Insecurity Aaditya Mattoo Development Research Group, World Bank - PowerPoint PPT Presentation

Trade and Cooperation in an Age of Insecurity Aaditya Mattoo Development Research Group, World Bank G-24 Technical Group Meeting, Colombo, 27-28 February 2018

Three questions • What is happening to global trade and why do we care? • Trade growth has slowed down and that may be hurting productivity • What is happening to trade agreements? • Trade agreements are becoming deeper and less trade diverting • How do we address the backlash against globalization? • The political economy of trade is changing and requires a new paradigm of international cooperation

Th The rela latio ionship ip betw tween world rld tr trade and inc income has changed in in recent decades Average growth rates across selected periods and years (percent) Trade volume Real GDP (market prices) 7 6 5 4.3 4 3.0 3 2 1 0 Sources: World Bank World Development Indicators, World Bank Global Economic Prospects Jan. 2018 for the 2017 estimates, and authors’ calculations. Note: Trade growth is the average of import and export growth rates.

Th The glo lobal l tr trade slo slowdown is is attrib ibutable le not t to se servic ices or r commodit itie ies, but to manufacturin ing 1986-2000 2001-2014 1986-2000 2001-2014 Average yearly import value growth (percent) Average yearly import value growth (percent) 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Machinery and Transport Other goods Goods Services Equipment The rapid growth in world trade in the Within goods, the significant long 1990s and the subsequent deceleration of trade growth was in slowdown in the 2000s was driven by the manufacturing sector goods rather than services Source: UN Comtrade, WTO Trade in commercial services database.

With ithin in manufacturi ring, tr trade growth declin lined more in in su subsectors with ith greater vert rtic ical l sp specia iali lizatio ion In the long 1990s, trade in the most In the 2000s, the largest declines in vertically specialized sub-sectors saw trade growth were in the sub- much faster rates of growth sectors with higher degrees of vertical specialization. Source: Source: Constantinescu, Mattoo and Ruta (2016), drawing on UN Comtrade, via WITS (ISIC2 classification). Notes: *** indicates a significance level of 1%, ** of 5% and * of 10%. Charts display sub-sectors of "Manufacturing of Fabricated Metal Products, Machinery and Equipment" (division 38 in ISIC2). Vertical specialization is the share of parts and components in a sub-sector's trade. The size of the bubbles denotes sub-sector's share in trade of ISIC2 division 38.

Maturatio ion of f Glo lobal l Valu lue Ch Chain ins Measures of world vertical specialization, 1995-2014 (percent) 120 110 100 90 Foreign value added (% of exports), WIOD 2013 80 Foreign value added (% of exports), WIOD 2016 70 Import content of exports, % of manufacturing exports (WITS, WIOD) 60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Input- Output Database (2013 and 2016 releases), UN Comtrade (WITS), authors’ calculations Notes: The measures of vertical specialization based on WIOD 2013 and 2016 data are shares of foreign value added in gross exports of goods and services. The third measure relies on manufacturing trade data from the UN Comtrade (obtained via WITS) and output data from WIOD.

Risi ising protectio ionis ist rh rhetoric ic is is so so far r not t refle flected in in ris risin ing protectio ion Share of trade covered by import-restrictive measures in world merchandise imports, percent b. Share of trade restrictive measures, including a. Number of trade restrictive measures remedies, in world merchandise imports, including trade remedies percent trade remedy initiations 350 trade remedies initiations restrictive trade measures excl. remedies 300 total share of world merchandise imports restrictive trade measures 250 1.4 1.4 excl. remedies 1.3 1.2 200 1.0 150 100 50 0 2011 - 2012 - 2013 - 2014 - 2015 - 2016 - 2011 - 2012 - 2013 - 2014 - 2015 - 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 Source: World Trade Organization, various issues of the “Overview of development in international trading environment.”

Bu But t declin linin ing pace of f tr trade li liberali lizatio ion may have pla layed a role le in in th the tr trade slo slowdown Average applied tariffs in advanced economies and Imports of Goods and Services emerging and developing economies (percent) (percent of GDP in US dollars) High income countries High income countries Low and middle income countries 35 40 35 30 30 25 25 20 20 15 15 10 10 5 5 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Faster trade liberalization in the 1990s relative to The liberalization led to a significant increase in the 2000s the ratio of imports to GDP Source: UNCTAD TRAINS. World Bank World Development Indicators. *Simple averages of MFN Applied and Preferential tariffs. Note: The data for tariffs does not pertain to a consistent sample of countries over time.

And the recent rise in policy uncertainty may have contributed to slowing trade World import growth and policy uncertainty, from mid-2012 to 2016 7% 300 U.S. U.K. elections referendum Monthly global economic policy uncertainty (index value, right axis) 6% 250 Europe's 5% immigration crisis 200 4% 150 3% 100 2% 50 1% Quarterly world merchandise imports volume (year-over-year percent change, left axis) 0% 0 2012 2013 2014 2015 2016 Source: CPB Netherlands Bureau of Economic Policy Analysis, www.PolicyUncertainty.com - Baker, Bloom and Davis (forthcoming), and staff calculations.

Some evidence that economic policy uncertainty hurt trade growth 0.4 Using new data on policy uncertainty for 18 Import volume (log-difference) 0.3 countries and over 20 years, we find a 1 y = -0.0692x + 0.3794 0.2 percent increase in uncertainty is associated R² = 0.0843 with a 0.02 – percentage point reduction in trade 0.1 volume growth. 0 Based on these estimates, the increase in -0.1 economic policy uncertainty in 2016 may have -0.2 caused a 0.6 percentage point decrease in trade growth. -0.3 -0.4 3 3.5 4 4.5 5 5.5 6 Log of Economic Policy Uncertainty (EPU) index Source: Constantinescu, Mattoo and Ruta (2017), Policy Uncertainty and the Global Trade Slowdown, World Bank.

The trade slowdown may have an impact on countries’ growth th On the demand side (Keynes): • Sluggish world imports may reduce opportunities for individual countries’ exports • However, the elasticity of world value-added exports to world GDP has been more stable ... On the supply side (Smith): • Slower trade growth diminishes the scope for productivity growth through specialization and diffusion of technologies. In particular, a slower pace of GVC expansion may imply diminishing scope for productivity growth through a more efficient international division of labor and knowledge spillovers • However, trade to GDP ratio remains historically high and openness may continue to deliver benefits. Also fragmentation within countries, often FDI-driven, could sustain productivity.

Ass ssocia iatio ion betw tween vert rtic ical l sp specia iali lizatio ion and lab labor productiv ivit ity Manufacturing industries: vertical specialization and labor productivity, 1995-2009 0.4 Growth in labor productivity 0.3 0.2 y = 0.2029x + 0.0217 R² = 0.2167 (percent) 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 Growth in vertical specialization ( percent) Source: Constantinescu, Mattoo and Ruta (2017) based on data from the 2013 Release of the World Input-Output Database (WIOD 2013) (Timmer et al. 2015). Notes: Each dot represents a country – year combination. Labor productivity is computed as the real value added divided by the number of persons employed. Vertical specialization in manufacturing for each country and year includes the foreign value added embodied in exports (backward linkages) as well as the domestic value added embodied in exports that the direct importer exports further or that returns home as imports (forward linkages).

Im Impli lied effect t of f a 10 percent inc increase in in in intermedia iate im import volu lumes on lab labor r productiv ivit ity 2.5 2 1.99 1.7 1.5 1 0.7 0.5 0 Imports of intermediates Imports of intermediates in Foreign value added domestically-asorbed embodied in exports output Source: Constantinescu, Mattoo and Ruta (2017) based on data from the 2013 Release of the World Input-Output Database (WIOD 2013) (Timmer et al. 2015). Notes: Based on panel regressions of log of real value added per employee, by industry, country, and year, on log of real capital stock per employee, log of price-deflated trade indicators (lagged 1 year), and fixed effects. Robust standard errors corrected for clustering at country-industry level are used. The coefficient reported for foreign value added embodied in exports is an instrumental variable (IV) estimate.

WHAT IS HAPPENING TO TRADE AGREEMENTS?