Why openness to trade matters

Global growth remains fragile after the 2008-2009 crisis. Trade growth is weaker than at any time in the last two decades. While protectionism has not surged since the crisis, there is evidence of creeping protectionism, especially with increasing non-tariff barriers to trade.

Policy-makers have been in crisis firefighting mode, focusing mostly on macroeconomic policies, notably fiscal and monetary stimulus and financial reregulation. Arguably, this has come at the expense of supply-side issues and structural reforms to address sluggish productivity within economies.

Microeconomic constraints to growth – distortions in product and factor markets, education, skills and infrastructure – have not been sufficiently addressed. If anything, market distortions have increased since the crisis, undermining competitiveness within economies.

This is where the case for trade and competitiveness kicks in. The two are intimately connected.

No country has developed successfully in modern times without harnessing economic openness – to international trade, investment and the movement of people – for its development. Trade and investment integration increases the size of the market available to domestic firms as well as driving potential value chains with which they could link up their own production. And it drives productivity and innovation by exposing firms to international competition, expertise and technology.

Through these two channels, external openness makes a significant contribution to poverty reduction, helping to unleash the potential of the private sector to create jobs – as the East Asian “miracle economies” have demonstrated. And, in advanced economies, employment and wage levels have become a key test of the effectiveness of economic growth in delivering widespread benefits.

Openness has non-economic benefits, too. Wider and deeper cross-border economic integration has contributed greatly to overall peace and stability since the Second World War. And it has increased individuals’ freedom to produce and consume in daily life, thereby widening life choices and chances of large numbers of ordinary people.

But openness on its own does not lead to success. It is the competitiveness of economies, whether continents, nations, subnational regions and even cities, that determines their levels of productivity. And productivity determines how well economies translate openness into opportunities for their firms, farms and people.

What does trade-related competitiveness entail?

First, policies and regulations that affect the domestic business climate, such as stable macroeconomic conditions, and competitive product and factor markets.

Second, institutions – the governance or decision-making framework for competitiveness – including efficient public administration, timely decision-making and impartial enforcement of property rights and contracts.

Third, core physical infrastructure – transport (roads, railways, ports and airports), communications, energy and logistical systems.

Fourth, “soft connectivity” – the social capital and knowledge capital that make investments in hard infrastructure and new technology more productive.

Finally, competitiveness is not just about what happens at national and international levels. With cities contributing 80% of world GDP, there is growing attention to competitiveness at sub-national and city levels as well.

Trade and competitiveness come together in global value chains (GVCs). These are the key drivers of employment, productivity and growth in international trade. Production stages that previously took place in a single factory, or in a single country, are now dispersed internationally across many factories and many countries. Trade no longer means just goods crossing borders; rather it is the international, interconnected flow of goods, services, investment, people and ideas along a value chain. This results in ever-tighter links between advanced and emerging economies.

GVCs enable developing countries to industrialize faster and better by performing certain tasks and occupying niches in a value chain. And they enable developed countries to specialize in higher-value production in goods and services, which means more productive, better-paid jobs and greater consumer choice.

Taking advantage of GVCs, however, demands raising the competitiveness game. This requires going well beyond keeping borders open to trade and investment. A whole host of domestic non-tariff and regulatory barriers needs to be removed and a welcome business climate provided to underpin connections among production stages in the supply chain.

Unilateral measures are a very important component of pro-GVC policy reforms. These are undertaken independently, outside trade negotiations. But they work best when they are locked in by international agreements. The preservation of an inclusive multilateral trading system is relevant, including closing the Doha Round and moving towards negotiations on new topics in the WTO.

Also relevant are bilateral investment treaties between developed and developing countries. And, not least, are the “deep integration” regional trade agreements that go beyond tariff elimination to cover strong disciplines on “behind-the-border” non-tariff and regulatory barriers.

Strengthening both openness in the global economy and domestic competitiveness has never been more important. A trade-and-competitiveness agenda should be a key priority for policy-makers around the world. This is needed to revive sluggish post-crisis productivity and growth, and to tap new sources of growth, innovation, job creation and development, not least through GVCs.

Read more in the World Economic Forum reports, The Global Competitiveness Report 2015-2016 and The Case for Trade and Competitiveness

Author: Razeen Sally is an Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and a Member of the Global Agenda Council on Competitiveness

Image: A man walks near a container ship at a port in Tokyo REUTERS/Toru Hanai