New Trade Realities Cause Concern

By Jomo Kwame Sundaram and Anis ChowdhuryReprint | |

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The majority of Cambodia’s exports to the European Union (EU), are textiles such as garments and shoes. Credit: Michelle Tolson/IPS

KUALA LUMPUR and SYDNEY , Sep 26 2018 (IPS) - Trade liberalization, a key dimension of recent globalization, has failed to promote broad structural transformation in developing countries and has instead contributed to increased worldwide inequality, a new United Nations report shows.

The Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion (TDR 2018) suggests that the profits surge and growing concentration of large transnational corporations, have depressed labour’s global income share, worsening income inequality.

The UN report also finds that policies that helped China to successfully develop, diversify and upgrade are now being discouraged, if not blocked, by developed countries influenced by transnational corporations threatened by such policies.

Despite long-standing concerns in developing countries about the international trading system, heightened recent anxiety in developed countries has strengthened scepticism about the supposedly shared benefits of trade liberalization.

Jomo Kwame Sundaram

More positive attitudes to trade liberalization will require more than seductive, but also deceptive slogans such as ‘freer trade lifts all boats’. Instead, a new momentum based on a more inclusive and developmental trade agenda is needed, reflecting the raison d’etre of the United Nations Conference on Trade and Development (UNCTAD), the TDR’s author.

Trade-induced structural change?
While the growing role of developing countries in international trade has been important for recent globalization, the ‘rise of the Rest’ – mainly developing countries or the ‘South’ – is a mainly East Asian story.

TDR 2018 shows that rapid export growth mainly came from the first-tier East Asian newly industrialized economies, and then China. Meanwhile, developed countries’ share of world exports declined, from nearly three-quarters of gross merchandise exports in 1986, to just over half in 2016. Export shares in most other developing countries remained constant or declined, except when commodity prices rose.

China stands out among the BRICS, whose share of world income soared from 5.4 per cent to 22.2 per cent during this period. Without China, the share of Russia, India, Brazil and South Africa in global output only rose from 3.7 per cent in 1990 to 7.4 per cent in 2016.

Anis Chowdhury

In 2016, East Asia accounted for about 70 per cent of all developing countries’ manufactured exports. Only East Asian developing economies have headquarters of leading transnational corporations. Of the world’s top 2,000 transnational corporations, transnational corporations’ share of profits rose from 7 per cent in 1995 to over 26 per cent in 2015.

More exports, less diversity
As developing countries increasingly rely on global market access, their exports have generally become less diverse. TDR 2018 associates these trends with spreading global value chains and the challenges of ‘catching up’ without a strong ‘developmental state’.

In fact, such value chains have long characterized commodity trade. Since 1995, 18 of the 27 developing countries with the relevant data had increased shares of extractive industries in export value added.

But, except for China, spreading global value chains have seen declining shares of domestic value added in gross exports. Except in East Asia, there is little evidence of ‘upgrading’ in these chains. While growing demand from China has stimulated growth in many developing countries in recent decades, it has not enhanced or diversified their export profiles.

Unfair trade
Size matters for corporate behaviour, both at home and abroad. Trade has been dominated by big firms, especially since the mid-1990s. Among exporting firms, the top percentile accounted for 60 per cent of exports, while an average of ten firms accounted for 40 per cent of exports.

Unsurprisingly, new entrants and smaller exporters have low survival rates, with three quarters giving up exports after two years, with developing country firms faring worse than their developed country counterparts.

Besides ‘hollowing out’ due to ‘offshoring’ from advanced economies, the income shares of low and medium skilled production workers in most developing country value chains besides China have been declining due to fabrication’s falling share of value added.

Size also matters for profitability, with the rapid profit growth of the top 2,000 firms depressing global labour income share. Worsening inequality attributed to trade is due to more profits from ‘intangible assets’, higher headquarters’ incomes, and cutting production costs.

Many big international firms engage in trade resulting in greater income flows to low-tax or no-tax jurisdictions. Payments for intellectual property have risen sharply in the last two decades in countries such as Ireland, Luxembourg, the Netherlands and Switzerland. Transnational corporate incomes in such locations have been rising far more than where their products are made or sold.

Policy space
TDR 2018 concludes that the problem is not with trade per se, but rather with its management and regulation. Rhetoric about ‘win-win’ solutions typically obscures how benefits can be more broadly shared.

UNCTAD argues that South-South trade agreements are less susceptible to such abuses of corporate power and influence. In contrast, policy space has been increasingly constrained by typical free trade agreements, reflecting powerful corporate influences via opaque negotiations.

Such agreements augment corporate profits, especially through ‘non-trade’ provisions. Inter alia, such clauses enhance intellectual property rights, cross-border capital flows, investor-state dispute settlement procedures, and harmonization of regulatory standards.