A War No Country Can Win

OECD Tokyo Head and G1 Global Board Member Yumiko Murakami shares her insights on the recent developments in global trade. This article was originally written on June 5, prior to the G7 Summit. Reprinted with permission from the Japan Times.

Sharing a panel at an economic forum at the Organization for Economic Corporation and Development in late May, U.S. Commerce Secretary Wilbur Ross and his European counterparts provided a striking contrast in their views on multilateralism.

“The sky has not fallen on the U.S. and it won’t,” said Ross, brushing off the concerns raised by the EU trade ministers about the adverse impact trade tariffs would have on global economies. Less than 24 hours after Ross’ blunt comments in Paris, the United States announced steep tariffs on steel and aluminum from their largest trading partners—Mexico, Canada and the European Union. All three of them immediately announced their intentions to retaliate with their own tariffs against American products. “Trade War” was headlined in breaking news and the global stock markets predictably took a hit.

If indeed this trade conflict is escalated to a trade war, no country will emerge a winner. Today, international imports and exports account for a third of the total global GDP, doubling from two decades ago. Any downward pressure on trading activity will have dire implications for the world economy. But rather than paint a gloomy picture of a world with less trade, let’s look at the benefits of enhanced trade integration. In a hypothetical scenario in which tariffs in each sector are reduced to the lowest level applied across Group of 20 economies, global trade would expand by an additional 3 percent over the medium term, based on estimates from the OECD studies.

The sheer volume of world trade today is clearly immense. Equally important is global connectedness, which is an undeniable force behind the engine of economic growth in the 21st century. Business is much more integrated and interlinked today than in the past, and therefore an escalation of trade tensions can significantly affect economic expansion and disrupt vital global value chains.

Trade policy liberalization, advances in technology and increased participation of emerging economies in the international division of production and labor have brought about large structural changes in global trade over the past 20 years. A growing number of companies engage in overseas sales through operations abroad, with the median share of overseas sales in total sales rising over the past 20 years in Europe, Japan, and the United States.

The increased share of exports measured in value-added terms that move through other markets before they reach their final destination is also a good indicator of the growing complexity and vulnerability of supply chains. It often amounts to a third of the total value added exported from the source to the final destination.

For example, that share in German exports to Japan is now over 43 percent, up from just 30 percent two decades ago. The case of the iPhone is a well-known example that demonstrates the global value chain in which multiple countries, including the U.S., China, Germany, Taiwan, South Korea and Japan, are intricately linked through the supply chain. Today, countless products go through the multifaceted global value chains before they reach the final consumer.

The end consumer, in this case, has enjoyed better products and lower prices, thanks to the global value chains. Companies can take advantage of competitive offerings of input required for the final product in various markets around the world as long as they are not subject to trade restrictions. In other words, consumers will be the losers in a trade war as they would be forced to pay more for possibly lower quality products.

In addition, most countries have been making substantial investments in overseas markets where they have business relations and operations. In the major advanced and emerging market economies, the stock of foreign direct investment assets and investment income from FDI in relation to GDP have doubled or tripled since the 1990s. Outbound FDI stock of the U.S. for example, was 35 percent of its GDP in 2016, compared to 14 percent in 1996. A similar trend has been also observed with inbound FDI stock in the U.S. It all implies that any unilateral trade sanctions would inevitably bring about unintended consequences outside of targeted countries in this age of global connectedness.

Understandably, increased trade intensity and companies moving their operations overseas have raised concerns about their impact on employment and inequality in the home economies.

There is no doubt that the desire to protect jobs for middle-class American workers has motivated U.S. President Donald Trump to take restrictive measures on foreign trade. The evidence suggests, however, that increased trade has played a less prominent role in overall employment and inequality developments than other factors, particularly technology. Rather than simply imposing trade sanctions on trading partners, broader policy packages including training of workers, industry diversification and upgrading physical capital, should create more jobs and lead to higher productivity and incomes for U.S. workers.

Minutes after Ross’ remarks raised the eyebrows of the European audience, French President Emmanuel Macron made a passionate plea to embrace multilateralism at the same OECD conference. He called for a complete overhaul of the World Trade Organization, which has lost the ability to implement and enforce rules and international trade agreements on its member countries.

Perhaps this is the last hope we have left to preserve a rule-based multilateral trade system. Macron proposed that the U.S., EU, China, and Japan work together to produce a blueprint to reform the WTO by the end of the year. However daunting and challenging it may be to revive this multilateral organization, this proposal should be taken seriously and urgently by all these countries as the stakes are high.

If the sky falls, it won’t be on just one country but rather all of them.

Photo by Donato Fiorentino 

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