The World Trading System and Macroeconomic Performance

1
The World Trading System and Macroeconomic
Performance

• Simon J. Evenett
• World Trade Institute

2
Todays lecture

• What have been the deep structural changes in the
  world economy since 1990?
• What factors are responsible?
• What developments have there been in the world
  trading system?
• What are the links between trade reforms and
  macro performance?
• Economic growth
• Financial crises
• Lessons from the 1990s

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Structural changes in the world economy since 1990

• Growing international trade flows
• Regional dimension
• Parts and final goods
• FDI boom
• Greenfield FDI
• Mergers and acquisitions
• Changing corporate form outsourcing, alliances,
  JVs etc.
• The long boom, financial volatility, and crises
• Growing inter-national and intra-national
  inequality

4
What factors are responsible?

• The rise and fall of the Washington Consensus
• External reform reduced discrimination against
  foreign firms and investors
• Internal reform deregulation and privatization
• East Asian crisis and after catharsis
• Falling air transport costs
• Skill-biased technical change
• Integration of transition economies (China, E
  Europe)
• Falling communication costs and democratization

5
Narrowing our focus to the World Trading System

• What do we mean by this term?
• Differentiate between outcomes and disciplines on
  governments
• Disciplines on discrimination
• Two forms of discrimination
• Against all foreigners
• Against some foreigners
• Manifestation MFN and national treatment rules
  in trade agreements

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Rules on what?

• Trade in goods
• Manufacturing
• Agriculture
• Trade in services
• Taxation of service trade (e-commerce)
• Rights of establishment (banks, utilities)
• Appropriation of foreign investments
• Physical investments
• Intellectual property

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Rule setting in what fora?

• Unilateral some developing economies
• Regional EU, NAFTA, Mercosur, APEC, AFTA
• Multilateral WTO and GATT

8
Regional developments

• Europe EU and its partners
• Accession candidates and agreements
• Non-accession candidates
• Asia Pacific APEC and beyond
• Before crisis
• After crisis
• Chinas accession to the WTO
• The Americas
• NAFTA
• Mercosur
• FTAA?

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Multilateral initiatives

• Completion of the Uruguay Round (1994)
• Expanded scope agriculture, services,
  intellectual property
• Creation of WTO
• Dispute settlement
• Singapore Ministerial (1996) and new issues
• Seattle Ministerial (1999) disaster
• Doha Ministerial (2001)
• Built in agenda plus what?
• Developing economy participation
• Mexico Ministerial (2003) Big show down?

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Macroeconomic effects of trade and investment
reforms

• Economic growth
• Financial stability
• Labor market outcomes

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Linkages between trade and investment reform and
economic growth

• Demand side explanations export-led growth and
  multiplier effects
• Careful to distinguish between sales and value
  added
• Supply side explanations
• FDI expands a nations capital stock
• FDI improves the quality of a nations capital
  stock
• Dependant on high skill workers and workers

12
Linkages between trade and investment reform and
macro stability

• Focus first on impact of foreign banks only
• Source of discipline or instability?
• Gambling for redemption
• Confidence and banking regulation
• Focus on effects of FDI booms only
• Current Account(T-G)(S-I)
• FDI boom leads to a surge in I
• Foreigners accumulate domestic physical assets
• Can cause inflation and asset price bubbles

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The Scary Stuff

• FDI boom accompanied by surge in portfolio
  investments
• Capital inflows must be allowed
• Portfolio flows can lead to stock market booms,
  lending booms, and property booms
• Maturity mismatch
• Importance of confidence Runs for the door
• Government response
• Near term Depends on exchange rate regime
• Long term Chiles scheme?

14
Impact of trade and investment reforms on the
labor market

• Growing inequality in and across nations
• How much due to trade?
• Studies say less than 20 percent. Rest is due to
  skill biased technical change.
• Migration response, especially for highly skilled
  workers.
• Worldwide competition for talent. Keeping good
  people?
• Africa 120,000 PhDs live there. As many live
  abroad

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Lessons from the 1990s

• Trade and investment reforms have macro as well
  as micro consequences.
• Firm overseas investment decisions must avoid
  fallacies of composition
• The success of trade and investment reforms
  depends on macro policies, especially towards the
  exchange rate and capital flows
• Means making openness work for nations is much
  harder than we ever thought