options are similar to those elsewhere – interventions in markets; provision of public goods such as roads or other infrastructure; income transfers; and reform of institutions, including land reforms and property rights, financial sector reforms, and legal frameworks – but the actual mix should depend on national circumstances.

In the case of developed countries, the OECD has established a basic principle for choosing among these instruments, stemming from the notion that policy objectives can be divided into two categories. The first is a matter of efficiency and is concerned with correcting “market failures”, for instance, if the cost of water pollution from pesticides or other agricultural chemicals is not accounted for in the market price of produce. The second set of objectives is concerned with the distribution of income (an equity issue). The principle is that policy should first seek to address market failures – ideally by tackling them at source – and then address distributional concerns with targeted policies such as payments for those affected.

However, in poorer countries where market failures are more widespread, it is often difficult to tackle them directly. For example, farmers may have low incomes partly because they have no access to credit. Subsidies to buy fertiliser or other inputs have been suggested as a practical solution to the problem of developing markets for inputs and providing financial services to small farmers. Similarly, price stabilisation has been proposed as a relatively simple way of mitigating the impacts of price shocks on poor households, as opposed to market-based forms of risk management such as insurance or the provision of income safety nets. The OECD argues that while there may be plausible reasons for governments to intervene in agricultural markets in poorer economies, the short-term benefits from the money spent may be far less than benefits from investments to support long-term agricultural development. In other words, policies that have been abandoned by OECD countries because they are inefficient and inequitable are unlikely to prove successful elsewhere.

But what do you do in the meantime? For Issues in Agricultural Trade Policy, the way to help the poor cope with sudden price movements is not agricultural policy but redistributive measures. Apart from anything else, sudden price increases or collapses do not have the same consequences for poor farmers selling food and poor urban (or rural) dwellers buying it. A policy that helps them all to maintain or improve their standard of living makes sense.

More generally, the book argues that a more open trading regime can help the agricultural sector achieve its goals, including food security, in the face of demographic and economic growth and possible threats such as climate change, by providing a greater diversity of products for consumers and by allowing the benefits from changing patterns of specialisation to be realised. Or: “The key challenge for governments in the period ahead will be to maintain a clear focus on the benefits of further reform, to renew efforts to integrate agriculture into the multilateral trading system, while addressing legitimate domestic policy interests in ways that are effective and minimise distortions to production and trade.” That’s the OECD-FAO Agricultural Outlook for the year 2000.

Useful links

OECD Global Forum on Agriculture 2014

OECD work on agricultural trade

Export restrictions: facts, fallacies and shovels

export restrictionsFollowing the twin discovery that governments were composed of politicians and that politicians mostly don’t look much beyond the next election, the OECD created the International Futures Programme (IFP) to encourage long-term thinking. A few years later, the UK government decided to set up a foresight unit, and in 2004 I went as IFP representative to a meeting in London where holders of stakes in different industries discussed what strategic thinking meant to them. It was much as you’d expect, with the oil industry explaining that they worked on a 50-year horizon, the pensions industry even longer, the finance industry losing interest after two seconds and going to look for something more exciting… The one surprise was the chief economist of a big mining company. “We don’t bother with strategic planning” he explained. “We get all we need from geological surveys and the market. So if the price of copper, say, is going up, we dig till there’s none left then move elsewhere. If it’s going down, we lean on our shovels until it goes back up again”.

I’d like to say they went bankrupt shortly after, but looking at the company’s performance, this charmingly down to earth approach seems to work well. At least if you already own a big enough share of the things your business depends on and everybody else needs them. That is practically never the case though for any firm, or even for a country. So as a new OECD report on export restrictions points out, since “no country is self-sufficient in every raw material, it follows that virtually all countries are vulnerable to any attempt to restrict the export of at least some commodities.”

And yet, the use of export restrictions seems to have increased over the past decade. The OECD Inventory of Restrictions on Trade in Raw Materials lists over a dozen ways this can be done, but the three most common are making exporters apply for a permit, putting a tax on exports, and restricting the quantity of a product that can be exported. All raw materials sectors are affected, from minerals and metals to forestry and agriculture products.

Emerging and developing countries use export restrictions most, although they’re not the only ones. But their citizens can suffer the most. Oxfam puts it like this: “you might think that governments would take urgent action to address fragility in the food system. But […] Governments often exacerbate volatility through their responses to higher food prices. In 2008 the global food system teetered on the edge of the abyss as, one after the other, more than 30 countries slapped export restrictions on their agricultural sectors in a giddying downward spiral of collapsing confidence”.

So why do they do it? The idea is that by restricting exports, more of the product is available on the home market, making it cheaper than it would be otherwise for local firms, thereby helping them to grow and compete on world markets. (Except for the producer of the restricted commodity). This probably works wonderfully well in countries with large reserves of iron ore whose principal activity is manufacturing lumps of iron in home-made forges for the weightlifting trade. And on the assumption that all its trading partners let it do this and don’t put up the price of anything in retaliation.

Because once you start getting into more sophisticated products, the advantages of export restrictions disappear. These days, final products rely heavily on the so-called “intermediate products” used to make them, sourced from the world’s global value chains. They can be high-tech items such as computer chips or very low tech, like wood planks, but more often than not they’re imported. The new OECD report describes an analysis of the impact in a number of sectors of what would happen if export taxes were simultaneously removed on steel and steelmaking raw materials. It finds that “When regions that apply export taxes remove these in coordination with similar action by trading partners, their downstream industries actually benefit.”

In their report mentioned above, among the solutions Oxfam proposes in relation to food, are “increasing transparency in commodities markets, setting rules on export restrictions” (they also call for “an end to trade-distorting agricultural subsidies”). This sounds very similar to the OECD report’s call for “better control, and more transparent use, of export restrictions”. The OECD report goes further though and looks at what alternatives are available to countries thinking of applying (or lifting) export restrictions. Chile for example, rather than concentrating on downstream processing, promotes a range of less capital-intensive and less energy-intensive intermediate goods and services industries linked to mining operations, as do a number of other successful minerals-rich countries.

Finally, this just in. Since I started writing today’s post, I’ve learned that my intro about the different sectors is sooo 2004 and the miner and the trader can be friends. A bipartisan report is to be presented to the US Senate today and tomorrow on Wall Street bank involvement with physical commodities. I feel like quoting whole pages of it in full, but in essence: “Since 2008, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have engaged in many billions of dollars of risky physical commodity activities, owning or controlling, not only vast inventories of physical commodities … but also related businesses, including power plants, coal mines, natural gas facilities, and oil and gas pipelines.”.

I used the copper example, and so do Senators Levin and McCain and their colleagues: “JPMorgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the London Metal Exchange (LME).” I quoted the homely image of a man and his shovel, and the Senators quote how even these days, market making isn’t all laser beams to transfer data and fancy algorithms to do high frequency trades: “Goldman approved “merry-go-round” transactions in which warehouse clients were paid cash incentives to load aluminum from one Metro warehouse into another, essentially blocking the warehouse exits”. But where we talk abstractly about risk, our men on the Hill cite “injuries, an international incident, or worse”.

That’s the world some policy makers think they can manipulate with export restrictions.

Useful links

OECD work on international trade

International trade: free, fair and open? (OECD Insights)