TRADE OPENNESS, GROWTH AND INEQUALITIES

36 Pages·2017·3.7 MB·English

ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
Trade openness,
growth and inequalities
Bercy, 31 january 2017
@DGTresor #EntretiensTresor
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
“Les Entretiens du Trésor” is a yearly conference that focuses on a
key economic issue and its associated policy challenges. This event
is hosted by the French Treasury, at the Ministry for the Economy and
Finance. It invites leading academics, policymakers and practitioners
to speak and debate, with about 400 targeted guests attending. The
theme of the upcoming 2017 edition will be “Trade openness, growth
and inequalities”.
The French Treasury closely analyses the latest trends in international
economics and their policy implications. Trade policy has again be-
come the topic of an intense political debate, in all parts of the world,
in a context where the exact implications of economic globalization
are especially difficult to identify and analyze. The conference intends
to foster a constructive, objective and thought-provocative exchange
of views on trade openness and globalization with a focus on their
impact on inequalities, from the economic diagnosis to the policy
implications.
Les Entretiens du Trésor will feature three panel discussions. The first
one will focus on a diagnosis on the economic implications of trade
openness and globalization. The second panel discussion will dis-
cuss what works and does not work in current trade policy, and what
should be strengthened or overhauled in trade agreements. The last
panel will be dedicated to the governance of globalization in a broad
sense, with an emphasis on the involvement and inclusion of the civil
society.
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
Contents
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Program
6
First panel discussion
10
Second panel discussion
14
Third panel discussion
17
Speakers’ biographies
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
Martin Sandbu, journalist at the Financial Times,
will act as moderator for the three panels.
8h45-8h50 Introduction by Odile Renaud-Basso, General Director of the Treasury.
8h50- 9h00 Opening remarks by Michel Sapin, Minister of Economy and Finances.
9h00-10h10 1st panel discussion: Weighing the gains from trade against rising
inequalities: which diagnosis of trade openness?
Speakers
Joseph Stiglitz, Columbia University, Nobel Prize in Economics
Roberto Azevêdo, Director General of the WTO
Marie-Ange Debon, Group Senior Executive and
Vice President International Division CEO of SUEZ
Branko Milanovic, City University of New York
Philippe Jahshan, President of the NGO Coordination Sud
Paul Romer,Chief Economist of the World Bank Group
10h10-11h10 2nd panel discussion: International trade negotiations:
new objectives, new ways and means?
Speakers
Jean Luc Demarty, Director-General for Trade of the European Commission
Sébastien Jean, Director General of the CEPII
Yann Delabrière, Chairman of Faurecia
Pervenche Berès, Member of the European Parliament
Guntram Wolff, Director of the think-tank Bruegel
11h10-11h30 Break
11h30-12h30 3rd panel discussion: Which reforms for the governance
of globalization and international trade?
Speakers
Philippe Aghion, Professor at the Collège de France
Juan Manuel Gómez-Robledo, Ambassador of Mexico in France
Martin Kaufman, Assistant Director Strategy, Policy and Review Department, IMF
Liina Carr, Confederal Secretary at ETUC
Henrik Bourgeois, VP European Affairs and General Counsel Europe,
General Electric Europe
Philippe Martin, Professor of Economics at Science Po Paris
12h30-12h45 Closing Remarks by Mr. Ángel Gurría, Secretary-General of the OECD
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
1st panel discussion
Do benefits brought about by trade openness still
outweigh its impact on inequality?
What are the objective economic benefits of trade openness?
The various economic theories on international trade conclude that trade creates long-term
aggregate benefits by an improved allocation of the factors of production. Indeed, empirically,
exports generate economic gains (for instance, 25% of French employees work for a company
that is active on international markets) and foster productivity. Rising country trade openness
by 10% increases work productivity by 1.4 to 9.6%1. As a result, world trade has dramatically
expanded: trade flows were multiplied by 5 between 1980 and 2015. It was also boosted by
technological changes in communication and transport, as well as proactive trade opening
policies. At the same time, global value chains fragmented according to country comparative
advantages and Foreign Direct Investments followed the same expansionary trend (FDI inflows
were multiplied by 30 over the same period of time).
A number of recent empirical studies2 have shown that, although they are tangible and poten-
tially substantial, the economic benefits of globalisation have not been shared out equitably,
and that inequality has widened in many countries especially since the end of the 1980s. In
OECD countries, the revenue of the richest 10% is now 10 times higher than the revenue of
the poorest 10%, whereas the gap was equal to 7 in 1980. Furthermore, even if inequalities
between countries shrunk, middle class revenues stagnated, as shown below with the graph
giving revenue evolutions with individuals ranked according to their income at the global level.
Trends in income inequality in OECD countries Trends in global income (in %)
between 1985 and 2013 between 1988 and 2008
Gini coefficients of income inequality,
mid-1980s and 2013, or latest available year
Increase Little change Decrease
Gini coefficients
1985 2013 or latest
Source: OECD (2015), In it together: why less inequality Source: “Global inequality: a new approach for the age
benefits all. of globalization”, Branko Milanovic, 2016.
1 « Contribution of trade and investment to increased productivity, growth, jobs and inclusiveness », OCDE, 2016
2 « Trade and Inequality: From Theory to Estimation », Helpman et al., 2016
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
The strong surge in world trade since the 1980s may have contributed to widening inequality,
together with other factors such as technological change (biased in favour of qualified employees),
tax reform (less redistributive) and the changing face of the labour market (increased rigidities).
If it is acknowledged that international trade provides aggregate long-term benefits, it also
causes job destructions that may be long-lasting and contribute to the widening of inequa-
lities: from theory to empirics
According to traditional trade theories (Ricardo, 1817), trade openness fosters mutual eco-
nomic benefits through specialization of countries based on their comparative advantages.
Nevertheless, (Hecksher-Ohlin-Samuelson, 1933-41) factors of production are affected by spe-
cialization in a very different manner from one country to another. In particular, specialisation
by developed countries in sectors where highly qualified labour is in strong demand will mean
relative salary hikes for highly qualified workers at the expense of those who are less qualified.
This will therefore exacerbates inequalities. If there is a lack of international labour mobility or
evolution in employee skills (job training), this salary adjustment may last over the long term.
A number of empirical studies have also shown that in sectors where the country concerned does
not enjoy a comparative advantage in international competition, increased salary inequalities
and gross job destructions (when the labour market is rigid) are the predominant channels
of adjustment to trade openness. China has played a particular role in the relation between
trade and inequalities because of its market size, its low-cost labour force, and its quick inte-
gration to international trade3. Autor researches (2013) claim that the increased competition
faced by the American manufacturing industry from Chinese imports has caused a long-term
decline in local employment in this sector (Chinese competition exposure could explain 25%
gross job cuts in the manufacturing sector). Similarly, in France, both the manufacturing sector
and employment are thought to have been affected by increasing competition from Chinese
imports which, according to a study, were to blame for 13% of gross job losses in manufactu-
ring between 1995 and 2007. This represented 90,000 local job losses (Malgouyres, 2016). We
observe a “U-curve” regarding the impact of international trade on employment in developed
countries4, as for technical progress: trade increases low skill and high skill job occupations.
Companies opened to trade hire high-skill employees while less productive firms focusing on
domestic market hire low-skill employees. In the aggregate, trade openness has a net positive
impact on job creations. Sharing trade benefits is therefore partly contingent on our ability to
efficiently and rapidly reallocate the factors of production.
Furthermore, frictional unemployment should not make us forget the massive positive effect
of trade openness on developing countries and the “great convergence” of living standards
supported by globalization. To quote only one figure, 500 million of Chinese people were lifted
out of poverty between 1980 and 20105, mainly thanks to integration of China to international
trade (the poverty rate fell from more than 65% to less than 10%).
3 Despite China only joined WTO in 2001, Chinese trade flows were multiplied by 32 between 1980 and 2015 while
global trade flows were multiplied by 5 over the same period of time.
4 « Skill-biased heterogeneous firms, trade liberalization and the skill premium », Harrigan et al., 2015
5 Source: World Bank. http://povertydata.worldbank.org/poverty/country/CHN
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
TECHNOLOGICAL CHANGE HAS A MAJOR EFFECT ON INEQUALITY TRENDS
Many recent macroeconomic studies suggest that the widening of income inequality is mainly
due to technological change in advanced countries and, to a lesser extent, to trade. The IMF6
has explained technological change seems to contribute mostly to salary inequalities (+0.74%)
when globalization would only bear a lower part of responsibility (+0.08%). (cf. graph below).
However, the effects of technological change and those of trade are partly connected and are
hard to disentangle. Trade disseminates technological change and, conversely, the latter may
stimulate trade in particular through competition7.
INEQUALITY CAN BE LONG-LASTING AND COULD PUT A DRAG ON GROWTH
Many studies point to the fact that job losses and the inequality related to increased globalisa-
tion will be long-lasting (a decade according to Autor). In addition, Melitz8 and Helpman9 recent
works analysed the Darwinian mechanism through which ambitious trade openness turns out to
have positive effects even on low-skill employees. At first trade openness increases inequalities
but when the level of trade openness is increased above a certain level, less productive firms
exit the market cutting lowest-paid jobs. Those jobs will be reallocated in higher productive
firms with higher-paid jobs.
6 « Rising income inequality: technology, or trade and finacial globalization? », Jaumotte et al., 2013
7 « Teaching lesson at the Collège de France, trade and innovation », Aghion, 2016
8 « The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity », Melitz, 2003
9 « Growth, Trade, and Inequality », Helpman et al., 2016
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
Those short term inequalities induced have a significant cost on aggregate welfare. Inequalities
could erode 20% of trade openness gains10, when taking into account distortionary effects of
redistribution mechanisms. However the domestic impact is heterogeneous, according to
characteristics of societies and their social redistribution system.
ISSUES FOR DISCUSSION
− To what extent do you feel that trade liberalisation has contributed to widening income
inequality in most advanced countries, and how do you compare this phenomenon with
the amplitude of aggregated benefits from trade?
− How great is the risk of protectionism restricting trade liberalisation and how would this
affect growth?
− How can globalisation-related benefits be better shared out and how can the impact of
severe trade shocks be mitigated?
− Should we be focusing on measures for those having lost out to globalisation or on an
improvement of social protection and training for all?
10 « Globalization, Inequality and Welfare », Antras, 2016
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ENTRETIENS DU TRÉSOR - TRADE OPENNESS, GROWTH AND INEQUALITIES
2nd panel discussion
International trade negotiations: new objectives, new ways and means?
Trade negotiations have become increasingly complex and tedious, because on the one hand
the issues that are now addressed are broader than simply tariff-dismantling and on the other
hand dealing with regulatory matters have exposed trade policy to renewed criticisms from
civil society. In this context, which scope should be given to trade negotiations? Which types
of markets should be opened to international trade, which common rules for international
trade, even production standards, should be adopted through these agreements? Barriers to
trade are less and less customs tariffs, but instead non-tariff measures of regulatory nature. The
number of trade-restrictive measures observed in G20 economies, as notified to the WTO, again
grew by 10% between 2015 and 2016. Besides, new issues are arising from the transformation
of the economy: services are expanding quickly in all countries, but trade in services is lagging
compared to trade in goods. Should we promote trade in services, and how, knowing that
market access of services is not modulated through tariffs as for goods? Furthermore, trade in
services raises new issues regarding regulation, for example in digital trade where free flows of
data must be analysed with respect to the protection of personal data. Finally, the “new gene-
ration” trade agreements attempt to enhance their ambition by including common rules in the
labour and environmental fields, in order to strengthen the level playing field towards high
and demanding standards. Trade agreements could in this way be also a part of the solution
to correct the negative externalities induced by trade openness, such as rising inequalities. For
instance, including binding provisions in favour of fiscal cooperation could facilitate targeted
redistribution policies designed to reallocate the gains from trade openness.
Similarly, trade openness stimulates commercial flows, with a potential negative impact on
carbon footprint. To mitigate this potential negative externality, targeting measures that faci-
litates trade on “environmental-friendly” goods may foster their production, and help directing
technological change towards clean technologies.
THE RELATIONSHIP BETWEEN TRADE OPENNESS AND SUSTAINABLE DEVELOPMENT
Trade negotiations, including adoption of common rules, have been recently seen as presenting
a risk of driving down standards in sustainable development. For instance, it is claimed that
environmental standards undermine the competitiveness of businesses and, trade agreements
has been pictured as a vehicle to facilitate trade by restricting the capacity of sovereign nations
to impose stringent environmental standards.
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