Chapter 5 The Political Economy of Global Production and Exchange
TABLE V.10 Composition of EU External Trade, 2000-2010
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- The Rise of Preferential Trade Agreements
- FIGURE V.5 The Growth and Diversity of Preferential Trade Agreements
- V. Conclusions: Evaluating the Gains and Losses from Trade
- TABLE V.11 Global Imbalances/Asian Imbalances, 1999-2010 (U.S. Current Accounts Balances)
- FIGURE V.7 Subsidies to Agriculture
TABLE V.10 Composition of EU External Trade, 2000-2010 (% of total EU exports or imports) Exports Trading Partner 2000 2006 2008 2010 United States 28.0 23.2 19.1 18.0 China 3.0 5.5 6.0 8.4 Switzerland 8.5 7.6 7.5 7.8 Russia 2.7 6.2 8.0 8.4 Turkey 3.8 4.3 4.1 4.5 Japan 5.4 3.9 3.2 3.2 Imports Trading Partner China 7.5 14.4 15.8 18.7 United States 20.8 13.0 11.9 11.3 Russia 6.4 10.4 11.4 10.6 Switzerland 6.3 5.3 5.1 5.5 Japan 9.3 5.7 4.8 4.4 Source: External and Intra-EU Trade, A Statistical Yearbook, 2011, 31-32. The United States remains the preponderant market for EU exports, but has declined substantially along with Japan in favor of China and Russia. In the area of EU imports, the position of the U.S. has declined more substantially with China and Russia the major beneficiaries of selling in the EU. The Rise of Preferential Trade Agreements53 The EU may be the most important preferential trade agreement but it is far from the being the only important one. Indeed, there is reason to believe the increasing openness in the global system resulting from the GATT/WTO process actually contributes to the creation of PTAs. Such arrangements can provide important forms of bargaining leverage within the negotiating processes of the larger multilateral systems.54 And the success of the EU project has contributed to creating other regional agreements as a competitive response to the EU. In many ways, the creation of the North America Free Trade Agreement (NAFTA) in 1994 can be seen in these terms. And NAFTA can be seen as a stimulus for MERCOSUR in Latin America and ASEAN-AFTA in Asia. And a recent wave of bilateral trade agreements and even cross-regional agreements have also been a response to this growing trend of negotiations. One estimate is that by 2008, as much as $5.9 trillion in trade (a bit more than one-third of global trade) took place among nations engaged in these kinds of agreements.55 The relationship of the WTO system and the emerging PTA system is a complicated one. The GATT/WTO system is based on multilateralism, non-discrimination and a commitment to most-favored-nation, which have the effect of spreading new rules quite widely. By contrast, regional trade agreements (RTAs), Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) are based on bilateral or restricted multilateralism and preferential terms that discriminate against non-members. As a consequence, PTAs represent a significant challenge to the WTO-based system of trading rules that has evolved over the past six decades. For the past two decades, PTAs have expanded considerably and have come to define much of the direction for trade. Though many of PTAs have a strong regional cast, about an equal number operate across regional boundaries. The rules in many PTAs extend significantly beyond those embodied in the WTO and the complex and differentiated system of rules for those inside and outside of PTAs undermines the broadly multilateral system created by the WTO. Measuring the impact of PTAs on overall global trade is difficult but basic indicators suggest that most global trade remains with the multilateral rules established by the WTO system.56 PTAs have become much more important as a vehicle for advancing free trade in the past twenty years.57 Figure V.XXX displays this growth and the diversity of PTAs during this period, especially the increasing importance of such agreements for free trade and economic integration. Nonetheless, many FIGURE V.5 The Growth and Diversity of Preferential Trade Agreements 
Source: The Economist, October 12, 2013, http://www.economist.com/news/special-report/21587380-multilateral-trade-pacts-are-increasingly-giving-way-regional-ones-my-backyard observers have worried about the exclusionary character of PTAs and fear the potential for large PTAs to turn into regional trade blocs threatening to undermine the multilateral trading order that has defined the post-1945 era. This concern has deepened as the WTO process has seemed to break down with no new agreements in nearly two decades. Perhaps more troubling has been the move by some of the largest emerging economies – China and Russia – as well as the United States and Europe to embrace large PTAs as a substitute for WTO. 58 The limited agreement achieved at Bali in the Doha round of WTO trade talks may well extend the importance of PTAs and the worries over the results for multilateralism. In early 2015, three mega groups of PTA negotiations were being conducted across the globe: (1) Trans-Pacific Partnership (TPP), US, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam (2) Transatlantic Trade and Investment Partnership (TTIP) US and EU (3) Regional Comprehensive Economic Partnership Agreement (RCEP). Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam are the ASEAN members negotiating with six other nations with which ASEAN has FTAs: Australia, China, India, Japan, Korea and New Zealand. The outcomes for each mega-negotiation remain uncertain with each somewhat dependent on the other two. The expansion of PTAs – especially the array of massive deals focusing on China, India, the EU and the U.S. - calls into question the role of the WTO as the primary institution for defining the rules for global trade. For nearly two decades the WTO has been stalled in an effort to reach new agreements on trade rules that will close the divide between developed and developing nations on new trade rules. However, in December 2013 an agreement was reached under the Doha Round of negotiations conducted by the WTO. This agreement focused on trade facilitation procedures and subsidies for agriculture. 59 Though the agreement is a substantive success, the dynamism in PTAs seems to have surpassed the WTO. But this can only come true if these large PTAs reach fruition. V. Conclusions: Evaluating the Gains and Losses from Trade Few topics generate more conflict in political analysis than trade. This is surely because trade is a double edged sword: it can lead to large gains from lower costs and more variety in goods, but also can produce large losses from the effects on wages, jobs and even profits. In addition, the gains and losses are unevenly distributed, especially for those who find their earnings and life prospects severely affected. One way to focus our thinking on this topic is to examine the trade relationship between the U.S. and China. This is one of the largest bilateral trading relationships in the world and one of the most controversial. There is considerable conflict between the U.S. and China over this issue, with regular calls from the U.S. Congress for efforts to punish China for its unfair behavior, and much resentment in China over what they view as unfair treatment. Over the years after 2000, trade between the U.S. and China has grown rapidly in size and the imbalances in this relation have grown even faster. Table V.11 gives details. TABLE V.11 Global Imbalances/Asian Imbalances, 1999-2010 (U.S. Current Accounts Balances)
2011 -465926 -395296 -315033 67.6 84.3 2012 -440417 -424376 -329475 74.8 96.4 Source: Author’s calculations, Bureau of Economic Affairs, http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=10&area_id=35
Chapter 2 discussed how the most important gains from trade come from the ability to specialize in goods where a nation has at least a comparative advantage. The exchange of these goods for those produced by a nation with a different comparative advantage allows both nations to consume at higher levels than either could by producing each of the goods alone. But, as we have also seen, this comes at a cost for workers who were previously employed in areas where specialization was less effective and must now shift their work to industries where the comparative advantage and specialization yields the highest benefits. This transition from one industry to another entails some costs and only works to the extent that all workers can make this transition. Otherwise, the benefits of specialization must be offset by the costs of economic restructuring. To this calculation, one must also add the benefits trade can have on the dynamic quality of an economy. Trade can produce incentives to improve the capacity to produce from investments in new equipment, in additional worker training, in more research and development and generally in innovative activities. Shifting from static to dynamic ways of analyzing comparative advantage suggest that trade can promote a more innovative and adaptable economic system. At the same time, the process of restructuring over part of the value chain can potentially damage other parts of that value chain that depend on the segment lost to foreign competition. How can we apply these ideas to the case of U.S.- China trade? There is considerable evidence that this trade relationship has led to considerable adjustment costs that must be offset against the gains from lower prices for goods imported from China. One important study looked at measures by U.S. counties for exposure to Chinese trade and of changes in manufacturing jobs and overall employment. Not surprisingly, those counties most heavily exposed to Chinese goods were much harder hit in employment that those less exposed. For example, counties at the 75th percentile – with more exposure to Chinese imports than ¾ of all counties – saw their manufacturing employment fall by one-third more than counties at the 25th percentile and also saw the non-manufacturing employment and wages fall more than those counties less exposed. Further, the rise in unemployment caused government payments for unemployment insurance, food stamps and disability payments.61 Much of this impact can be traced to the speed of China’s rise as an export power, with most of the effects coming in the decade after 2000. Low income countries (mostly China) accounted for a rapidly rising share of U.S. manufacturing imports, increasing from 2.9% in 1991 to 5.9% in 2000 to 11.7% in 2007, and by that year 4.6% of all U.S. spending was on goods imported from China (see Figure V.6).62 Chinese imports were especially significant in luggage, rubber and plastic footwear, games and toys, and die-cut paperboard and substantial in apparel, textiles, furniture, leather goods, electrical appliances and jewelry. When the gains from trade are compared to the increased welfare costs for the resulting unemployment, as much as two-thirds of the gains are wiped out even without trying to measure the individual costs of being unemployed and finding another job. Though China trade still has a net gain for the U.S. as a whole, the losses from trade are substantial and sobering. FIGURE V.6 
David H. Autor, et al. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” unpublished paper, http://econ-www.mit.edu/files/6613 Justin Lahart, “Tallying the Toll of US-China Trade,” Wall Street Journal, September 27, 2011. There are other gains to be had from trade, and also other loses that must be considered in tallying the effects. An important feature of the gains and losses comes from the ways firms respond to the competitive effects of imports from nations such as China. Some firms can fail to act, others may choose to relocate part or all of production abroad – offshoring - and others can invest in new products and processes and innovate in effective ways to gain competitive advantage. Recent studies confirm some of the losses from Chinese imports, finding falling prices, lower demand for unskilled workers, declining profitability and failing firms. But there are also gains from trade competition that drives surviving firms to engage in significant technological upgrading. Firms facing higher levels of Chinese import competition create more patents, spend more on R&D, raise their IT intensity, adopt more modern management practices, and increase their overall level of TFP (total factor productivity).63 The positive consequence of this process is a stronger economy, with firms and workers better able to compete in global markets and also deliver higher quality and lower prices domestically. There are yet more complexities to this story. Though trade does press domestic firms to innovate, it may also lead to other less favorable consequences. Trade certainly did lead to adaptation and adjustment in the U.S. economy, but some of these adjustments may have pernicious consequences. Focusing on the industrial restructuring and shifts in employment in the U.S. over the two decades after 1990, we see employment shifting from tradeable sectors (goods that can be traded in the global economy, such as manufactured goods) to the non-tradeable sectors (such as health care, government construction, and hotels and food service), which experienced almost all of the U.S. growth in employment after 1990. Much of the growth in construction employment to 2007 was a result of the creation of bubble of investment in housing that was unsustainable and collapsed in the global financial crisis beginning in 2008. Moreover, non-tradeable sectors have experienced lower wage levels than tradeable sectors and the large growth in employment here is associated with increasing income inequality.64 Rapid declines in manufacturing employment were associated with the ability of firms to maintain levels of production, primarily by investing in machines and technology. The offshore outsourcing of large parts of the value chain produced a rather stark process of specialization that led to rising wages for the shrinking number of persons remaining in manufacturing. Equally troubling has been the erosion of the capacity for innovation as a result of the process of offshore outsourcing. The sharp division of labor in this process – develop, design and innovate in the U.S. combined with manufacture components and assemble abroad – often cannot work because of the deep connections between innovation and manufacturing. These two parts of the value chain are connected through the concept of an industrial ecology, thought of as a complex flow and exchange of knowledge and expertise that nourishes both parts. Innovation requires the presence of the knowledge and expertise associated with manufacturing, which has been systematically moved offshore and used by firms there to upgrade their capabilities over time.65 When companies like Kodak gave up manufacturing cameras, this damaged their ability to design and innovate with the very digital camera they invented. This was because the industrial ecology for this kind of manufacturing was gone and this absence was a barrier to innovation. So, how does the complex thicket of gains and losses net out? In one very important sense this is a political and not just an economic question. How a nation sees the net effects of trade depends greatly on the political configuration of the various groups who are affected in differentiated ways. Though there are almost always important costs associated with the gains from trade, whether these costs are recognized and actions taken to ameliorate them is the result of a political process and therefore inconsistent from one nation to the next. Systems of political economy will act to reap certain gains because of the political strength of those groups positioned to obtain these gains. Costs are recognized when those who are hurt have the political leverage to get them recognized. The policies adopted in relation to trade often are best understood as a political balancing act designed to balance gains against losses in political terms. Making a coherent national trade strategy is sometimes undermined by the cacophony of vested interests focused only on what gains or losses they will experience. Consider agricultural production. Food is a vital resource, is often produced domestically, the producers (farmers) often have the ability to express their political interests, and food imported from abroad can enhance the quantity and quality of domestic consumption. Because of the political power of agricultural interests, many nations have chosen to provide various forms of payments to these interests in order to maintain their incomes in the face of market pressures to lower prices. Some of this can surely be justified on the grounds of food security, so as to guarantee domestic food production even if this is not economically feasible. But the largest part of agricultural subsidies comes from the political leverage of those groups who benefit. FIGURE V.7 Subsidies to Agriculture 
Source: The Economist, September 24, 2011 http://www.economist.com/node/21530130 Figure V.7 shows a general decline from very high levels in such subsidies in Japan, declines in the United States now have fallen below 10% of agricultural receipts, whereas in China payments have risen to about 17% of receipts. Each of these societies has determined politically that subsidies to promote domestic food production are worth billions of dollars. However, many nations reach very different conclusions about supporting workers whose jobs have been eliminated by trade. The value of forcing workers to adjust – often under very difficult circumstances – is thought to be high and the political strength of displaced workers is somewhat less than for owners of farms. Overview article – poltradeliberal.pdf GPNS in Asia gpnsasiatrade.pdf asiatradeglb.pdf Asiaresourcenat.pdf Asianeconomies.doc Fdiasia.pdf
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