Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | The free trade debate is not black and white

Globalization has its discontentsbut ignoring its benefits would be foolhardy

Global trade is in the midst of an extended moment of soul-searching. The close scrutiny from both the left and the right is inevitable. Trade dynamics and paradigms are rarely static. But even so, the United Nations Conference on Trade and Development’s (Unctad’s) Trade and Development Report 2018, released last week, is extraordinary. Its approach is summed up by the subtitle: Power, platforms and the free trade delusion. The jeremiad against global trade as it exists today paints with a broad brush indeed. That said, it raises some important points. One of these is to do with the way global value chains (GVCs) have worked—or failed to do so—in fostering growth.

The classical conception of comparative advantage is something of a blunt instrument. Capital and labour have become increasingly mobile over the decades, technology has advanced and tariff and non-tariff barriers have fallen. GVCs have evolved accordingly. In theory, integrating into GVCs would allow developing economies to capitalize on their labour arbitrage advantage. Investment and forward and backward linkages along the GVC would eventually lead to technological upgrading and diversification into new sectors. As countries bootstrapped up the value chain to more high productivity and capital intensive activities, the labour arbitrage advantage would pass to poorer economies that would repeat the process.

Japanese economist Kaname Akamatsu termed this the ‘flying geese phenomenon’ with Japan flying lead and other Asian nations strung out behind it in a pattern dependent on their stage of growth. The labour comparative advantage would pass down this pattern, leaving upgraded economies in its wake. The first rank of economies after Japan did take flight as predicted: South Korea, Hong Kong, Taiwan and Singapore. So did China, bringing up the rear of the flock. But the rest of Asia, save some of the South-east Asian economies to an extent, has been let down by GVCs, according to Unctad.

Broadly speaking, there is something to this. Between 1995 and 2014, China has managed to increase its share of manufacturing domestic value added in gross exports by 11.9 percentage points. It is an outlier in every way. Only three other Asian economies—four if Turkey is included—have shown increases, and of much smaller magnitude. Instead, a number of developing economies such as Brazil and Peru have seen the importance of extractive industries grow for exports, partly due to the commodities supercycle. The consequence: more investment in those industries and a lack of the structural economic transformation GVC integration is supposed to bring. Excluding both China and extractive industries, the share of domestic value added in other developing countries’ exports declined by 11 percentage points in this period.

On the face of it, India is part of the problem. Post-liberalization, Indian manufacturing has, unsurprisingly, become more integrated into GVCs. The share of manufactured goods in its export basket has risen as well. But processed supply imports have risen concurrently—and manufacturing value added declined.

There is another way to look at it, however. A 2016 Research Institute of Economy, Trade and Investment paper, Global value chain and the competitiveness of Asian countries, used a measure called GVC incomes. This is the value added share of manufactured goods that are exported plus the value added share of those that are sold domestically. Given rising domestic demand in developing economies like India’s, it presents a more complete picture than looking only at exports. The paper found that India’s share in real GVC income from manufacturing had almost doubled in the post-liberalization period until 2011. And Indian workers had benefited more than in any other Asian economy save China’s in terms of jobs created. The number of high-skilled workers involved in GVC manufacturing had gone up by 106.8% in the 1995-2009 period. The numbers for medium-skilled and low-skilled workers were 49.4% and 4.4%, respectively.

This is not to say that the concerns raised in the Unctad report—and by many others—should be dismissed. The Indian numbers, for instance, make it clear that India’s vast pool of unskilled labour has benefited less than more skilled workers. And the rise of oligopolistic firms deserves attention, as this newspaper has noted (https://goo.gl/xYSZbb). Their dominance can result in monopsonies that allow them to shave margins to the bone. This leaves upstream companies with little space to innovate or improve labour conditions, contrary to the upliftment GVC integration is supposed to bring. The rising share of non-transferable intangible assets in value addition creates complications as well, entrenching their dominance.

The Indian experience does, however, show that reasoned debate is important. Blanket condemnation of free trade or pipe dreams like Unctad’s push for raising the Havana Charter’s long-buried corpse don’t qualify.

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