International trade is in trouble after the global financial crisis and, with the new Trump administration, the world faces a protectionist onslaught. As a result, there are three ways that international trade can go from here — one considerably ‘more likely’ than the other two.
Let’s begin with the state of play. Three features stand out: a global trade slowdown, creeping protectionism and the failure of the Trans-Pacific Partnership (TPP).
First, global trade growth — what is dubbed ‘peak trade’ — has slowed down markedly. International trade grew twice as fast as world output in the quarter-century before the global financial crisis (GFC). It slumped during the crisis and then picked up again, but since 2012 it has barely kept pace with world GDP growth. Trade revived along with global economic growth in the first quarter of 2017. But it is too early to tell if this is a new trend or just a blip on the screen.
Second, protectionism has increased since the GFC. It has not escalated to 1930s heights, nor has it reversed existing globalisation. Rather, post-GFC protectionism has been ‘creeping’ up, mostly through anti-dumping duties and insidious non-tariff barriers such as subsidies, onerous standards requirements and public procurement restrictions.
Third, President Trump has announced the US’ withdrawal from the TPP. This is highly unfortunate for two reasons. First, the TPP was the most ambitious trade deal in 20 years, with hard rules for freer trade and foreign investment. Second, it was a geopolitical signal of US reengagement in Asia — the vaunted US ‘pivot’. Now these economic gains are foregone. And it is a dangerous signal of US disengagement from Asia.
This leaves the field open for China to assume trade leadership in Asia. It is already doing so on infrastructure. China is the leading power in the Regional Comprehensive Economic Partnership (RCEP), which brings together the ASEAN countries plus six others. But RCEP is shaping up to be a typically ‘trade-lite’ intra-Asian trade agreement. While it will eventually remove most import tariffs, it will likely do little to tackle the non-tariff and regulatory barriers that are by far the biggest obstacles to trade and foreign investment in Asia.
The first ‘more likely’ scenario is of trade winds blowing in a more protectionist direction, starting in the United States. In addition to the US withdrawal from the TPP, President Trump wants to renegotiate the North American Free Trade Agreement (NAFTA), has threatened high tariffs against China and against US companies that relocate production abroad, and says he will ignore the World Trade Organisation (WTO). The US’s other major trade initiative, a free trade agreement with the EU, is either stalled or dead. Trump’s senior trade policy appointees are fellow economic nationalists. All are obsessed with trade deficits, China-bashing, and industrial policy to revive United States manufacturing.
New US protectionism could begin with a spike in antidumping and countervailing duties, aimed first at China. Import taxes, euphemistically called a ‘border tax adjustment’, could be part of a US tax-reform package. Other measures might follow that would cause a flood of WTO disputes. And other countries would follow the US protectionist lead, starting with the EU and China.
If this happened, it would only accelerate trends since the GFC. Creeping protectionism would no longer be creeping: it would accelerate, affecting bigger chunks of international trade and disrupting global value chains. Peak trade would be worse: there would be a bigger world trade slowdown. That would drive world GDP growth even lower, in the West and the rest.
But there are powerful countervailing forces. The most potent is existing globalisation through global value chains. United States companies are woven thickly into them, and they will likely lobby against Trumpian protectionism. United States producers and consumers will suffer from US protectionism and other countries’ retaliation. The Congressional Republican leadership, some cabinet officers and senior White House staff, as well as Republican and Democrat governors in the states, could restrain the economic-nationalist impulses of Trump and his senior trade appointees.
The second more pessimistic scenario is a full-blown trade war: unrestrained US protectionism, escalating tit-for-tat retaliation by the EU, China and others, perhaps the break-up of NAFTA and the severe disruption of global value chains. This would be a lurch back to 1930s-style protectionism, de-globalisation and depression. But this is unlikely.
A more optimistic scenario would be of others taking up the baton of open-market trade leadership. The EU might be up for it. And China. International cooperation would be more equally shared. And the WTO revived. But this is also doubtful. Both the EU and China have ever bigger internal weaknesses that limit their ability to lead abroad. Absent the United States, prospects for international trade cooperation are bleak, not least in the WTO.
Outward-looking US leadership is still essential for international trade. Without it, the world economy would be worse all-round — more unstable and less open. That is true for other areas of global economic policy and for global security. The United States, contrary to gathering conventional wisdom, is still the ‘indispensable nation’.
Razeen Sally is Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. He tweets from @razeensally.
More than ever, cities are the lifeblood of the global economy, and increasingly determining the wealth of nations. Productive policy innovation is taking place in cities, more often than in the halls of national governments or international forums such as the UN, EU and G20. The closer it is to the citizen, the more flexible and practical policy-making becomes. Also, the more experimental it becomes, contributing to all-round learning and adaptation. Cities emulate one another and adopt best international practice better than nations do.
Competitiveness hinges on the productivity of the city, its ability to use available inputs to drive sustainable economic growth and prosperity. In the Competitiveness of Cities Report, we compiled 33 case studies of cities around the world – cities with different endowments and at different stages of development. Some are proven success stories, others are potential success stories, while yet others have become stuck or failed.
So what did we learn? Urbanization is the “megatrend” that is most relevant to city competitiveness. Never before have urban spaces and populations grown at the speed and scale they are doing today. As of 2010, for the first time in history, more than half of the world’s population lives in cities. But they already account for over 80{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global GDP. According to the UN, an extra 2.4 billion people around the world will urbanize by 2050.
For the foreseeable future, rapid urbanization will be almost exclusively a non-Western affair: 94{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of those who move to cities in the next few decades will come from the developing world. McKinsey Global Institute estimates that, by 2025, the developing world’s top 443 cities will account for close to a half of global GDP growth and 18{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global GDP. These cities will contain the bulk of about 1 billion new middle-class consumers.
So what are the key lessons for city competitiveness? We offer a checklist of four items, which constitute our what-to-reform, how-to-reform agenda.
Think institutions, the decision-making framework of the city. Leadership and vision (a clear, farsighted view of where cities should head, and a single-minded practical will to ensure they get there) show the power of city leaders as CEOs. Lee Kuan Yew in Singapore, Sheikh Mohammed in Dubai, Sergio Fajardo in Medellin, Colombia, and SR Rao in Surat, India, are stellar examples.
Singapore highlights the importance of gradually building up institutional strength through successive phases of development. But Monterrey in Mexico and Cebu in the Philippines point to fragile institutions that can endanger existing gains as well as future competitiveness. Cities should also look out for windows of opportunity– often during a political or economic crisis – to push through a critical mass of decisive reforms. This is what happened when Singapore was kicked out of Malaysia in 1965, and when Surat was stricken by plague in 1995.
Think of the regulatory framework for the city’s business climate.“Getting the basics right”– stable and prudent fiscal policies, including low and simple taxation, a flexible labour market, openness to trade and foreign investment, simple and transparent business regulation – is the primary lesson for good public policy, at both national and municipal levels. Cities should develop their own foreign economic policies on trade, foreign investment, tourism and attracting foreign talent, and go global as far as they can. Singapore, Dubai, Hyderabad and Ahmedabad in India, and Ningbo in China are great examples.
Think “hard connectivity” – the city’s core physical infrastructure. Cities need a mixture of planning and organic growth, which are complements, not substitutes. Manhattan is a great example with its street grid and room for organic expansion over the past two centuries. Brasilia, Chandigarh in India, and many Chinese cities today are counter-examples of over planning. Next, urban density, including “building tall” in city centres, is preferable to urban sprawl. Hong Kong and Singapore are great examples of urban density, as is Chicago in recent years.
Think “soft connectivity” – the city’s social capital. Education is the ultimate form of this. US cities such as Boston, Pittsburgh and St Louis have escaped post-industrial decline and specialized in knowledge-intensive niches by capitalizing on their strengths in education. Next, cities need to facilitate digital infrastructure to support human-computing interfaces that empower individuals. Also, making cities more liveable – improving the quality of urban life – must be a higher priority for upper-middle-income and high-income cities. Wroclaw (Poland), Leipzig (Germany), Busan (South Korea) and Curitiba (Brazil) are good examples.
Reforms at the municipal level are usually more feasible than at the national level, even when they seem impossible in national capitals. Urbanization trends enlarge these possibilities. Cities should grasp this opportunity, experiment with new rules and put reforms on a fast track.
The renowned urbanist Jane Jacobs said that successful cities are those that are flexible and adapt quickly to changing conditions. That is borne out by the success stories mentioned here. The alternative is to become stuck in mono-industrial, monocultural decline, such as happened in Detroit.
The right mixture of priorities requires tailoring to specific conditions and stages of city development. Most obviously, priorities for a Western city with a stable population, facing sluggish growth, unemployment and ageing, will be quite different to those of an emerging-market city with lower income levels, high growth potential, a fast-expanding population and big gaps in infrastructure.
This article was originally published by the World Economic Forum on the 15th August 2014
Author: Razeen Sally was chair of the World Economic Forum’s Global Agenda Council on Competitiveness in 2013-14 and coordinated its new study on the competitiveness of cities.
In the video below Razeen argues that countries around the world need to devolve power to cities and be more open to foreigners if they are to benefit from new patterns of urbanization.
In trade policy the negotiating action is now in “mega-regionals” – big-block trade agreements revolving around one or more major powers. ASEAN is involved in two, the American-led Trans-Pacific Partnership (TPP) and the Chinese-led Regional Comprehensive Economic Partnership (RCEP). Are mega-regionals good for trade and economic growth? Will they spur regional and global economic integration? Where does ASEAN stand?
As of 2013, there were 261 free trade agreements (FTAs) in Asia, over a hundred of them operational. Asia’s three major powers, China, Japan and India, are heavily involved. Among ASEAN countries, so are Singapore, Malaysia and Thailand. ASEAN also has its own ASEAN Free Trade Area (AFTA), now upgraded into the ASEAN Economic Community (AEC). And ASEAN has collective FTAs with China, Japan, South Korea, India, and Australia-New Zealand.
The strength of FTAs varies enormously. US FTAs in Asia are by far the strongest. They have the widest sectoral coverage and go deepest with disciplines to ensure market access. But they contain exemptions for politically sensitive sectors, and are riddled with complex and discriminatory rules-of-origin (ROO) requirements. EU FTAs are the next strongest. But intra-Asian FTAs are generally weak – they are “trade-light”. The better ones remove tariffs on most goods, but they are weak on disciplining protectionist regulatory barriers in goods, services, investment and public procurement. That is true of Chinese, Japanese and Indian FTAs, as well as the FTAs of ASEAN countries.
Overall, the new wave of FTAs has not given a big boost to trade and foreign investment. But nor has it impeded trade growth. Effects have been broadly neutral, or at best marginally positive.
Now attention has shifted to mega-regionals. There are three being negotiated: TPP, RCEP, and the EU-US Transatlantic Trade and Investment Partnership (TTIP). TPP’s membership is twelve to date (USA, Mexico, Canada, Chile, Peru, Australia, New Zealand, Japan, Singapore, Brunei, Malaysia and Vietnam). It started earlier than the others and is the closest to completion. RCEP’s members are the ASEAN countries plus China, Japan, South Korea, India, Australia and New Zealand.
Taken together, these three mega-regionals account for the bulk of world trade and GDP. Mega-regionals potentially amplify the gains from trade liberalisation. If done cleanly and comprehensively, they would iron out distortions caused by multiple and overlapping FTAs among members (such as differing ROOs). With a bigger integrated economic space, they can reap economies of scale and spur technological innovation. This is particularly important for global supply chains. Regional production networks to serve global markets are the biggest drivers of productivity, employment and growth in international trade. They have a big stake in integrated regional and cross-regional markets. Still, mega-regionals are not “multilateral”: they discriminate against non-members. That is a big potential source of disruption to global supply chains.
TTIP and TPP are the most ambitious mega-regionals. They cover markets for all goods, services, investment and government procurement, and go deep into regulatory disciplines, including on intellectual property, food safety and technical standards, and customs procedures. In TPP, “twenty-first century” innovations include rules to facilitate supply chains and e-commerce. But there are major barriers that stand in the way of success. Protectionist lobbies are big obstacles in several countries, including parts of agriculture and autos in the USA, agriculture in Japan, government procurement in Malaysia, and state-owned enterprises in Vietnam. The US insists on intellectual-property, public-health, labour and environmental standards, and ROO requirements that may impede market access for developing countries. And the Obama administration lacks Trade Promotion Authority from Congress, without which TPP is unlikely to be concluded and ratified. TTIP has also been slowed down by obstacles on both sides of the Atlantic.
RCEP looks the least ambitious. If it follows the pattern of intra-Asian FTAs, it will remove tariffs on about 90 per cent of goods over a fairly long timeframe. But it will have weak disciplines on non-tariff regulatory barriers that are the biggest obstacles to trade in the region. It might end up agglomerating the “noodle-bowl” of FTAs among members rather than ironing out distortions among them. In such a scenario, RCEP will create little new trade and investment, and cause extra complications for global supply chains. But negotiations still have some way to go.
Much depends on US and Chinese leadership. President Obama’s leadership is needed to conclude a “high-quality, 21st-century” TPP – and open the door to eventual Chinese membership. But he has conspicuously failed to lead on international trade. Similarly, the Chinese leadership has been defensive on trade policy for almost a decade. But there are signs that China is becoming interested again in regional and global trade liberalisation. It will take Chinese leadership to inject more ambition into RCEP.
All ASEAN countries are in RCEP and four are in TPP. What should they do on mega-regionals? First, they should push for ambitious agreements that are wide (with maximum sectoral coverage) and deep (with strong disciplines on regulatory barriers), with relatively simple ROOs and open accession clauses for non-members. Only this type of mega-regional is likely to create significant trade and investment, and facilitate the expansion of global supply chains.
Second, they should back this up with intra-ASEAN measures, such as accelerating progress on AEC and strengthening provisions in existing FTAs. But it must be recognised that mega-regionals, and indeed other FTAs, are not a panacea. Political realities will inevitably dilute their ambition and quality. Given their gaps and distortions, they are unlikely to deliver the huge gains that many pundits predict. This applies to TPP, RCEP and AEC.
The key policy implication that follows is that ASEAN countries should go as fast, wide and deep as possible with unilateral liberalisation. They should also “multilateralise” preferences in existing FTAs as far as possible, i.e. extend them to non-members on a non-discriminatory basis. This is how ASEAN countries have liberalised and integrated into global supply chains in the past. That is unlikely to change in the future.
This article is reproduced from a regular column for the Singapore Straits Times. Sally is a Tutwa Senior Associate.
Two thousand five hundred participants, protected by 4000 Swiss troops, gathered in Davos in late January to chew the cud on all matters “global”. The mood reflected the clear blue sky above the snow-capped peaks. The chatter was mostly about Europe and the West, and less about the Rest. Gamely, we sloshed about in the snow and endured multiple security checks while commuting between events. And everyone was cheery at the farewell soirée on the “magic mountain”, the setting for Thomas Mann’s eponymous novel. (more…)
That Asia is set to overtake the west as the engine room of the global economy is accepted conventional wisdom. But once the pack leaders approach the technology and efficiency frontier, currently occupied predominantly by Western economies, what will they have to do to sustain and deepen their growth and development in order to avoid falling into the middle income trap? Tutwa Associate Razeen Sally argues that the key is for Asian countries to pursue greater economic freedoms for their citizens, in order to unleash their creative and entrepreneurial potentials. (more…)
More than ever, cities are the lifeblood of the global economy, and increasingly determining the wealth of nations. Productive policy innovation is taking place in cities, more often than in the halls of national governments or international forums such as the UN, EU and G20. The closer it is to the citizen, the more flexible and practical policy-making becomes. Also, the more experimental it becomes, contributing to all-round learning and adaptation. Cities emulate one another and adopt best international practice better than nations do.
