Exports, Trade Policy and Economic Growth in Eras of Globalization 9780415372190, 9781315231358

Table of contents :
Cover
Title
Copyright
Dedication
Contents
List of figures
List of tables
Preface
1 Introduction
2 Exports, trade policy and economic growth: demand side growth accounting and an overview of theoretical and empirical evidence
3 Exports in the first era of globalization and interwar years: trade policy and export expansion measures
4 Exports, trade policy and economic trends in the postwar era
5 Exports and economic growth: a new assessment of the postwar era
6 Regional trade agreements and their impact on exports
7 The importance of export-led growth: time series
and panel data evidence
8 Challenges confronting globalization
References
Index

Citation preview

Exports, Trade Policy and Economic Growth in Eras of Globalization

This book provides an excellent resource for understanding the forces in international trade liberalization over two centuries that have brought us to this point, where the successes, setbacks and the countervailing forces now vie for the public’s mind and support: the outcome of which will determine the future progress of increased globalization, or lack thereof. The book also examines whether trade policy has indeed promoted exports in the vast number of countries which increasingly look to trade agreements to gain a competitive edge, and to what extent export-driven growth has been an important force in advancing economic development around the world. In doing so, the book examines one of the most controversial issues in economic development: the promotion and significance of export-led growth. Edward M. Feasel is the Vice President for Academic Affairs and Professor of Economics at Soka University of America, USA. He received his bachelor’s degree in Economics from Yale University and completed his doctoral degree in Economics from the University of California, Berkeley. His research interests are in economic outcomes and societal values, regional economic issues, the Orange County economy, economic growth and its relation to development assistance and trade, and effects of monetary and fiscal policy. He is the author of Japan’s Aid: Lessons for Economic Growth, Development and Political Economy.

Routledge Studies in the Modern World Economy

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Exports, Trade Policy and Economic Growth in Eras of Globalization Edward M. Feasel

First published 2018 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2018 Edward M. Feasel; Chapter 6 and Chapter 7, Edward M. Feasel and Daiki Kumazawa The right of Edward M. Feasel to be identified as author of this work, and Edward M. Feasel and Daiki Kumazawa to be identified as authors of Chapter 6 and Chapter 7, has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Names: Feasel, Edward M., author. Title: Exports, trade policy and economic growth in eras of globalization / by Edward M. Feasel. Description: Abingdon, Oxon ; New York, NY : Routledge, 2018. | Series: Routledge studies in the modern world economy ; 177 | Includes bibliographical references and index. Identifiers: LCCN 2018009033 | ISBN 9780415372190 (hardback) | ISBN 9781315231358 (ebook) Subjects: LCSH: Exports. | Free trade. | Commercial policy. | Economic development. | Globalization—Economic aspects. Classification: LCC HF1414.4 .F43 2018 | DDC 382.3—dc23 LC record available at https://lccn.loc.gov/2018009033 ISBN: 978-0-415-37219-0 (hbk) ISBN: 978-1-315-23135-8 (ebk) Typeset in Galliard by Apex CoVantage, LLC

This book is dedicated to my dearest students, who inspire me to grow and become better.

Contents

List of figures viii x List of tables Prefacexiii 1 Introduction

1

2 Exports, trade policy and economic growth: demand side growth accounting and an overview of theoretical and empirical evidence

7

3 Exports in the first era of globalization and interwar years: trade policy and export expansion measures

22

4 Exports, trade policy and economic trends in the postwar era

50

5 Exports and economic growth: a new assessment of the postwar era

92

6 Regional trade agreements and their impact on exports

142

(CO-WRITTEN WITH DAIKI KUMAZAWA)

7 The importance of export-led growth: time series and panel data evidence

158

(CO-WRITTEN WITH DAIKI KUMAZAWA)

8 Challenges confronting globalization

190

References214 Index222

Figures

2.1 3.1 3.2 4.1 4.2 4.3

Regional trade agreements World exports 1820–2014 (exc. 1939–1949) Number of trade treaties, 1815–1913 World exports as a percentage of world GDP GATT/WTO accession statistics Countries formerly involved in the Trans Pacific Partnership (TPP) talks 4.4 Countries involved in the Regional Comprehensive Economic Partnership (RCEP) agreement talks 4.5 Countries involved in the Shanghai Agreement 4.6 Countries involved in APEC and the Free Trade Area of the Asia–Pacific (FTAAP) 4.7 Countries involved in the Economic Cooperation Organization (ECO) 4.8 Countries involved in the Organization of Islamic Cooperation (OIC) 4.9 Countries involved in the Central American Integration System (CAIS) 4.10 Countries involved in the Union of South American Nations (USAN) 4.11 Countries involved in the Economic Community of West African States (ECOWAS) 4.12 Countries involved in the Common Market for Eastern and Southern Africa (COMESA) 7.1 Impulse responses of log real GDP, annual data 7.2 Impulse responses of log real GDP, quarterly data 7.3 Impulse responses of log real GDP, OECD and Four Tigers quarterly data 7.4 Impulse responses to Korean nominal GDP, real exports, and real GDP SVAR, 1960:1–2012:4 7.5 Impulse responses for Korean nominal GDP, real investment and real GDP per worker SVAR, 1970:1–2012:4

8 23 26 51 55 65 67 68 69 72 73 76 80 87 88 169 171 175 179 183

Figures ix 7.6 7.7 8.1 8.2

Impulse responses of Korean real investment, real exports and real GDP per worker SVAR, 1970:1–2012:4 Implications of results for Korean development process US manufacturing employment, 1960–2016 US manufacturing sales, 1992–2016

185 187 205 206

Tables

3.1 3.2 3.3 3.4

Treaty initiations by country, 1815–1913 24 Latin American countries independence 25 Export expansion measures for 1820–1992, select countries 31 Export expansion measures using nominal data from Mitchell (2017), 1820–1929 35 3.5 Export expansion measures using nominal data from Fouquin and Hugot (2016), 1820–1929 37 3.6 Exports by industry, select countries (percent of total) 40 3.7 Exports by industry, by region (percent of total) 42 3.8 Export expansion measures during the Great Depression using data from Mitchell (2007) 45 3.9 Export growth rates during the Great Depression using data from Mitchell (2007) 46 3.10 Export expansion measures during the Great Depression using data from Fouquin and Hugot (2016) 47 4.1 Asia and Pacific Islands countries independence 53 4.2 African countries independence 54 4.3 Post-Soviet countries engaged 55 4.4 Regional trade agreements in East Asia, Southeast Asia and Oceania, 1950–2017 62 4.5 Regional trade agreements in South Central Asia and West Asia, 1950–2017 70 4.6 Regional trade agreements in North and Central America, 1950–201775 4.7 Regional trade agreements in South America, 1950–2017 78 4.8 Regional trade agreements in Europe, 1950–2017 82 4.9 Regional trade agreements in Eastern Europe, 1990–2017 84 4.10 Regional trade agreements in Africa, 1950–2017 86 5.1 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Asia 94 5.2 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Americas 96 5.3 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Europe 98

Tables xi 5.4 5.5

5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19 5.20 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Africa 99 Export expansion measures (change in exports as a share of overall GDP change) for the post-Cold War, Asia and Eastern Europe 106 Manufacturing exports share 1960–1987 by SITC manufacturing industry, select countries 107 Manufacturing exports share 1990–2017 by HS manufacturing industry, select countries 110 Service exports share 2000–2015 by EBOPS services industry, select countries 113 Demand side growth accounting across regions, 1997–2011 118 Demand side growth accounting by industry for the G7 economies, 1997–2011 121 Demand side growth accounting by industry for the BRICS economies, 1997–2011 123 Demand side growth accounting by industry for select Asian economies, 1997–2011 125 Demand side growth accounting by industry for select Americas/African economies, 1997–2011 127 Demand side growth accounting by industry for select European economies, 1997–2011 128 Value-added exports by industry in 2011, Asia 130 Value-added exports by industry in 2011, Americas 132 Value-added exports by industry in 2011, Europe 135 Value-added exports by industry in 2011, Africa 138 Comparison of export expansion and contribution measures across eras of globalization 140 Comparison of export expansion and contribution measures across eras of globalization increased sample 141 GATT/WTO and RTA effect by countries in Asia and Oceania, 1950–2015 147 GATT/WTO and RTA effect by countries in Americas, 1950–2015148 GATT/WTO and RTA effect by countries in Europe, 1950–2015149 GATT/WTO and RTA effect by countries in Africa, 1950–2015150 Estimates for WTO and RTA effects in the world, 1950–2014 151 Estimates for GSP effects for all GSP providers w/ctry fixed effects, 1950–2014 152 Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Asia, 1950–2014 154 Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Americas and Africa, 1950–2014 155

xii  Tables 6.9

7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 7.15 7.16 7.17 8.1 8.2 8.3 8.4

8.5

Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Europe, 1950–2014156 Panel datasets: coverage and sources 160 Panel unit root tests results 163 Panel Granger causality test results 165 Pedroni’s panel cointegration tests results 167 Variance decompositions for log real GDP, annual data 170 Variance decompositions for log real GDP, quarterly data 172 Panel unit root and Granger causality tests for investment rate 173 Variance decompositions for log real GDP, quarterly data 176 Descriptive statistics for South Korea data 177 Unit-root tests for real exports, real GDP, and nominal GDP for Korea 177 Granger causality tests for real exports, real GDP, and nominal GDP (13 lags) for Korea 178 Variance decomposition for nominal GDP, real exports, real GDP SVAR Korea 180 Unit-root tests for real investment and real GDP per worker for Korea 181 Granger causality tests for real investment, real GDP per worker, and nominal GDP (3 lags) for Korea 181 Variance decomposition for real investment, real exports, real GDP SVAR Korea 184 Granger causality tests for real investment, real GDP per worker, and real exports (1 lag) for Korea 184 Variance decomposition for real investment, real exports, and real GDP per worker SVAR Korea 186 Number of foreign affiliates in the country by region, 1990–2010193 Number of foreign affiliates across regions and in other developing countries not listed in Table 8.1, 2010 195 Top 20 countries by sum of MNEs revenue in Global 500, 2015196 Rankings of countries, country MNEs total revenue in Global 500, and individual MNEs, 2015 (millions of US dollars) 198 Top 1 percent income share 204

Preface

The inspiration for this book came from my last book project, which compared Japanese aid with other donors. My attempt to provide a comprehensive examination on the subject brought insight to all dimensions of foreign aid, including using what was a punishment imposed on Japan, that is, war reparations, to launch its foreign assistance program, which allowed Japan to strengthen its ties with other nations and expand exports, an important element in its strategy to catch up with the West. The research showed that Japan was the leading donor for most of the postwar era to countries throughout Asia, some of which followed its model and became fast-growing nations, focused on an export-oriented development strategy. It includes China, who saw over half a billion people escape poverty over the last several decades. As a result, this all became the inspiration to write a comprehensive book on the importance of exports and understanding their role in economic development. I am indebted to the excellent research assistance of many of my students, but two in particular for this project: Ting Chang, from Taiwan, and Hiroyuki Jinno, from Japan. For several years now, they have worked diligently on completing all of my assignments. They will see much of their work, although in different form, in the tables and figures throughout this book. I am also grateful to Daiki Kumazawa, currently at Stanford, who is the coauthor of two chapters. I look forward to his future pursuits and accomplishments. I have also benefitted from the numerous comments of colleagues who have read various versions of papers that became chapters in this book. Robert Pahre was very generous in sharing his Trade Agreement Database for the nineteenth century, and discussions with Peter Pedroni on his panel structural VAR methodology were invaluable. I especially thank those that attended sessions at the following conferences where I presented: Liberal Arts Macro Workshop, Davidson College, 2017; Western Economic Association International Biennial Pacific Rim Conference, Nanyang Technological University, Singapore, 2016; Asia Pacific Economic Association, Thammasat University, Bangkok, Thailand, 2014; Korea and the World Economy XIII Conference, Sungkyunkwan University, Seoul, Korea, 2014; and the Western Economic Association International Biennial Pacific Rim Conference, Keio University, Tokyo, Japan, 2013. The feedback and opportunity

xiv  Preface to share my work were important steps to this final product. This book would not be possible without the support, encouragement and inspiration of my wife, Evelyn. Her assistance with preparation is most deeply appreciated. Of course, all errors are solely the responsibility of the author. Edward M. Feasel Aliso Viejo, California

1 Introduction

The first era of globalization was a period where the expansion of the global economy supported the process of nation-state formation. In many regards, the second era of globalization served a similar function, as newly independent nations emerged from colonization in the aftermath of World War II in Asia and Africa, and the newly liberated post-Communist countries were formed with the demise of the Soviet Union in the 1990s. The role of the multinational corporation increased dramatically, and the production process evolved and expanded across borders, eroding some of the regulatory authority of nation-states. These are the types of factors that have been at play in both eras of globalization, but one of the central driving forces and motivation is the attempt to expand exports to support economic growth in the home country. Trade policy is the vehicle to accomplish this goal. What is attempted in the following pages is a comprehensive examination of the evolution of trade, namely exports from destination countries, and trade policy and their relationship to economic growth and development in countries in the two eras of globalization covering the nineteenth century and early twentieth century, and the last half of the twentieth century and beginning of the new millennium. The book is designed to cover different aspects of this in each successive chapter, and thus, chapters can be used independently depending on the dimension of interest of the reader. Of course, the chapter ordering does matter in terms of a comprehensive examination of the subject, and each leads to a fuller understanding of all the dimensions of globalization in both eras. A word should be said here about the use of the term globalization. While all agree globalization is a fact of current day life, it is a vacuous term to some extent as it has come to encapsulate almost anything that matters beyond the nation-state. In economics, globalization is best understood by the linkages between nationstates in the three dimensions of people, goods and money. These are examined in the discipline through the three areas of migration/immigration, international trade and international finance, respectively. As such, one can actually measure the degree of globalization and even compare one period to another. The focus of this book will be international trade and, in particular, exports. This is based on the belief, as mentioned earlier, that a prime motivation of globalization is to promote exports to support domestic economic growth. In this regard, it

2  Introduction is exports that bring the additional demand from external sources that allow the domestic economy to expand beyond what would otherwise be supportable by domestic demand alone. If nations could achieve the same results simply by closing borders and focusing internally, we would see exclusively what economists call “autarky” states: nations that don’t trade. Chapter 2 begins the exploration into exports role in economic growth by reviewing both the theoretical and empirical economic literature on exports and economic growth. It is only recently that exports have been acknowledged, at least in the theoretical literature, as playing a potential role in economic growth. This is a result of new growth theory and new international trade theory which both emerged in the 1980s. The timing of the emergence of this new literature with the emergence of the fast-growing newly industrialized countries (NICs) in East and Southeast Asia is no coincidence. A focus on the importance of increasing returns to scale, emphasized by some in earlier writings, was also incorporated into growth and trade models. There is still not wide agreement on the role of exports in the growth process and the channel by which it can impact growth, but the chapter provides the necessary background of possibilities, including the possibility that exports are simply a reflection of the Say’s Law: the idea that supply creates its own demand and that exports are just one dimension of demand for domestically produced products. Whether exports cause growth or are induced by growth, the chapter introduces a simple accounting framework to determine what fraction of increase in real gross domestic product (GDP) over long periods of time can be attributed to domestic demand and external demand. Data limitations make it difficult to do an exact accounting exercise as proposed across both eras of globalization, but the chapter outlines how currently existing data can be used to get some indication of the importance of exports in the growth process. The first era of globalization classified as the period between 1820 and 1913 is examined in Chapter 3. An overview of the economic environment and forces of the time are discussed. The entire period is marked by the spread of the production techniques from the new industrial revolution in the United Kingdom to the rest of Europe and to the United States. The early part of the era also sees new independent states emerge from colonization in the Americas and, later, other new states, including Germany and Italy. Expanding economies and trade helps to support these nation-states solidify their position and the role of the nation-state as the main institutional force. The chapter highlights based on the nineteenthcentury trade agreement database (Pahre, 2008b) the astounding number of trade treaties established in the period. This is a vehicle of trade policy to expand exports in the nineteenth century not often mentioned and is similar in many regards to current practices in the world. The chapter also uses three separate datasets to examine export expansion in countries during different periods of the first era of globalization and in the interwar years after 1913. The interwar years provide an excellent comparison, as it is a period when trade protectionism increased. An important feature of growth in the nineteenth century was the beginning of countries moving up the value-added chain of manufacturing exports

Introduction 3 to promote trade and growth. Focusing on exports in textile products in the first phase, which seems natural given the industrial revolution started in this industry, and then expanding into metal products and machinery with electricity becoming the new energy source, the chapter highlights this development process followed by leading nations of the time. The chapter concludes by examining the role of exports in the transmission of the Great Depression around the world, serving as a case study on the importance of exports in supporting economic activity, in this case, how its decline has adverse impacts on the level of economic activity. In the aftermath of World War II, the advanced nations led by the United States desired to avoid the protectionist practices that led to economic decline in the interwar years. The Bretton Woods system was established along with the new General Agreement on Tariffs and Trade (GATT) framework to lower trade barriers between countries around the world. Chapter 4 examines trade policy in the postwar era, highlighting the similarity with the earlier era of globalization in engaging newly emerging independent colonies in the global trading network after World War II in Asia and Africa and then from West Asia and Eastern Europe with the end of the Cold War. One of the most significant changes in trade policy occurred in the 1990s when there was a shift to an emphasis of regional trade agreements (RTAs) as the preferred vehicle to expand trade liberalization rather than GATT, and later the World Trade Organization (WTO), which replaced GATT in 1995. Since the early 1990s, there has been an explosion of RTAs. The chapter discusses forces behind this, including the early establishment of a mega RTA with the European Community in 1958, and also the lack of success of later rounds of multilateral trade negotiations, mostly due to the belief that advanced nations were prospering at the expense of developing nations as a result of multilateral trade liberalization. The emergence of more successful and powerful large developing nations referred to as BRICS, including Brazil, Russia, India, China and South Africa, and their willingness to disagree and oppose proposals from advanced nations, was another force. Controversial topics show the changing nature of trade over time as advanced nations look for agreements on trade in services, local content agreements in terms of what portion of final product must be produced in a country, and government procurement contracts with equal access to foreign companies, to name a few. These issues also highlight the increasing role of the multinational enterprise (MNE) in the global trading network. There is a collaboration between advanced country governments and MNEs in setting the trade policy agenda. Chapter 4 concludes with a close look at RTA proliferation in different regions of the world, including proposed ones that were not successful (the Trans Pacific Partnership Agreement, led by the United States), ones close to completion (the Regional Comprehensive Economic Partnership, involving China and large past of Asia and Oceania), and the expanding interests of bilateral RTAs among countries and especially the European Union (EU). With the background on trade policy and the major economic trends in the current era of globalization given in Chapter 4, Chapter 5 turns to the data to examine the export expansion in the postwar era. Two sets of data are used, one

4  Introduction based on gross exports available widely in the postwar period in real dollar terms and value-added exports in nominal terms. Gross exports are not ideal in that they include the value of intermediate products used to produce the export, and as the main interest is in the impact of exports in supporting expanding domestic production, imported inputs have no contribution. Nevertheless, the export expansion measures presented using gross exports can give indication of the expansion of a country’s export market relative to the increase in production that occurred in the domestic market. These are the same expansion measures that are presented for countries in the nineteenth century in Chapter 3. The final section provides the same measure, but now called export contribution measure, as they are based on value added and thus represent increased final demand within the country due to exports, where the value of inputs have been removed. Overall, the chapter’s results point to and confirm the export oriented-growth approach of the East and Southeast Asian Economies. However, equally focused on an export orientation and on a much wider scale is the EU, with export expansion measures across countries rivaling the fast-growing nations of Asia. The successful economies in East Asia have served as a regional force in supporting other developing nations in the region to pursue a similar outward-oriented approach to development by moving up the value chain of manufacturing exports over time. It is clear that the EU is playing the same role in Europe, now with its members that were former Soviet satellite economies. Some have referred to the Asian model as the flying-geese model of economic development. Evidence here suggests Europe has been the most extensive and successful application of this model. There is no evidence of the United States serving such a role in the Americas. There is the question if the EU will serve a similar role in Africa and the Middle East, as Chapter 4 shows its trade policy has great interest and efforts in the region. Chapters 6 and 7 are econometric studies on two important questions regarding exports that arise from the previous chapters: does trade policy, namely GATT and the WTO and more recently RTAS, lead to increases in exports across countries? And, do increases in exports cause economic growth? Chapter 6 addresses the first question using bilateral trade from the postwar era. Individual country regressions for over 180 countries provide mixed results on the impact of GATT and the WTO in increasing exports. There are strong positive effects for East and Southeast Asia, North America and Europe, to a lesser degree for South Central and West Asia, but mixed results for Central and South America. There are more widely negative results for the Pacific Islands, Caribbean and Africa. The results support the oftenstated negative view of some of these developing nations who are skeptical on the benefits of WTO negotiations. RTAs are shown to be more universally successful in promoting increases in exports in countries around the world and can explain their proliferation since 1990 and the lack of success of WTO multilateral negotiation rounds. The chapter also examines crossover effects of RTAs of competing nations on one’s own trade partners. Evidence for Japan is an example where RTAs from China, Korea and the EU diverted exports away from Japan, and its own RTAs have been able to somewhat counterbalance the effect. This would explain Japan’s

Introduction 5 heated pace of RTA formation after 2005 as presented in Chapter 4; its willingness to enter TPP negotiations as it was always reluctant to enter multilateral RTA negotiations and its decision to complete negotiations after the US withdrawal; and its recent conclusion of an RTA with the EU in 2017. Chapter 7 examines the effect of exports on real GDP fluctuations over time using the time series and panel data estimation technique. The main results are that exports do play a role in explaining movements in real GDP over time, but a modest amount of perhaps 20–30 percent in the short run and less in the long run based on a wide sample of countries. Supply shocks representing traditional growth theory factors such as technological shocks account for the greatest fraction of real GDP movements. A closer panel examination of the Four Asian Tigers shows that their experience lies in stark contrast, where demand is the main driver of GDP changes. However, it is not necessarily export demand. A final detailed econometric case study of Korea’s experience shows that investment demand is the main driver in explaining the increases in real GDP over time. Both investment demand and supply shocks in turn lead to increases in exports, which further lead to increases in investment feeding back into the system. It’s not the case that exports aren’t important in the growth process, but they are not the driver of growth. Instead, evidence shows that export growth facilitated economic growth in the postwar period by providing the necessary external demand to support the “economic miracle.” The concluding chapter looks at two important challenges to globalization. The first is the increasing role of the MNE. MNEs for advanced countries have collectively become so large that they resemble the size of national economies. They also often operate outside the realm of regulatory authority of nationstates, while at the same time coordinating and asking nation-states to advance trade liberalization, given their need for access to cheap inputs and markets to expand into. The evolution of the production process into specialized portions has allowed different parts of the production of goods to be located across the globe creating a global value chain. The MNE has become the main driving force in the expansion of globalization. To the degree that globalization is viewed negatively, it is surprising that there isn’t more anger expressed at MNEs. The US elections in 2016, however, is where a backlash against globalization did have real consequences, with the eventual winner making a major focus of his campaign the negative consequences of RTAs for the United States and the role of MNEs in taking jobs away from the country. The second issue examined is inequality in all its varied dimensions, within countries and between countries, and the efforts to achieve greater equality beyond the income dimension in advanced nations. Many of these issues revolve around immigration matters, which also impacted the US election. This is the other area where the backlash against globalization had real consequences: in the UK referendum on the EU. The EU’s requirement for free movement across borders, especially in light of the refugee crisis Europe faced in 2015, played a large role in the United Kingdom deciding to pull out of the EU. These issues need to be addressed if globalization is to continue to thrive in years ahead. The

6  Introduction EU provides one model of addressing income inequality in a nation through its welfare state, but it’s not clear if its insistence on nations giving up sovereign rights to join the group is a model of integration others will follow. As the United States retreats, Asia and Europe try pick up the mantle of leadership in expanding globalization. These countries too have experienced backlash though, and for the near future, protectionist and nationalist sentiments are on the rise globally. This was the mood in the world during the interwar years, when the export growth stagnated, and national self-interest dominated. It’s not that there wasn’t growth – the roaring 1920s led to a steep rise in the US stock market, despite increasing protectionist practices. We are once again in uncertain times, old leadership retreating and lesser selves rising. It is hoped that providing a comprehensive examination of the importance of exports as linkages between nations and their role in economic growth during both eras of globalization will lead to a deeper appreciation of what has been accomplished through trade policy in expanding and deepening these linkages, perhaps providing a glimpse at what possibilities lie ahead and, in so doing, lead to more well-informed world citizens.

2 Exports, trade policy and economic growth Demand side growth accounting and an overview of theoretical and empirical evidence While there is wide recognition of the increasing importance and impact of globalization around the world, one area where its role has not been widely understood or even recognized is in explaining economic growth. One of the main reasons for this is that the economic growth theory has a long-established tradition in economics, and even with the developments in new growth theory, these new insights have largely been incorporated into growth accounting in the context of the traditional framework, a supply side accounting framework in which exports play no role, except perhaps indirectly through impacts on the factors of production or through technology. This chapter introduces a demand side growth accounting framework to measure the relative importance of domestic demand and external demand in facilitating the growth process over time. Before presenting estimates of this measure for countries during different eras of globalization and for different periods of time in later chapters, this chapter first highlights the increasing importance of trade agreements between countries in this current era of globalization and reviews the theoretical and empirical evidence on the relationship between trade and economic growth.

Trade policy in the current era of globalization That we are in an era of globalization is a fact widely accepted across the world. It would not be a mistake to trace the beginning of this current era of globalization to the end of the World War II, when 44 nations agreed to the Bretton Woods monetary system, which established the International Monetary Fund (IMF) and the World Bank in 1944, and just as important, in 1947, when 23 nations signed the General Agreement on Tariffs and Trade (GATT). One very important change that has taken place over this period is the emphasis on trade policy from multilateral coordination under GATT, and later taken over by the World Trade Organization (WTO) beginning in 1995, to a movement across nation-states toward a regional focus in fostering trade agreements and relationships. Figure 2.1 shows the number of regional trade agreements (RTAs) that have gone into force by year in the post-World War II era. The solid line represents the cumulative number, while the bar chart shows the actual number for each year. Perhaps the most consequential RTAs, and the one which opened the door to

8  Exports, trade policy and economic growth 20

350

18 300

total in force

250

14 12

200

10 150

8 6

100

number entered in force by year

16

4 50 2 0

0 1958 1961 1971 1976 1981 1985 1987 1989 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 number entered in force by year

total in force

Figure 2.1 Regional trade agreements Source: WTO (2017a)

following RTAs, were the two initial ones that came into force in 1958 and 1960: the Treaty Establishing the European Economic Community (EEC), signed in Rome in 1957, and the European Free Trade Area (EFTA), established by the Stockholm Convention in 1960. Four successful rounds of GATT negotiations had concluded prior to these first two RTAs: 1947, Geneva; 1949, Annecy; 1950–1951, Torquay; and 1955–1956, Geneva. While the Europeans were keen to build more quickly on the progress made, it was the case that the US approach was more cautious (Grimwade, 1989, pp. 35–36). As a result, Belgium, France, Italy, Luxembourg, the Netherlands and West Germany formed the EEC. Quickly in response, Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom formed the EFTA. Both were allowed under the original provisions of GATT in clause XXIV, which allowed for the cornerstone of GATT’s nondiscrimination policy, the Most Favored Nation (MFN) clause, to be suspended if aligning countries met a set of criteria. Although the figure shows subsequent RTAs that came into force after the initial two, the agreements remained to be made at a relatively slow pace and stable until the early 1990s, and almost half involved expansion of the EEC. During this period, four additional GATT rounds of trade negotiations took place that continued to make progress on a multilateral basis: Dillon, 1960; Kennedy, 1964; Tokyo, 1973; and Uruguay, 1986. However, each subsequent round took longer to complete, with the Uruguay round taking over seven years. Of course, the number of countries participating had also increased in each round, reaching

Exports, trade policy and economic growth 9 triple digits in the Tokyo round. The most recent GATT round, called the Doha round, which involves 159 countries, began in 2001 and has yet to officially conclude. The figure shows at the end of the completion of the Uruguay round is when the dramatic increase in the number of RTAs negotiated begins. Since 1993, the number of RTAs each year has been in the high single digits, and it increases to double-digit numbers every year in the new millennium. It is perplexing that the United States allowed article XXIV to be contained in the original articles of the GATT agreement, given its focus on multilateral negotiations. Chase (2006) argues that many countries including the Europeans wanted greater flexibility given the uncertainty of the impacts of multilateral reductions in trade barriers, and the United States eventually lessened its emphasis on strict multilateralism and allowed what it hoped would be preferential arrangements that would complement the multilateral efforts and success.1 Allen (1961) provides an analysis from the US perspective at the time of allowing the EEC precedent to proceed, which included geopolitical considerations given the Cold War and European history and the relationship among nations leading up to both World Wars. In any case, article XXIV opened the door for what is now an ever-expanding network of regional agreements that some refer to as the “spaghetti bowl.” This evolution in the focus of trade policy from a multilateral to a regional focus nonetheless reflects an increasing emphasis across nations on the importance of trade and trade policy to their economies. Relative importance can best be measured by action, and as such, the trend in RTA formation reflects nations’ belief that international trade, and the promotion of exports in particular, play an important role in generating economic growth. And, yet the role of exports and trade policy in economic growth theory is not widely understood or even acknowledged. The next section introduces a demand side growth accounting framework that can measure the contribution of exports in an economy’s growth experience over a period of time.

Demand and economic growth accounting Solow (1957) developed an intuitive method of accounting for the fraction of economic growth that can be attributable to the various factors of production and technical change. Given the production function for the economy, which is often assumed to be Cobb–Dougals with constant returns to scale, it is straightforward to show that growth accounting relationship as the following: ∆Y ∆K ∆L ∆A  =α + (1 − α) + , Y K L A

(2.1)

where Y is real gross domestic product (GDP), K is capital, L is labor and A is technology. The first term on the right-hand side of the equation measures capital’s contribution to output growth, the second term is labor’s contribution, and the final term is technology’s contribution, called total factor productivity.

10  Exports, trade policy and economic growth With an estimate of α and growth rates for capital and labor, measures for the first two terms on the right-hand side of the equation can be obtained. Using the growth rate of real GDP, total factor productivity can be measured as a residual. For some time, this framework of economic growth accounting and the accompanying growth theory based on Solow (1956) guided and dominated economists’ way of thinking on the subject. This was despite the widely known dissatisfaction with the assumption that the main contributor to growth, technical progress, was assumed exogenous in the Solow growth model. Paul Romer’s (1986a, 1990) seminal work launched a new strand in economic growth research, based on increasing returns and imperfect competition. He termed it endogenous growth to clearly contrast the new direction with traditional growth theory and its assumption of exogenous technological growth. New growth theory emphasized the role of knowledge accumulation in the growth process. One important result Romer (1990) highlighted was that “integration into the world economy will increase growth rates.” In addition to Romer’s work, there were also advances in international trade theory incorporating increasing returns and imperfect competition that led to results implying trade could influence economic growth and increase welfare through increasing the variety of products (we will return to this later). What was the impact of new growth theory for our understanding of growth accounting? Mankiw et al. (1992) claim that expanding a traditional Solow growth model to include human capital can sufficiently account for the variation in standards of living observed in the world. Estimating such a model, the authors show that an augmented Solow model fits the data quite nicely. Regardless of whether exogenous or endogenous technical progress is deemed as being true, the growth accounting exercise remains intact and legitimate as a means of decomposing growth into its sources on the supply side. Supply and demand ultimately can be likened to two sides of a coin: they represent two facets of the same underlying phenomena. Traditional growth accounting measures the change in equilibrium from the supply side, identifying what portion of the change in real output is attributable to changes in the factors of production and technical progress, and potentially some version of knowledge included based on new growth theory. This accounting decomposes the fraction of output growth that can be linked to growth in all the inputs in the production process, whose levels determine the position of the aggregate supply curve in the macro economy based on traditional macroeconomic theory. A similar accounting exercise can be done on the demand side of the economy, for it must be the case that demand increased in sufficient amount to accommodate the economic growth that was realized in the economy. Demand has two important components when one considers the impact of globalization: domestic demand and external demand. External demand is of course determined by the level of exports. Adding domestic demand and external demand together must equal output in the economy. Thus, any increase in output or production must be met by an equal combined increase in domestic demand and external demand: ∆Y = ∆Domestic Demand + ∆External Demand. 

(2.2)

Exports, trade policy and economic growth 11 Dividing both sides of equation 2.2 by the change in real output, ΔY, will then give the fraction of the increase in output accommodated by domestic demand increases and the fraction for external demand. The fraction from external demand is given by External Demand Contribution =

∆External Demand ∆Exports ≅ .  (2.3) ∆Y ∆Y

External demand is measured by the increase in exports. There is not a strict equal sign in the last part of the equation due to an important feature of the measurement of exports. If exports were measured as the true value-added increase in exports in the domestic economy, the last part of the equation would have a strict equal sign. In practice, exports are instead measured in gross terms and not value added. Fortunately, international economic intuitions such as the World Bank, WTO and IMF have all come to realize the importance of having measures of value-added exports, and recent estimates have become available. This measure of external demand contribution using value-added exports will give an exact measure of the increasing (or decreasing) role of globalization in the form of exports in supporting increases in real GDP over long periods of time. As value-added exports are only available for the most recent period covering just over a decade, efforts to determine the role of globalization and exports in supporting increases in economic growth must rely on gross export data. In this case, measures of exports will include the value of inputs that are imported from abroad to produce exports. It is possible in the extreme case that the increase in any exports is equal to the value in imported inputs used to produce those exports, and thus any increase in exports would have no effect on output. To see this, one must return to the expenditure approach for measuring GDP, which consists of consumption (C), investment (I), government spending (G) and net exports (exports [X] minus imports [M]) and Y = C + I + G + (X – M). If X and M rise by the same amount, Y will not change. Here, using exports to measure external demand then is not accurate and can be problematic. This has become more of an issue in recent years as the production of exports has been separated into parts so that portions can be done in different countries, especially with the rise of multinational enterprises (MNEs) moving production around the world. This is especially problematic in certain entrepôt economies where products are simply imported and re-exported. Thus, it is one of the main reasons international institutions realize the importance of measuring value-added exports and have invested in creating such measures. As we are interested attempting to compare the importance of exports across eras of globalization, data for gross exports will be utilized where it is available. In this case, the export contribution measure more accurately reflects what will be termed an export expansion measure in that it shows the growth in the home economy’s overall export market during a period, relative to the change in overall domestic production in that same period: Export Expansion Measure =

∆Exports . (2.4) ∆Y

12  Exports, trade policy and economic growth The closer the gross value of exports is to value-added exports, the more this measure will reflect the actual contribution of the external sector to supporting domestic increases in production. Nevertheless, the expansion measure will be suggestive of this importance, as we compare measures within and across countries over long time periods. Chapter 3 will examine trade policy and export expansion measures in the nineteenth century, and Chapter 4 will do so for the current era of globalization, including an application of the demand side growth accounting framework using more recently available value-added export data for the period 1997–2011. The Solow growth accounting exercise looks at variables in terms of growth rates, whereas the demand side growth accounting expressed in Equation 2.3 is for longer term time differences. To see the relationship between a growth rate and the share of increase that Equation 2.3 is in fact decomposing output growth into, the growth rate of output could be expressed rewriting 2.2 by dividing ∆Y ∆Ddom ∆X through by the initial level of output, = + , where the left-had Y Y Y side is the growth rate of output, and the two terms on the right-hand side of the equation give the fraction of the growth rate supported by domestic and external demand, respectively. Long-term changes are used instead of growth rates as it is believed that it is more intuitive to express long-term changes as fractions divided between domestic and external demand. An important point here is about the distinction between growth theory, growth accounting and increases in standards of living. The Solow growth model and other models attempt or have been used to explain the differences in standards of living across countries where the main variable of interest is output per capita. Other models, as we will see shorty, both theoretically and empirically focus on explaining output growth. The Solow growth accounting exercise, as measured by the Solow residual, represents economic growth beyond growth in the factors of production and thus clearly represents increases in the standards of living. The demand side growth accounting framework only decomposes the same increase in real output observed over longer time spans from a demand side view, and it does not capture what fraction represents increases in standards of living, or output per capita. One must be careful here also not to interpret these measures as indicating causation. Just as in the case of Solow growth accounting, growth can ultimately be the result of an endogenous process where all variables of interest are being determined simultaneously; capital and output for example may both be endogenously determined, and it’s not the case that capital movements are exogenous in the underlying model. The accounting exercise simply gives an indication of the contribution attributable to each of the factors from one point in time to another, and not what drove growth. Similarly, the demand side accounting only measures the contribution to the increase in overall demand attributable to domestic and external demand. It is not necessarily the case that this increase in external demand caused the increase in overall demand. The structural econometric work in Chapter 7 attempts to examine the issue of which

Exports, trade policy and economic growth 13 forces cause growth more closely. Before we turn to the data to examine export expansion and contribution measures across countries and across time, it will be useful to provide a brief summary of both the theoretical literature on trade and growth and the empirical literature on the relationship between trade openness and growth. The former will give some context to knowing the possibilities and limits on what light the demand side accounting exercise might shed on our understanding of the relationship between exports and growth in terms of causation and role. The empirical literature will give background on the current sentiment in economics on the size and importance of openness for actually explaining economic growth.

Theoretical underpinnings of growth theory: any role for exports? In the Solow growth model, economic growth is driven by the supply side of the economy, and technology was assumed to be exogenous. New growth theory complicated this by allowing all inputs in the growth process on the supply side to be endogenously determined. Another complication that new growth theory added was to introduce the potential for the demand side of the economy, namely through trade, to impact economic growth. Traditionally, the field of macroeconomics has separated itself into the analysis of the business cycle on the one hand, represented by changes in output over several quarters or a few years, from economic growth on the other hand, represented by the growth of output over longer periods of time such as decades. In the former case, the fundamental debate has been whether the short-run aggregate supply curve is vertical or upward-sloping, which essentially determines whether demand has any role in influencing the level of output in the economy. Traditional Keynesian models with sticky prices and/or wages justified the upward slope to the aggregate supply curve and in that context would agree an export shock would cause an outward shift of the aggregate demand curve and output to increase. The rational expectations revolution led by Robert Lucas brought serious reflection on the role of demand in understanding output fluctuations, even in the short run, and led to the conclusion that where aggregate demand did have real effects in the economy, it was only due to imperfect information on the part of producers. On both sides of the debate, however, there was no contention that demand would have any impact in the long run, or on economic growth. In models of both the Keynesian and Neoclassical persuasion, the economy moves to full-employment output in the long run. Adjustment to this equilibrium would be instantaneous in the Neoclassical case and with some lag due to sticky prices in the Keynesian case. New Keynesians over the years introduced microfoundations models and later also using the new toolkit of imperfect competition models to show that even in a rational expectations world small nominal rigidities and/or real rigidities could still lead to stickiness in prices leading to the aggregate supply curve being upward-sloping (see Mankiw et al. [1988] for the former and Mankiw and Reis [2010] for the latter). As Mankiw

14  Exports, trade policy and economic growth and Reis suggest, the question is “what friction causes the short-run aggregate supply curve to be upward sloping rather than vertical, giving a role to aggregate demand in explaining economic fluctuations?” In the rational expectations world of Lucas, where anticipated demand shocks have no real effects, what does the demand side growth accounting exercise identify? To understand more fully what the demand side growth accounting framework is examining in terms of these two schools of thought, suppose we examine an increase in potential or full-employment output and call the period that occurs the period of economic growth. In the Lucas supply world, the effectively vertical short-run supply curve would shift to the right and cause a movement along the aggregate demand curve. This movement along the demand curve would theoretically cause both domestic and external demand to increase as relative prices change. The demand side growth accounting exercise would simply identify what proportions demand changed for the two components of domestic and external demand. This would still be an informative and a worthwhile exercise. While the Say’s Law, namely the concept that supply creates its own demand, is in full effect here, it is still useful to see what components of demand were stimulated and how important domestic versus external markets were for the economy’s expansion. The situation is likely more complicated as domestic or external demand may have also exogenously increased during the period causing the aggregate demand curve to shift out as well. This will not increase output any further in the Lucas model than the increase in potential output that occurred, but it may change the composition of the change in demand between domestic and external demand that actually occurred. The analysis would be similar for the Keynesian case if we examined a movement form one long-run equilibrium to another. This is because even in the Keynesian business cycle model, there is no role for demand in the long-run growth process: demand levels do not effect potential output. Changes in aggregate demand, such as in exports, would only cause temporary changes to output. As mentioned earlier, the new growth theory opened the possibility that demand could have potential growth effects. Here one must be careful to distinguish between levels and growth rates. It is possible that there exist level effects that occur over longer periods of time, which generate increased growth rates but do not effect equilibrium long-run growth rates. These would be increases in potential output that moves us to a new long-run equilibrium but does not alter the economy’s long-run growth rate; there is only a temporary increase in growth rates as output expands to the new higher level of potential output. Before we turn to new growth theory as a potential channel through which external demand may affect growth, there are potential channels in other theoretical work where demand shocks can operate in a growth sense by increasing the level of potential output. One important channel is through investment.2 In fact, all theoretical models where demand potentially effects the long-run and/or equilibrium economic growth involve the investment in either physical or human capital. The Q-theory of investment outlined by Tobin (1969) is one such vehicle. In the traditional

Exports, trade policy and economic growth 15 neoclassical theory of investment, one of the difficulties was that the model suggested that the capital stock responded to shocks with a discrete change, which would require an infinite rate of investment since investment is the rate of change in the capital stock minus depreciation. Q-theory is based on adjustment costs to investment, which overcomes this problem. Q is defined as the market value of a company’s assets divided by the book value (replacement costs) of a company’s assets. In the Q-theory, Q changes quickly in response to external changes, and capital will adjust more gradually over time. This introduces a role for expectations in the traditional neoclassical model. As Romer (2012) points out, an increase in expected output causes Q to increase immediately and leads to increases in capital and investment over time to the new equilibrium point. One can imagine a trade policy change, such as an RTA leading to lowered trade barriers, leading to an expected increase in the size of export markets and output, could have this described effect where Q, investment and output are higher in the new equilibrium. Of course, whether the new level of output and capital is permanently higher will depend on whether there is a permanent increase in market size or not. Romer (2012) states in fact that Q-theory leads to the traditional accelerator model of investment where investment is a function of the level of output, something early macro theorists purported, but with no micro or even theoretical foundations.3 In fact, some of the early macro theorists who supported the accelerator model went further and outlined their belief in the importance of exports as a major source of economic growth in the economy. Kaldor (1981) paid tribute to the work of Harrod (1933) where the latter outlined the idea of the export multiplier. Harrod is better known for his work on growth based on the Harrod (1939) and Domar (1946) growth model.4 Kaldor’s (1970) earlier work emphasized the role of external demand in explaining economic growth at the regional level. Dixon and Thirlwall (1975) developed a regional growth model following Kaldor, where the growth rate of output is explicitly a function of the growth rate of exports. Kaldor (1981) was more nuanced and made clear his belief that increasing trade did not necessarily make a country better off. The key determining factor was the role of manufacturing, and if one could increase manufacturing output through trade, then trading countries would be better off. Interestingly, Kaldor (1981) emphasized the role of increasing returns, especially in the manufacturing sector, as a reason for the potential strong effect of exports on economic growth. Feder (1983) introduced another specific structural estimation equation for the impact of exports on output growth based on including the level of exports in the production function. The author justifies this by positing that exports result in a positive externality to the production process.5 The most direct theoretical investigation of the role of exports in economic growth occurred in the new trade literature. Krugman (1979, 1980) in a series of papers introduced a new model for understanding international trade based on internal increasing returns and imperfect competition. One of the main results in expanding our understanding of trade is the emphasis of these papers on intraindustry trade: trade that is in the same industry, but of differentiated

16  Exports, trade policy and economic growth products. This type of trade makes up much of the trade between similar large wealthy countries, especially those similar in terms of capital and human capital endowments. These models show that countries welfare increases when countries move from autarky to trade as the variety of products increase. Krugman (1980) presents such a model where variety increases with trade. In the specific model, there is no scale effect however: that is, the scale of production does not increase. In other words, trade does not expand total production, and gains from trade are entirely through variety. This would argue that from an expectations perspective, the prospect of increasing variety would be the main motivation for increasing trade. Krugman himself states that “this is an unsatisfactory result” and explains he works out scale effects in another paper. In fact, in his 1979 paper, he shows labor growth results in increased production in a similar trade model. In the paper, Krugman argues that opening up trade results in a similar increase in demand that produces results similar to analyzing labor growth in the model. In these models, trade produces a level effect on production, an increase in potential output if you will, and not a permanent effect on the growth rate. For an excellent review of the trade literature and the seminal papers in these new trade models, see Helpman (1990). Helpman (1990) also points out the relationship of the trade literature and the new growth literature where the former results in only scale effects on output. The author concludes that to have a permanent effect on the growth rate from trade, there must be external increasing returns to scale to the firm, but internal to the economy. In a series of papers, Grossman and Helpman (1994) produce such a model where Research and Development and innovation play a critical role to providing such external increasing returns.6 Romer’s (1990) seminal work also does this as pointed out earlier. Lucas (1988) also develops a model where trade could affect growth rates permanently by introducing learning by doing, which generates the external scale effect (increasing returns to scale). Lucas acknowledges that removing trade barriers even in a neoclassical model could produce level effects, but surmises such effects spread over time would be quite small and could not account for differences observed. Thus, he proceeds to develop a theoretical model where these demand effects from trade could result in permanent increases in the growth rate. Lucas states, But is it possible, I wonder, to account for the large cross-country differences in growth rates that we observe in a theoretical model that does not involve external effects of the sort I have postulated here? I have not seen it done. Earlier, although in a different context of trying to understand involuntary unemployment, Weitzman (1982) highlighted how classical macroeconomic models “are implicitly based on some version or other of Say’s Law”7 and that only with increasing returns can one have effective demand play a meaningful role. Arthur (1994) provides a rich discussion on the wide implications and relevance of increasing returns, as well as possible models, which the author refers to as a positive feedback system that causes increasing returns and results in dominance

Exports, trade policy and economic growth 17 by first movers/entrances.8 Ventura (2005) provides a model that tries to reflect some of the main ideas of the new trade and growth literature. The results from the model highlight the decreasing returns to scale effects from capital and labor and the external scale effects in the production of technology. In particular, when the former outweighs the latter, it is still the case that economic integration will increase growth rates, but it will be temporary and lead to level effects. When the opposite is true, the external scale effects are larger, and the growth rate will be permanently higher. Jones (1995a, 1995b) argues that the scale effects implied by the new growth models where growth rates are permanently effected are just not reflected in the data. Young (1995) also argues a similar point focusing on the “East Asian Miracle” showing that while output and manufacturing export growth in these economies was unprecedented, the accompanying growth in factors of production and resulting total factor productivity growth are not. In the context of the Asian example, it would still be the case that demand side growth accounting could shed light on the relative importance of domestic and external demand in the East Asian experience, and the importance of the underlying structural shocks that lead to the unprecedented growth would still be debatable: either export demand shocks increasing potential output in levels or growth rates, or supply shocks that induce increasing exports. Based on these challenges, several authors develop endogenous growth models without external scale effects which do not result in permanently higher growth rates (see Young 1998 and Eicher and Turnovsky 1999). Baldwin and Forslid (2000, 1999) and Baldwin et al. (2005) in a series of interesting papers build endogenous growth models with trade policy included and specifically modeling trade policy impacts on the investment sector. The models in these papers utilize Tobin’s Q-theory of investment with adjustment costs and are able to examine the impacts of incremental trade policies on economic growth. This is in contrast to much of the theoretical literature where trade is usually examined by looking at the movement from autarky to trade. The growth effects, however, in these models are only transitory with no permanent effect on growth rates, as was the case examining Q-theory in the neoclassical model earlier in the section where the level effects on output from a policy of export expansion resulting in expectations of increased market size were discussed. Baldwin et al. (2005) specifically incorporate the role of MNEs and foreign direct investment in trade promotion and its impact on economic growth. More recently, Sedgleya and Elmslie (2010) argue that Jones’ (1995b) results should be reconsidered as capital accumulation was not incorporated into the knowledge growth process and once it is time series evidence based on cointegration tests support endogenous growth theory in that there appears to be one stable cointegrating relationship. The review here shows that there is no consensus in the theoretical literature on the actual mechanism by which exports can affect economic growth. The demand side growth accounting exercise will measure the contribution of domestic and external demand to the growth process, but it will not be able to shed light on causation from fundamental sources or

18  Exports, trade policy and economic growth identify the structural shocks that have driven growth. An attempt at this will be done in Chapter 7, but only future advances in theory and empirical applications from the theory will bring greater clarity on the matter.

Empirical literature on trade’s impact on economic growth There is a voluminous literature empirically investigating the impacts of international trade on economic growth. Fortunately, there are also some excellent surveys of the literature to assist the interested reader to quickly review and scan the landscape of past work. For examples, see Singh (2010), Baldwin (2004), Winters (2004) and Lewer and Van den Berg (2003). The general finding in the literature is that there is a positive impact between openness in international trade and economic growth. Studies have used either the percent change in real GDP or in per capita GDP as the dependent measure of economic growth in their studies. Lewer and Van den Berg (2003), for example, find the main benefits of trade, after reviewing both theoretical and empirical work in the authors’ final conclusion, are threefold: gains from specialization, reductions in risks from unpredictable adverse outcomes, and faster expansion of knowledge. In his cross-sectional study of the factors explaining economic growth, Barro (1991) established a work horse for many future studies on economic growth, including those examining the impact of trade.9 Barro’s regression equation is based on implications of the Solow growth model and the relevant variables that should be included to explain growth across countries. Dollar and Kray (2003) provide perhaps one of the most well-known applications of the Barro growth regressions in this context, finding a significant positive relationship between trade and growth. Others have used time series or panel methods to estimate the relationship between openness and economic growth with parser specifications including fewer explanatory variables, often focusing on Solow determinants of growth and adding openness to the regression. As mentioned previously, Feder (1983) also developed an empirical framework via a model specifying two sectors of the economy, one an export sector and the other a domestic-only producing sector. Studies have utilized his estimation equation, which more directly relates economic growth to export growth and includes potential positive externalities in growth from increased trade. Lewer and Van den Berg (2003) examine a wide selection of these type of studies across cross-section, time series and panel techniques, using either growth of GDP or per capita GDP. The authors conclude there is a remarkable consistency in the size of the estimated coefficient despite the various measures and econometric methodologies that have been employed, suggesting that a one percentage point increase in the growth of exports increases economic growth by one-fifth percentage point, which over time can be a sizeable impact. There are of course studies that show no evidence of international trade on growth. Rodriguez and Rodrik (2001) are often cited as one of the main works emphasizing caution as they highlight econometric methodological issues that

Exports, trade policy and economic growth 19 make it difficult and even unlikely to accurately estimate the true effect. The authors reexamine works that previously had shown positive effects and highlight the sensitivity of the results. In a series of papers, Rose (2004a, 2004b) introduces another shadow of doubt on the importance of openness for economic growth by examining whether trade policy actually increased trade in the first place. If trade policy does not affect the volume of trade, then it is unlikely that it could impact economic growth. This issue will be examined further in Chapter 6 which conducts an investigation on the effects of trade policy in increasing exports, specifically whether a country’s decision to join GATT/WTO and their individual RTAs affects their exports. As a general principle, there are several specific methodological issues authors have had to grapple with in the literature. First is the appropriate measure of openness. Most early studies utilized export measures to examine the impacts of trade on economic growth. Later studies showed that broader measures of openness, usually including imports as well, seemed to also have explanatory power for economic growth. Finally, others have pointed out that measures of actual trade policy, such as tariff levels, rather than trade volume, would actually be the appropriate measure of trade openness. The literature is full of studies using various indicators representing each of these types of measures. More recently, Sakyik et al. (2015) used three different trade share measures that have been debated in the literature and found significant growth effects from trade. The second methodological issue surrounds the exogeneity of any openness measure. More precisely, any positive relationship between trade openness and economic growth could in effect simply reflect the fact that economic growth causes increases in trade and/or openness and not the other way around, trade causing economic growth. Studies have attempted to overcome this issue either through using instrumental variables techniques, time series methods such as General Methods of Moments, and/or testing for causation using Granger Causality Tests. Others have examined time series properties of the data, testing for cointegration and then modeling variable as a stable long-run relationship when there is evidence of cointegration. For a survey on the time series studies of the impact of openness on economic growth, see Giles and Williams (2000, 2001). Frankel and Romer (1999) employ a creative instrumental variables technique where the component of trade attributable to geographic characteristics, which is implied in the standard gravity model, is used to develop instruments to accurately estimate the trade effect. Although results show estimates are smaller than traditional OLS estimates, the effect is significant and implies an important impact of trade on economic growth. The third methodological issue has been trying to identify the channels and processes by which openness effects economic growth. Some authors have tried to identify which of the determinants of growth as identified by neoclassical and new growth theory are effected by openness and the role of complementary macro policies and institutions in determining the effectiveness of trade openness impacting economic growth. An example of this type of studies is Edwards (1998) who uses nine alternative measures of trade, examines the effect of

20  Exports, trade policy and economic growth openness on total factor productivity measures and finds positive results for all measures. This of course examines trades’ impact on productivity, which is a channel by which trade could impact growth, as outlined in the previous section, and tries to address the measurement issue by using multiple measures. Wacziarg (2001) and Falvey et al. (2013) show evidence that trade has significant effects on capital investment, suggesting that this is the main channel trough which growth is affected. Both studies attempt to deal with the measurement issues by introducing alternative trade policy indicators. Of course, not all studies have shown broad consistent positive effects of trade on growth. Ulas¸an (2015) for example found that lower trade barriers have no impact on economic growth in a dynamic panel study including over 100 countries. More recent studies have found qualifying results on the impact of trade that are not broadly consistent for different economies. Schneider (2005) finds trade has positive impact, but the impact is largely important in high technology trade. Wang et al. (2004) compare the impacts of trade and foreign direct investment (FDI) and find that trade is more important for developing countries, whereas FDI is more important for growth in medium and advanced countries. The important distinction is the technology-absorbing capacity of a country. Arora and Vamvakidas (2005) show the benefit of trade depends on one’s partners, where developing countries benefit most from trading with advanced partners and vice versa. Chang et al. (2009) show that the impact of trade depends on a country’s complementary polices in a variety of dimensions of public policy. DeJong and Ripoll (2006) use tariffs as the trade policy measure and find only rich countries show evidence of benefiting from tariff reductions on economic growth. An implication of the traditional Solow growth model is that economies should converge over time to similar levels of standard of living, or output per capita. New Growth theory with increasing returns actually suggests convergence may not occur, and in fact, inequality may grow over time as winners continue to take advantage of economies of scale. Results again can be found on both sides in the literature, but a few recent results again suggest results may be more qualified depending on the countries being examined. Parikh and Shibata (2004) find evidence of convergence only for the cases of Asia and Latin America, and divergence for African countries. Sohn and Lee (2006) find convergence among countries in the same free trade agreements (FTA), suggesting a strong motive for developing countries to participate in FTAs. Even if trade has positive impacts on growth, some studies have shown there may be other consequences of increased openness that should be kept in mind. Parikh (2006) shows that while trade has a positive effect on economic growth, it has a negative effect on trade balances and potentially balance of payments challenges. In a series of papers, Giovanni and Levchenko (2010, 2009) using industry panel data show countries with greater trade linkages have greater co-movement over time with increased volatility at both the industry and aggregate level. While the previous two sections show there exists a wide literature on both the theoretical and empirical investigation on the relationship between trade and

Exports, trade policy and economic growth 21 economic growth, the demand side growth accounting framework introduced in this chapter can shed light on the relative importance of domestic versus export demand in the growth process under all circumstances. Of course, causation cannot be determined, but this current era of globalization has undoubtedly increased the importance of international trade and openness for economic activity in general, and one suspects for economic growth in particular. Currently, there is no means to show its relevance in a clear empirical manner. Demand side growth accounting provides an alternative to the most often used measure of the export- or trade-volume-to-GDP ratio, usually presented as an estimate. The demand side accounting framework is a more relevant measure of the role of trade in that it provides a dynamic measure of the importance of external demand. The concept of demand side growth accounting makes clear external demand is measured by exports and not by any other measure of openness. Ramanayake and Lee (2015) have recently shown when comparing results across trade measures that exports is the most robust determinant of economic growth. The demand growth accounting framework suggests this should be expected since any trade policy that would have impact on growth, through whatever channel theory might outline, would need to operate through increasing the level of exports in the economy.

Notes 1 The author also finds evidence the United States had a secret agreement with Canada that article XXIV would support, although the United States never entered into such an agreement at the time. 2 For a model of investment added to a standard intertemporal trade model, see Obstfeld and Rogoff (1999). 3 Gennaioli et al. (2015) show using survey data that actual investment is related to Chief Financial Officers’ expectations of earnings growth. 4 Although a precursor to the Solow growth model, the Harrod–Domar model emphasized demand in the growth process, but it was criticized for its knife edge solution which many felt was not realistic. 5 While these early theories did not derive theory from microfoundation principles, the idea of scale effects that might result from an increase in exports was highlighted. 6 Grossman and Helpman (1994) give references for their work in this regard and provide a good review of the endogenous growth literature. 7 In Weitzman’s (1982) model, the existence of multiple equilibria suggested a coordination failure where government could potentially play a role to move the economy to the more desired outcome. 8 Arthur (1994) shares that Alfred Marshall as early as 1890 wrote about manufac­ turing firms experiencing increasing returns where their production costs decrease as their market share increases. The author argues that knowledge-based industries experience a similar phenomenon. 9 Barro (2003) actually expands his growth regression to include measures of openness in a panel using growth rates over decades and finds a positive relationship between openness and economic growth.

3 Exports in the first era of globalization and interwar years Trade policy and export expansion measures

Globalization is not a phenomenon that began in the twentieth century. The first era of globalization in the nineteenth century was a result of the industrial revolution which began in the United Kingdom and then spread to the rest of Europe and to the United States. Figure 3.1 plots the time series for world exports from 1800 until 2010. While the rapid growth in the last 60 years since 1950 is dramatically captured in the chart, especially the significant acceleration in the post-1990 period, the inlaid figure showing world exports from 1800 to 1935 also shows the significant expansion in global trade during the first era of globalization and its subsequent decline and halt during the interwar years. The differences and similarities between the current and past era of globalization have been written about extensively, and the current chapter will provide a broad overview of features of the early era in terms of trade policy and evolution of economic activity. This will provide context for the measures of export expansion presented in the last section, which provides a measure of the importance of export demand in the growth experience across countries over this period. The chapter concludes with an examination of the Great Depression and the substantial role export demand played in the transmission of the negative domestic downturn in the leading nation at that time. The modern world’s deepest recession provides a good indication of the importance of external export demand (or the lack thereof ) for understanding changes in the levels of economic activity over long periods of time.

Trade policy and economic activity in early globalization The first era of globalization and several hundred years prior to it saw the emergence of empires expanding territory around the world under what is termed imperialism, the motivations of which were numerous including economic, political and religious. Colonialism was the establishment of colonies around the world under imperialism, with Great Britain, France, Germany and Portugal as the leading colonizers, and with Japan and the United States entering the ranks in the late nineteenth century (McCarthy, 2006, p. 8). The British Empire was the leader in forming these “export economies” that reached every major continent, and it could be claimed for centuries that the sun never set on the

Exports in the first era 23 300 1800-1938: index (1870 = 100) 600

250

500 400 300 200 100

150

0 1800 1805 1810 1815 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935

index (1990 = 100)

200

100

50

0 1800

1815

1830

1845

1860

1875

1890

1905

1920

1935

1950

1965

1980

1995

2010

Figure 3.1 World exports 1820–2014 (exc. 1939–1949) Source: WTO (2017b)

empire (Ibid., p. 22). The French Empire was also expansive and as long lasting, but it differed in that it favored centralization and assimilation, which as a result, in many cases left longer-lasting and stronger economic ties after countries gained their independence in later periods (Ibid., pp. 32–40). In all cases, these colonies served important roles in trade serving as a main source of raw materials needed in the home country, but also importantly as markets for imports from the home country (home exports) with ships carrying varied cargo back and forth between colonies and home (Ibid., p. 32). McCarthy discusses the role of chartered companies in the efforts of many empire nations in expanding trade around the world, a similar role that multinational enterprises (MNEs) play in the current era of globalization (Ibid., pp. 40–82).1 Prior to European colonization, trade took place mainly within continents. It was colonialism that linked the world’s regional trade networks (Buckman, 2005, p. 2). The accumulation of wealth that emerged from trade and empire building led to the strengthening of nation-states as the center of powers rather than cities, which was often where power lie previously (Ibid., p. 6). In fact, the first era of globalization and expansion of trade and economic activity to other continents was a critical element in facilitating the emergence of new nation-states and the nation-state as the dominant actor in the global economic system. As Buckman (2005, p. 8) states, “global trade is never a meeting of equals,” and this first era of globalization was often under the context of home rule over satellite economies. As new states emerged and empires expanded, there were also the increasing links

24  Exports in the first era between nation-states, facilitated by trade policy in the form of trade agreements reducing trade barriers between countries, namely tariffs. Michalak (1994a, pp. 23–27) outline the various levels of regional integration that can exist: 1 Sectoral cooperation: cooperation between well-defined sectors only. 2 Free trade area (FTA): elimination of quantitative trade restrictions and customs tariffs with choice of restrictions on non-members. 3 Customs union: elements of the FTA with additional requirement of uniform tariff and common quota restrictions for non-members. 4 Common market: customs union plus free movement of factors of production. 5 Economic union: common market and monetary and fiscal policy harmonization. 6 Political union: economic union and common defense and foreign policy. In examining the pros and cons of trade liberalization, two important determinants are trade creation, which is new trade generated from entering an agreement with partners, and trade diversion, which is the potential loss of efficient existing trade with other non-member partners due to entering the agreement. Pahre (2008a) examines the dynamics and forces behind trade policy in the nineteenth century. In terms of the cross-border flows of money (or capital), goods and people scaled for the size of economies, and population in the relevant periods, in many cases, the level of integration relative to the post-World War II era was similar for the major participants up to a point. The last 25 years has seen globalization reach new heights compared to any period. Figure 2.1 displayed the significant increase in the number of RTAs since the early 1990s. Data from Pahre’s Trade Agreement Database for the nineteenth century presented in Table 3.1 show a similar dramatic number of trade treaties for countries for the Table 3.1 Treaty initiations by country, 1815–1913 Country

Initiations NonCountry ratified

Initiations Nonratified

Italy United States France Austria Mexico Peru Prussia The Netherlands United Kingdom Uruguay Nicaragua Bolivia Switzerland Argentina

90 86 73 71 56 53 49 40 37 36 36 35 34 33

32 30 29 29 29 28 27 23 21 14 14 11 4  

Source: Pahre, R. (2008b)

4 6 9 3 14 1 4 4 2 7 2 2 3 6

Spain Honduras Belgium Guatemala Chile El Salvador Dominican Republic Ecuador Costa Rica Portugal Paraguay Haiti Iran  

1 1 4 4 2 2 1 1 2 2 1 1 1  

Exports in the first era 25 period 1815–1913. The total number of treaty initiations is truly staggering. Italy, which emerges as a nation during this period along with the United States, have the highest number of trade treaty initiations. The countries in the table that have a higher rate of nonratification of treaties are suggestive of the internal political turmoil some nations experienced during this period of increasing economic connectedness. The existence and large numbers of treaty initiations for Latin American nations with Mexico and Peru at the top of the list shows another important force for trade agreements during this era: the independence of many Latin American countries and the effort to increase trade relations between Europe and the United States with these new independent countries. Table 3.2 lists the year of independence for many of these countries and the colonial power from which independence was gained. The table makes clear that Spain was the main colonizer in this region of the world, along with Portugal and Brazil, and both European nations had lost ability to maintain their control due to political developments in Europe and the supremacy of the British fleet, which made communication for the empires with their colonies more difficult.2 The eventual rise of regional liberation movements headed by well-known figures Simon Bolivar in the north and Jose de San Martin in the south spread the quest for independence throughout the region. Trade with these new independent countries for natural resources and agriculture was an important part of trade for the new industrial nations’ in Europe and the United States and also served as an important market for their exports. Figure 3.2 shows the number of trade treaties in effect between 1815 and 1913. The trend shows the increased escalation up to 1830, the steady increase

Table 3.2 Latin American countries independence Country

Year (Colonizer)

Argentina Belize Bolivia Brazil Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Honduras Mexico Nicaragua Paraguay Peru Puerto Rico Uruguay Venezuela

1816 (from Spain) 1981 (from UK) 1825 (from Spain) 1822 (from Portugal) 1810 (from Spain) 1810 (from Spain) 1821 (from Spain) 1844 (from Haiti) 1821 (from Spain) 1821 (from Spain) 1821 (from Spain) 1810 (from Spain) 1821 (from Spain) 1811 (from Spain) 1821 (from Spain) none (territory of the US) 1825 (from Brazil) 1811 (from Spain)

26  Exports in the first era 250

200

Number

150

100

50

0 1815

1822

1829

1836

1843

1850

1857

1864

1871

1878

1885

1892

1899

1906

1913

Figure 3.2 Number of trade treaties, 1815–1913 Source: Pahre, R. (2008b)

up to 1870, and the dramatic drop in that year due to the Franco–Prussian war. The war was relatively quick with Prussian and German forces gaining victory over the French. In the end, Germany emerged as a fully united nation-state that changed the balance of power on the continent. Trade policy based on new treaties eventually picked up where it left off, and there was a substantial escalation in the number of treaties up to the beginning of the World War I in 1913. The data here show that the increased RTAs of the current era of globalization in Figure 2.1 have precedent back in the first era, another feature of commonality not often discussed. Pahre (2008a, pp. 364–360) argues that trade between 1815 and 1913 can be described in three waves. The most important driving force in the first wave is the progress toward establishing new nation-states, especially Germany. Its origins were in the Zollverien, which literally is made up of Zoll or “custom, duty, or tariff” and verein, meaning a “union.” The Zollverein were founded in north, middle and southern parts of what is now Germany (McCarthy, 2006, pp. 140–168). Trade treaties established between the Zollverein and other nations did not include the Most Favored Nation (MFN) clause. This heightened prospect of nations being left out led to increased agreements, especially on the part of Austria and Hungary (Pahre, 2008a, p. 314). Transportation advances in steamships and railroads and the building of infrastructure supporting trade networks internally and externally also supported trade relations (Ibid,. p. 365). The second wave began in 1860 with the Anglo–French trade agreement known

Exports in the first era 27 as the Cobden–Chevalier treaty of 1860, which included a MFN agreement. Subsequently, the clause was incorporated in most treaties after this point and led to the spread of bilateral agreements and a network of multilateral arrangements, given that the inclusion of the MFN clause did not allow a trading partner to agree to better terms afterwards without applying the same terms to its partners included in the MFN agreement. This reciprocity was instrumental in creating a multilateral arrangement of trading relations through bilateral trade agreements and reduction in trade barriers, building a life of its own (Ibid., p. 33, pp. 288– 294; Kenwood and Lougheed, 1971, p. 78). Recent RTAs do not have reciprocity agreements and may be a weakness of the current RTA proliferation in being a force for larger integration and connectivity across RTAs as in the nineteenth century. Also, important was the solidification of loosely linked states in Italy, emerging as a nation-state in 1861, and the German Zollverien legally becoming the German Empire in 1871. The development of new sources of government revenue in the form of income taxes in addition to tariff revenue as nation-states grew was also important for the liberalization of trade during this period (Pahre, 2008a, p. 106). One of the greatest challenges to this second wave was the transportation and communication revolutions in the 1870s and the use of refrigeration, leading to increased imports and greater calls for protection (Ibid., p. 367). The emergence of the new nation-states and rising nationalism also contributed to an increase in protectionist sentiments. O’Rourke (2000) actually finds a positive correlation between tariffs and economic growth in a panel of ten countries from 1875 to 1914, suggesting tariffs actually increased with economic growth during the period. The trade agreements based on MFN, however, helped to avoid a retreat into protectionism and allowed for continued gradual expansion. Pahre (2008a, pp. 367–368) argues that during this third wave, in addition to calls for import protection from protectionist movements, these were combined with calls for greater expansion of the country’s export markets. The latter is what allowed politicians to continue reducing trade barriers with the eventual entry of two previously reluctant countries, Sweden and Russia, into the trade network through establishing new trade agreement treaties (Ibid., 334 and 370). The pattern of trade in goods also evolved throughout this early era of globalization. Britain was the first to undergo the industrial revolution in the eighteenth century. In the nineteenth century, it spread to the United States and to other parts of Europe (Kenwood and Lougheed, 1971, p. 21). In all these instances, it began with textile industries which turned cotton into thread. Steam engines provided power to machines used in the production process that dramatically reduced the costs of production (Buckman, 2005, p. 10). The emergence of the new industry created a need for a variety of resources, and the resulting surplus of production also meant there was a need for new markets where these items could be sold (Ibid., p. 13). Kenwood and Lougheed (1971, pp. 22–23) discuss the spread of the industrial revolution and the technological advances in production, energy, communication and transportation, and their impacts on trade patterns before 1930. Prior to

28  Exports in the first era 1870, textiles and iron production were the innovating industries with steam power serving as the main source of power (Ibid., pp. 22–24). This shifted to steel machine tools and electrical engineering products as electricity became the main source of energy, and once it emerged, the diffusion of the technology was rapid and promoted increased trade (Ibid.). This description of the interaction between technical progress and trade suggests an interactive economic growth process beginning with innovation in production and trade playing the necessary part to support or facilitate the expansion in growth by providing expanding markets with greater demand. This increased capacity and shift in manufacturing due to innovation started in the United Kingdom, spread to France and Belgium by 1850, and then to the United States, Germany, Sweden, Russia and Japan by 1900 (Ibid.). An important reason for the difference in the Japanese case compared to China was Japan’s willingness to incorporate Western influences and technology (Ibid., p 143). With the increased need for resources which shifted from agriculture products to mineral products given the new production technologies, countries such as Russia, Canada, South Africa, Australia, Chile, Malaysia and others became important exporters of these materials (Ibid., p. 24). Kenwood and Lougheed (1971, pp. 29–30) also provide an excellent description of the important role of capital and financing to support this expansion in production and trade around the world. Bordo and Rousseau (2012) confirm this point and go further to suggest that finance played a much more important part in generating economic growth than trade in this first era of globalization. The most important aspect determining where foreign direct investment (FDI) went was the absorption capacity of a country, and in this regard, the United States, Canada, Australia, Argentina, Brazil and a number of European countries were primary destinations (Kenwood and Lougheed, 1971, pp. 40–49). The United Kingdom was the world’s largest trading partner, and it played an important role in clearing balance of payments with its large surpluses with India serving a critical part in this regard: it was willing to use these surpluses in the multilateral payment system as loans to countries to which they had deficits with (Ibid., p. 114). This was especially true from the early 1880s as protectionism was on the rise. The United Kingdom was practically the only country under a true gold standard prior to 1870, and other countries were only able to truly participate between 1897 and 1914, which provided increased stability and allowed for greater integration in the final period of the first era of globalization (Ibid., pp. 115–122). Capital in the form of FDI played an important role in domestic development as well during this period. The United Kingdom invested heavily in railway construction in the United States, Australia, India and Canada; the French in Belgium and Germany; and France and Germany in Austria, Italy, Spain and Sweden; and Russia was one of the main destinations of many advanced nations’ FDI after 1880 (Kenwood and Lougheed, 1971, p. 51). However, there is evidence that FDI in these countries that was directed to primary product industries appear to have benefitted mainly investors and not the recipient country (Ibid., p 55). At the same time, the growing need and difficulty for feeding populations

Exports in the first era 29 in the urban areas of advanced Europe led to a significant outflow of not only capital, but also labor to establish new primary market suppliers. These “enclave economies” benefitted the export sectors in those nations through increased demand, but largely left the rest of the economy unchanged (Ibid. pp. 134–135). For those countries that were able to begin the path to industrialization, there were two means for economies to enter the manufacturing export industries: enter directly as did the United Kingdom, the rest of Europe and the United States, or use revenue from exports of primary products to purchase necessary capital to enter manufacturing industries: the latter was the path that Russia and Japan followed (Ibid. p 136). The advent of the World War I cut off manufacturing imports in many countries, which led these countries to expand their own production to meet domestic demand (Kenwood and Lougheed, 1971, p. 182). This was true for the United States, Canada, Australia, Brazil, Finland, India, New Zealand, South Africa and Japan. It also led to greater protection for these infant industries after the war as countries believed this was the best means of advancing on the path of industrialization and economic development (Ibid.). With the end of the first war, the former empire of Austria-Hungary was dissolved and replaced by Austria, Hungary, Czechoslovakia and Yugoslavia; Turkey was left as a country out of the Ottoman Empire; Poland reemerged after having been divided by Germany, Russia and Austria-Hungary; and Finland, Estonia, Latvia and Lithuania came from lands held by Russia. With the emergence of these countries, there was a general global trend to protect one’s own agriculture industry over trying to expand manufacturing (Ibid. p. 186). Patterson and Afilalo (2008, pp. 22–28) argue that the nineteenth century can be seen as a continuing process of building and solidifying the modern nation-state, where sovereignty is the major feature of the state. The new economic systems of fascism and communism emerged after the war as alternative systems, which further expanded a growing divide during the interwar era. The new League of Nations initially assisted in the early 1920s in stabilizing crisis in some nations, but it played little role after that as nations continued to be wary of infringements on their sovereignty. In fact, these concerns over sovereignty presented substantial challenges to obtaining the agreement on the Bretton Woods system in the postwar era as the next chapter will discuss (Ibid., p 28). By 1926, the United States was the largest creditor nation. However, it was not serving in this capacity as the United Kingdom did in facilitating balance of payments imbalances by providing liquidity in the form of credit (Kenwood and Lougheed, 1971, pp. 194–203). In the end, between 1913 and 1937, trade grew much slower than output with Europe’s share of trade declining dramatically, which stood in contrast to the great expansion in trade over the prior century (Ibid., pp. 222–226). While there are various theories on the decline of trade during this period, the multilateral payments system had incorporated numerous exchange controls across countries to deal with balance of payments issues (ibid., p. 242). High inflation rates in many European countries made it difficult for them to return to the gold standard during the 1920s, and only as things

30  Exports in the first era improved in the late 1920s were they able to do so, but unfortunately at wrong conversion rates (Irwin, 2012, pp. 6–7). The situation had become ripe for a major domestic crisis in the largest creditor nation to be transmitted globally, as occurred in the Great Depression. This will be examined more closely later in the chapter. We now turn to measuring the importance of export demand during the first era of globalization and the interwar years.

Export expansion measures in the nineteenth century and interwar years To get some measure of the importance across countries of exports in their economies during the first era of globalization, export expansion measures discussed in the previous chapter are created using three datasets. The export expansion measure is given by the following equation: Export Expansion Measure =

X t − X t-i ∆X , (3.1) = ∆Y Yt − Yt-i

where X is exports, and Y is GDP. If value-added export data were available, the measure would give the overall increase in demand due to external demand. As gross export data are utilized given that value-added export data are not available for the period, the variable is better described as an export expansion measure: it shows the increase in gross exports or the increase in the overall export market, as a share of overall increase in real GDP, increased total production in the domestic economy. Changes in the gross value of exports do not represent changes in final demand in the economy as they include imported inputs. Nonetheless, the larger the export expansion measure, the greater the indication of the role of exports in the growth process of the country. Table 3.3 provides estimates based on data from Maddison (2001). The data are based on real GDP and real exports. For the earliest period between 1820 and 1870, the Maddison data are only available for France, the United Kingdom, Spain, and the United States. The left portion of the table gives annual compound growth rates for the period, the center section gives the export expansion measures and the right portion gives the export-to-GDP ratio. The most advanced nation at the time, the United Kingdom, grew at an impressive annual rate of 2.1 percent over the half decade period, and export expanded by nearly one-fifth of the growth in real GDP, 17 percent to be exact. This is over twice as high as the other two large empires of France and Spain making clear the greater reliance and emphasis on external trade in the United Kingdom. This double-digit measure of significance is slightly greater than what the export ratio of 12 percent in 1870 would suggest. At the same time, even if the export expansion measure could be interpreted as export contribution to overall demand growth, the measure suggests that 83 percent of the economic growth over the period was supported by domestic demand that occurred with the expanding industrial revolution in the United Kingdom: in the demand

Export expansion measure

0.9

2.1 0.9

1.4

4.2

1.7 1.0 2.0 3.4 4.0 3.9 6.0 2.4 3.4 1.6 2.8 2.2 1.9 1.8 2.4 2.1

0.6 2.4 1.0

0.5 2.3 2.0 2.7 1.0 0.7 1.7 1.2 1.6 1.9 2.2 2.6 0.5 1.1 0.4 2.2 0.4 1.6 0.1 2.2

−0.4 0.7 0.5 1.0 1.7 −0.3 −0.2 2.0 2.2 1.8 1.7 2.8 2.7 0.4 0.0 1.0 1.1 −0.1 2.5

4.9 9.3 7.6 9.3 6.9 3.5 4.6 4.6 5.0 3.9 3.8 6.8 6.4 5.0 5.7 4.7 2.9 6.6 4.8 4.9

6.6 3.6 8.2 8.0 7.5 4.6 5.6 3.0 2.7 2.8 1.3 3.3 3.7 2.3 1.9 2.3 1.7 3.3 0.3 3.0                   2.6       8.4     17.0 8.4   11.7 11.0 9.0 3.1 14.4 12.2 4.0 6.6 8.2 13.0 11.5 18.3 18.0 22.3 11.9 4.5 11.2

4.0 3.6 2.8

3.9 0.0 4.9 −2.4 9.8 −20.7 8.0 −5.0 6.3 7.6 −1.7 15.8 6.1 9.0 6.7 6.5 23.1 10.1 3.4 2.2 5.2 −3.0 4.6 1.8 42.6 −5.4 9.8 1.1 −13.8 −558 16.4 −0.2 −23.7 6.5 –0.9 102.6 −48.4 1.0 5.2

1820– 1870– 1913– 1929– 1950– 1973– 1820– 1870– 1913– 1929– 1870 1913 1929 1950 1973 1992 1870 1913 1929 1950

Real GDP annual growth rate

Source: Author’s calculations based on Maddison (2001)

China Japan S. Korea Taiwan Thailand India Indonesia Australia Canada US Argentina Brazil Mexico France Germany The Netherlands UK Spain Former USSR World

Country

Table 3.3 Export expansion measures for 1820–1992, select countries

0.7 8.7 9.8 11.3 3.8 1.5 5.9 12.4 23.3 6.4 1.9 2.2 1.8 19.1 30.7 57.1 16.8 6.0 5.1 13.3

2.8 17.1 20.6 41.6 13.7 1.5 8.7 24.4 38.3 12.8 12.5 7.1 10.6 36.6 52.6 80.9 40.8 23.4 29.9 16.6 1.0

3.1 1.1

1.3

2.0

0.7 0.2 0.0 0.0 2.1 2.5 0.9 7.4 12.0 2.5 9.4 11.8 3.7 4.9 9.5 17.5 12.0 3.8 0.0 5.0

1.4 2.4 1.0 2.5 6.7 4.7 2.2 12.8 12.2 3.7 6.8 9.5 10.8 8.2 15.6 17.8 17.7 8.1 2.9 8.7

1.7 1.9 1.1 2.3 3.5 2.3 7.9 12.4 4.5 1.0 8.2 17.8 5.2 2.5 10.2 34.4 6.6 7.0 4.5 11.4 3.7 2.6 2.0 1.7 3.6 3.3 5.0 7.4 11.2 9.1 11.2 16.9 15.8 13.0 19.9 27.2 3.6 3.0 5.0 8.2 6.1 2.4 2.1 4.3 7.1 4.0 2.6 4.7 14.8 3.5 2.2 6.4 8.6 7.7 15.4 22.9 12.8 6.2 23.8 32.6 17.2 12.5 41.7 55.3 13.3 11.4 14.0 21.4 5.0 1.6 5.0 13.4 1.6 1.3 3.8 5.1   7.0 11.2 13.5

1950– 1973– 1820 1870 1913 1929 1950 1973 1992 1973 1992

Export ratio

32  Exports in the first era accounting framework using value-added exports, domestic demand contribution plus export demand contribution sums to 1. There are data for 14 other nations for the period 1870–1913. The United Kingdom continues to have the highest reliance on external export demand in its economic growth process with exports growing nearly a quarter of what output growth was. All European nations export expansion measures are in double digits and all greater than the simple export ratio at the end of the period. The new nation Germany, which served as a major force in the expanding global trade network based on new trade treaties, had an exports expansion measure of 18 percent. As growth is a dynamic process and depends on the rate of change in variables and not the level or even ratio of levels of relevant variables, the export expansion measure lends a potentially more accurate measure of the importance of exports in the growth process. Mexico and Thailand are the only two developing nations with double-digit export expansion measures. The United States with its large vast natural resources and growing population based on steady immigration shows the smallest dependence on exports to support growth among all industrial nations. This is true for the United States in all periods that are examined in both eras of globalization. As expected from earlier discussion of the interwar period, growth rates are significantly lower across countries for the period in table covering 1913–1929, with a few exceptions. Also, export expansion measures are generally lower, which is to be expected given the halt in trade liberalization progress and increasing protectionism discussed in the previous section. Indonesia, Japan and South Korea are notable exceptions where exports increased, and they were able to maintain similar growth rates to the previous period. The Netherlands and France were also able to maintain similar export expansion measures to the previous period and also display higher growth rates compared to their European counterparts, except for Spain which turned inward and still maintained a 1.6 percent annual growth rate over the 16-year period. Most significant in terms of trade reduction were Germany, the United Kingdom and Russia, where there was a large decline in exports as shown by the negative double-digit numbers for the export expansion measures, and the countries show the lowest annual growth rates among the sample. While the discussion here is by no means conclusive with regard to interpretations of causation, the deterioration in the international trading system and the nations impacted the most by the decline in export demand saw the lowest growth rates in the over decade sample of 19 countries. One caution in interpretation of export expansion measures is seen in the results for Canada and Mexico during this period. In both cases, the measure is over 20 percent, suggesting significant reliance on export market. However, in both instances, the annual growth rate is significantly lower than in the previous period; thus, while export expansion did buttress some of the slower growth in real GDP during the period, lower growth indicates a lower value in the denominator of the expansion measure. The period 1929–1950 covers more of the interwar period and the beginning of the postwar era. The former USSR, United States, Canada, Argentina,

Exports in the first era 33 Brazil and Mexico were all able to achieve annual growth rates generally around 2 percent, and in all cases, exports were not very important. Domestic demand in these large countries supported the growth. The greatest declines in exports were experienced in Germany, which was of course defeated and much of the country in ruins after the war, and South Korea, which was occupied by Japan. In the case of Germany, exports declines by a multiple of over 5, and for Korea, a 20 percent decline in exports relative to the GDP increase, slowed growth. The final row in Table 3.3 shows the slowdown in trade expansion for the world as a whole during the interwar years relative to prior and future periods. The annual growth rate for world GDP did not change much compared to 1870–1913, but the individual country growth rates in the table points to the wide dispersion of growth rates across countries. This is a feature of globalization in the first era as well, with the successes and declines of nations varying greatly often seemingly in relation to their level of engagement in the global trading system. The next chapter will examine the current era of globalization more closely using available data, but the Maddison data also provide the ability to evaluate export expansion measures in the postwar era with a consistent dataset and compare them to measures for the first era of globalization. The two periods, 1950–1973 and 1973–1992, are also shown in Table 3.3. With the exception of several Asian nations, the annual growth rates are the highest during the early postwar period across countries compared to all other periods. For France, Germany, the Netherlands, the United Kingdom, Australia and Canada, these are also associated with double-digit measures of export expansion, with Germany and France showing the greatest percent at 30.7 and 57.1, respectively. While Japan is often held up as the model of export-oriented growth, the numbers here suggest the European nations have relied more on exports to support growth. Of course, Japan’s measure steadily increased, and for the 1973–1992 period, we see a dramatic increase of the importance of exports in the country as well as in South Korea, Taiwan and Thailand. In the same period, all European nations listed, as well as the former USSR, Australia and Canada, all had export expansion measures near or greater than 25 percent. While growth rates were lower in the 1950–1973 period, the export measures were higher. While there have been many comparisons of the two eras of globalization, the results here suggest the current era of globalization at least in regard to the importance of export expansion relative to domestic output growth is much more significant in the current era.

Export contribution measures using other datasets While the Maddison dataset is a widely used resource for economists examining historical contexts, it does have a limited number of countries. Other datasets exist with greater coverage of countries, but generally only contain nominal data. While empirical work on trade in many cases uses nominal data as accurate price deflators are not usually available, it is preferable to use data in real terms, especially when examining economic growth as we are interested in the growth of the real economy and not inflationary effects. With this shortcoming in mind

34  Exports in the first era on the use of nominal data, this section estimates the export expansion measure using two different additional datasets. Given we are estimating the expansion of exports relative to domestic production, it is hoped that inflationary impacts would affect both the numerator and the denominator roughly equally and thus still give a reliable indicator of export expansion in real terms and its potential importance in the economic growth process across countries. The first dataset is the International Historical Statistics by Mitchell (2007). Table 3.4 present similar information to the estimates using the Maddison dataset for the periods 1820–1870, 1870–1913, and 1915–1929. The greater availability of time series data allows for the final period to be more refined to begin the interwar period after the World War I and end just prior to the Great Depression. For the earliest period, while Spain is not available compared to the Maddison dataset, Australia, Denmark, Italy and Sweden are additional countries. Estimates of the export expansion measure for the United Kingdom, United States and France, which are in both datasets, are all higher relative to the Maddison estimates: nearly twice as high for the United States and France (although the United States is still in single digits) and half as high for the United Kingdom. For the four additional countries, the export measures are quite high, all over 20 percent, and as high as 50 percent for Sweden. This potentially suggests a larger role for exports compared to estimates using data from Maddison (2001). For the period 1870–1913, estimates for exports for the United States, France, Germany, Spain and the United Kingdom are similar in both datasets. For Canada and Brazil, the estimate is nearly twice as high and new estimates for Denmark, Italy and Sweden, all in double digits, with Denmark being the highest with exports expanding nearly one-third of the expansion in GDP. While the estimate for Sweden compared to the previous period declined by half, collectively Canada, Denmark, Germany, Norway, Sweden and the United Kingdom all have estimates greater than 20 percent, again suggesting a much more significant role for exports in this first era of globalization between 1820 and 1913. For Japan, Taiwan and the Netherlands, the estimates are significantly higher than those in Table 3.3, as well by a factor greater than double and even 10 in the case of Taiwan. While it is difficult to know how accurate the export and GDP statistics are, especially for the significantly higher estimates for Taiwan and the Netherlands, there is a scenario which would explain the estimates in both cases. For Taiwan, the country came under Japanese rule from 1895 to 1945 after the Japanese victory over China in the First Sino–Japanese War. As a satellite economy, trade was forced with Japan, which could account for the greater export expansion measure, especially given the close proximity to Japan, which is different than in case of other colonies around the world. The situation is similar for the case of Korea for the period 1915–1929: Korea came under Japanese rule from 1910 to 1945 and was forced to trade with Japan. In the case of the Netherlands, the Dutch East Indies, a Dutch colony, was taken over by the government in 1800 from the former Dutch East India Company, which was one of the earliest MNEs, founded in 1602. This Dutch colony expanded with further military conquests

52.2 25.4

21.3

22.0 15.1

22.8 5.2

1820–1870

 

      9.2 5.0     2.6 2.0   1.7       1.8 2.3

Export expansion measure

GDP annual growth rate

7.1 10.7     3.7 6.1   6.2       10.3 8.6

     

 

Export ratio

6.7   9.0 6.9 4.0 3.9 5.9 2.9 1.7 3.5 2.0 3.5 2.9 2.1 3.5 1.8

 

GDP annual growth rate

86.1 8.1 6.6 23.1 15.6 32.1 15.9 20.2 14.0 137.3 23.7 13.6 22.0 25.5

16.1

1870–1913

Export expansion measure

4.6   27.6 22.5 5.7 14.6 34.3 16.9 11.7 17.3 8.4 94.4 14.9 11.4 16.6 18.5

 

Export ratio

8.8 8.6 9.5 5.2 6.5 1.1 13.0 9.1 7.9 4.2 13.6 5.1 4.3 4.8 5.2 2.6

GDP annual growth rate

16.0 24.2 10.1 9.3 4.4 66.9 14.0 21.9 13.6 37.6 10.6 7.8 3.8 6.5 10.1 27.0

1915–1929

Export expansion measure

15.9 8.8 99.1 6.9 7.1 14.1 21.8 33.9 15.3 13.8 10.7 54.2 28.3 9.2 27.8 12.9

 

Export ratio

Source: Author’s calculation based on Mitchell (2007); Notes: Japan 1885–1913; Taiwan 1905–1913; Australia 1826–1870, 1879–1913; Canada 1870–1910; Denmark 1921–1929; France 1920–1929; Germany 1880–1913, 1925–1929; Italy 1861–1870; The Netherlands 1900–1913; Spain 1901–1913; Sweden 1861–1870; UK 1830–1870.

Japan* Korea Taiwan* Australia* US Canada* Brazil Denmark* France* Germany* Italy* The Netherlands* Norway Spain* Sweden* UK*

Country  

Table 3.4 Export expansion measures using nominal data from Mitchell (2017), 1820–1929

36  Exports in the first era during the period 1870–1913, and the Dutch expansion is a well-documented occurrence of colonialism in Asia. Given the importance of the Dutch East India to the nation of the Netherlands, it is possible that exports played a critical role in economic growth as the estimates in the table suggest. At the same time, one must keep in mind that with nominal data, increases can be reflective purely of inflation, and if prices on export goods increased relative to domestic goods, this would also create a larger export expansion measure which would not represent any increase in the number of goods, just the relative value of goods. Also, given exports are not in value-added terms, it could be a significant amount of imports that are involved in the production of final exports in the Netherlands, and these imported inputs do not reflect nearly as much of an increase in domestic production. For the interwar years, the estimates between the two datasets are drastically different. One of the main reasons for this may be the ability to remove the war period and begin in 1915. Examining Figure 3.1, it is clear there is a dramatic decline in worldwide exports from 1913 to 1915. Having to begin the interwar period in 1913, the Maddison dataset thus includes the period of decline caused by the war. Figure 3.1 shows that if one can start the period in 1915 and go through 1929, there is a significant increase in world exports despite the increase in capital controls and increase in protectionist sentiments discussed earlier. This was a period when countries went back on the gold standard after the war, which is testament to the desire to return to the global trading system prior to the war. However, the system had severe imbalances which negatively impacted some countries more than others, the United Kingdom for example, which instituted austerity measures to try to address its balance of payments issues. The United Kingdom ultimately abandoned the gold standard in early 1931, with most other major trading countries following in years shortly thereafter. At the same time, annual growth rates in this interwar period were higher in every country listed in the table than previous periods except for Australia and Canada. The United Kingdom’s leadership and efforts to maintain the gold standard despite its difficult domestic situation may have allowed others to benefit greatly from a growth perspective. While growth rates were generally higher, the percentage of growth facilitated by exports as suggested by the export expansion measures was lower than in the previous period, with the exception of Australia, Canada, Germany and the United Kingdom. For the Netherlands, Norway, Sweden and Spain, the decline is significant. The third dataset used to create estimates of export demand contribution is the TRADHIST database developed by Fouquin and Hugot (2016). This is the most extensive database where the authors used both secondary sources as well as primary sources from governments. Table 3.5 present the estimates for the nominal variables in the data. The top part of the table shows the data allow estimates for France and the United Kingdom back to the early eighteenth century. For the period prior to 1760, we see in both cases the annual growth rate of nominal GDP is low as would be expected in the world prior to the industrial revolution. Interestingly, in both cases to the extent there was GDP growth

1700–1760 1716–1760 0.17 42.3 1700–1760 0.6 21.3           1820–1870 1826–1870 9.7 22.8 1835–1870 3.1 18.7 1861–1870 4.8 14.1 1820–1870 1.9 9.2 1835–1870 1.9 32.9 1820–1870 2.3 13.8 1820–1870 3.2 20.4 1821–1870 2.1 6.7 1860–1870 2.4 24.1 1820–1870 2.0 16.1 1820–1870 2.1 24.8 1833–1870 4.1 19.0 1861–1870 1.3 25.9 1820–1870 1.5 86.5 1820–1870 2.9 14.9

  France UK The Netherlands Portugal Sweden Korea Chile   Australia Belgium Brazil Chile Colombia Germany Denmark Spain Finland France UK Greece Italy The Netherlands Norway 22.5 15.3 34.3 6.2 18.2 11.5 16.9 5.6 12.0 11.7 19.5 14.8 8.4 42.9 14.6

5.3 9.6

GDP Export Export annual expansion ratio growth measure rate

Period

Country

18.7 43.0 17.2 9.1 10.8 17.9 27.7 11.3 25.1 13.9 21.7 13.9 11.7 127.7 18.5

4.2 9.9 7.1 7.8 8.8 9.9 1.4

 

 

11.2 35.6 15.4 14.2 10.2 16.4 27.9 7.9 24.1 14.5 15.5 21.5 10.7 30.7 15.6 (Continued)

5.3 −6.7 10.1 20.7 11.3 28.0 22.0 7.2 30.4 23.4 19.7 33.3 10.6 5.3 5.0

               

GDP Export Export annual expansion ratio growth measure rate

1915–1929 1915–1929 5.3 1920–1929 −1.3 1916–1929 7.4 1915–1929 8.7 1915–1929 7.7 1915–1929 5.6 1915–1929 5.2 1915–1929 4.1 1915–1929 6.6 1915–1929 3.6 1915–1929 3.4 1915–1929 3.0 1915–1929 4.5 1915–1929 5.8 1915–1929 3.8

 

GDP Export Export Period annual expansion ratio growth measure rate

1760–1820 1760–1820 1.5 3.4 1760–1820 2.1 10.0 1802–1831 −0.6 4.4 1776–1820 0.6 9.7 1800–1820 −2.2 12.6 1790–1820 4.5 9.6 1810–1820 2.6 1.3 1870–1913 1870–1913 3.8 17.7 1870–1913 1.5 73.0 1870–1913 5.1 15.0 1870–1913 3.3 10.0 1870–1913 3.2 8.1 1871–1913 3.3 19.3 1870–1913 2.9 32.2 1870–1913 1.7 16.4 1870–1913 3.5 29.1 1870–1913 1.7 15.9 1870–1913 2.0 23.4 1870–1913 3.5 13.6 1870–1913 2.1 14.0 1870–1913 2.2 182.5 1870–1913 2.9 20.2

Period

Table 3.5 Export expansion measures using nominal data from Fouquin and Hugot (2016), 1820–1929

1820–1870 1820–1870 1820–1870 1820–1870    

                             

New Zealand Portugal Sweden US Argentina Austria

Hungary Bulgaria Canada Switzerland Cuba Egypt India (UK) Japan Mexico Taiwan Uruguay USSR Guatemala Korea South Africa

 

1.7 1.7 2.2 4.5

 

1.7 1.7 24.3 4.2

 

(AustriaHungary)

4.3 4.3 19.0 4.8

GDP Export Export annual expansion ratio growth measure rate 3.8 1.9 3.0 4.2 8.8 2.1

 

169.7 16.1 22.8 46.2 25.9 17.8 20.1 5.4 86.6 12.7 7.1

27.6 1.9 24.1 6.4 24.9 19.1   111.6 16.3 28.9 43.3 28.6 11.3 15.2 7.1 56.7 14.7 7.5      

28.1 2.9 22.6 6.1 27.1 15.4

3.0 0.3 4.9 7.1 5.5 4.0

12.8 −1225.1 11.0 9.3 45.1 36.1 9.9 7.2 −69.0 6.3 −71.3 −28.0 9.5 24.9 8.2

24.1 58.0 12.6 3.7 13.1 12.8

16.1 97.3 18.2 22.0 45.3 26.7 8.8 10.5 12.2 35.1 15.4 4.6 12.9 19.3 15.1

22.6 5.3 21.7 4.9 20.0 18.4

GDP Export Export annual expansion ratio growth measure rate

1925–1929 6.5 1911–1921 0.1 1915–1929 5.9 1915–1929 5.1 1915–1929 0.9 1915–1929 4.1 1915–1929 3.7 1915–1929 8.1 1919–1929 −0.5 1915–1929 8.7 1920–1929 0.1 1915–1929 −0.5 1923–1929 11.9 1915–1929 7.8 1915–1929 4.9

1915–1929 1915–1929 1915–1929 1915–1929 1915–1929 1925–1929

GDP Export Export Period annual expansion ratio growth measure rate

  1892–1911 2.6 1870–1913 4.6 1885–1913 3.8 1903–1913 7.0 1886–1913 5.3 1870–1913 1.3 1868–1913 3.0 1895–1913 8.4 1903–1913 7.0 1870–1913 4.4 1885–1913 7.0        

1870–1913 1870–1913 1870–1913 1870–1913 1884–1913 1870–1913

Period

Source: Author’s calculations based on Fouquin and Hugot (2016); Notes: For Germany from 1820–1870, the data are for the Zollverein; For Austria from 1870–1913, the data are for Austria-Hungary.

Period

Country

Table 3.5 (Continued)

Exports in the first era 39 over the half century prior to 1760, export expansion played a significant role with export expansion measures of 21 in the United Kingdom and 42 percent in France. Growth rates are higher for the two countries between 1760 and 1820 as the industrial revolution takes hold and the role of exports diminishes in this period. The table shows that growth in Sweden was actually negative in the period due to a succession of wars and defeats that had the country lose its territory. The estimates suggest that the export decline played a role as exports contracted nearly 13 percent compared to overall GDP decline. The middle and bottom-left portion of the table gives estimates for countries where data are available between 1820 and 1870. For all countries where estimates were provided for the same period in Table 3.4, the values are similar in Table 3.5, with the exception of Sweden, whose level is half of what it was previously: the estimate, nonetheless, indicates exports grew nearly a quarter of the increased real GDP. Here, estimates for the Netherlands are available for this earlier period and again show very high levels of reliance of exports: exports grew by 86 percent relative to the increase that occurred in GDP. Again, for the period 1870–1913, the values of estimates are similar between the two nominal datasets, except for Australia where it is over twice as high in Table 3.5 at 17.7 percent, and more in line with estimates from the Maddison data. Similar estimates include the Netherlands, where the value is even greater in this case, and Japan and Taiwan. New countries in this period relative to Table 3.4 are Bulgaria, Chile, Finland, Greece, New Zealand, Argentina, Austria, Bulgaria, Switzerland, Cuba, Egypt, India, Uruguay, Mexico, Colombia and the former USSR. For all but the latter three, estimates are double-digit for the export expansion measures and are especially high for Belgium and Bulgaria, which were important trading partners during this period. In the case of Mexico and the former USSR, the estimates are similar to those from the Maddison data, which is reassuring. The middle and bottom part of the right side in Table 3.5 gives estimates for the interwar years, 1915–1929. Just as in other periods, most estimates are similar to previous ones in Table 3.4. One notable exception to the upside is France whose estimate is 23.4 percent, compared to the previous one of 13.6. Relative to the previous period, Spain, Netherlands, Norway and Sweden all have significantly lower export expansion measures, again consistent with the earlier discussion on the increase in protectionism and exchange controls during the period. For the new countries included in the table, Belgium, Bulgaria and Switzerland experienced similar decreases in export expansion measures. The four cases where the export measures are negative are informative lessons in interpreting the measure. In the case of Belgium, GDP declined during the period by 1.3 percent annually. Belgium was left devastated after its occupation by Germany during World War I. Although Germany had to pay war reparations, the funds were late and even required French and Belgian armies moving toward Germany to force follow through. The −6.7 percent indicates that exports actually increased during the period, although by very small amounts, suggesting it was difficult for the country to expand its trade in the global trade network given its domestic situation.

40  Exports in the first era In Mexico, a civil war caused GDP to decline during the period, but exports increased, causing the negative sign. In the former USSR, the October Revolution of 1917 and the creation of the Soviet Union in 1922 saw lower economic growth during the period as power was consolidated, but the negative export expansion estimate shows exports expanded during the period. In the case of Uruguay, a new constitution in 1917 divided power between the president and a new Administration Council, resulting in significantly reduced growth, just 0.1 percent between 1920 and 1929. The negative export measure indicates that exports declined, but given the small change in GDP, it should not be interpreted that export decline was the main factor in causing lower growth in the period. It is indeed the case that the export decline contributes to the significantly lower growth rate, but caution should be used when interpreting the export expansion measure in low-growth periods.3

The role of manufacturing exports While data are limited across countries, there were sufficient data to get an idea of how the export expansion and economic growth process took place across the main trading partners during the first era of globalization and the interwar period. Even less data are available to examine exports in any detail by industries. Table 3.6 presents data from Kuznets (1996), who has data for exports of textiles and metal products as a percentage of total exports for several countries. As outlined earlier, the industrial revolution began as an application of mechanized production in the textile industry, first in the United Kingdom and then spreading to other parts of Europe. The data for the earliest period 1830/1840 are only available for the United Kingdom and Germany. Sixty-six percent of UK exports in this period were in the textile industry, which can be expected as the United Kingdom was the birthplace of the industrial revolution. The number for Germany is 28.8 percent, but it indicates how the industrial revolution had spread to other

Table 3.6 Exports by industry, select countries (percent of total) Period

UK Japan US

Denmark France Germany Sweden Italy Canada

A. Textiles 1830/1840 1870/1880 1910–1913 1953–1963

    66.0 58.6 38.5 35.4 7.4 20.6

 

B. Metal products  1830/1840 12.7 1870/1880 12.9 1910–1913 26.3 6.5 1953–1963 54.3 44.0 Source: Kuznets (1996)

  3.0 2.6

  0.9 0.4 2.4

0.3 24.1 3.9 41.0 22.0

24.0 10.3

  28.8 19.5 14.4 8.0

14.4 38.9

2.7 6.1 27.8 47.1

 

  1.2 1.7 2.1

1.3 19.3 45.9

18.8 17.2

   

  0.3 0.5

      4.9 11.5 37.4 12.7

Exports in the first era 41 parts of Europe, which can be inferred for other countries in Europe, even though those numbers are not available. Data for over a half century later in 1910–1913 confirm this for France and Italy with double-digit percentages of textile exports. In addition, they show that this was also the case for Japan’s development. As mentioned earlier, Japan is an outlier in Asia, as countries in the region during this period generally wanted to avoid Western contact and trade relations. Japan’s development experience and the data here show its openness was important for the country to embark on a path of industrialization and development as the first non-Western nation. Interestingly, the textile export percentages for the United States, Canada, Denmark and Sweden show a different path of industrialization where they never reached levels of textile exports percentages as the United Kingdom, Western Europe and Japan. As the industrial revolution spread and technological advances in energy production made electricity the main source of energy, the next stage of the industrialization saw production switching to metal products. Ttble 3.6 shows that the United Kingdom was again a lead country in this development. By the end of the first era of globalization in 1913, the United States, France, Germany, Sweden and Canada had all reached double-digit exports in metal products. Japan and Italy were both behind in this regard. As countries transitioned to greater manufacturing exports in metal products, their shares of exports in textile exports fell dramatically. This was less so for Japan and Italy and is most likely connected to the fact their share of metal product exports did not increase as much. The picture that emerges of this first era of globalization is one where nation-states solidified with their increasing economic growth supported significantly through export expansion. For the developed nations, this involved an evolving industrialization where emphasis was initially on textile exports and switched to metal products as technology led to new energy sources and production methods. Table 3.7, also based on data from Kuznets (1996), gives an additional feature of the first era of globalization in terms of exports by industry for broader regions. The first three columns in the table show that while the first era of globalization was a period of industrialization, spreading to different parts of the world, international trade is largely dominated by trade in primary products across countries: even for developed countries, half of exports in the 1876–1880 period are in primary products. For example, in the United States, cotton was the largest export product in 1890 and in 1913, while iron and steel were only one-tenth the value of cotton exports in 1890; however, they had become the second largest export product for the United States by 1913 (Irwin, 2003). The notable exception is the United Kingdom (and Ireland) in the first row, where only 11.9 percent of exports were in primary products in the same period 1876–1880, suggesting trade was already dominated by manufacturing goods. By 1913, the United Kingdom and Europe and Japan were at similar levels, although Table 3.5 showed that for Europe, this consisted of a greater percentage of exports in metal product manufactured goods, whereas in Japan, textile manufactured exports were by far the largest manufacturing export category.

42  Exports in the first era The data in Table 3.7 show textile product exports are the highest for Europe and Japan. We can see the decline that occurs over time in the developed world with the 1953 figures as exports move toward metal exports shown in the final two columns. Interestingly, with this decline in the proportion of textile exports, there is no region that shows any increase as the opportunity for filling in production left by others potentially opens up. Instead, the bottom part of the table for imports of textile products shows a decline in the percentage of textile products imported in every region. This may be why Japan and Italy continued to show large shares in textile exports as their comparative advantage led them to stay in the industry much longer than others. This decline in textile imports percentages contrasts with the increase of import percentages across regions of metal products. This increased demand around the world was met largely by the great expansion in the developed world, especially in Europe and the United States initially and much later by Japan. This suggests terms of trade moved in favor of metal products and away from textile products. As the interwar years were a period of increased protectionism, the time was not yet ripe for other developing countries to enter the textile export market and start the process of industrialization that the successful developed nations had undergone in the first era of globalization, supported by export demand expansion. This would have to wait until the postwar era, when a group of Asian nations would be the next to embark along that path.

Table 3.7 Exports by industry, by region (percent of total) Region

Primary products

Textiles

Metals

1876/ 1913 1953 1913 1953 1913 1953 1880 Exports UK and Ireland Developed Underdeveloped World Europe and Japan US, Canada, and Oceania Latin America Asia and Africa Imports Developed Underdeveloped World Europe and Japan US, Canada and Oceania Latin America Asia and Africa Source: Kuznets (1996)

11.9 50.6 97.6 61.9 85.7

 

           

30.3 44.0 86.4 55.4 38.2 68.4

26.3 32.2 85.3 50.1 30.7 41.0

      16.1 7.2 20.2 38.7 6.3 4.2 3.7 6.8 13.5 6.2 15.8 27.9 20.5 11.2 19.2 36.8 2.2 2.6 20.1 36.2

95.6 84.8 67.8 37.0 60.4 69.9 49.9 36.7 36.8

94.0 85.0 61.6 41.6 54.8 66.6 50.6 40.0 36.0

0.2 0.1 2.1 4.9 7.8 4.9 3.8 6.0 8.2 4.3 12.3 21.6 23.0 10.7 20.1 28.7 11.7 6.5 14.2 24.0 7.2 4.0 12.1 19.6 14.6 5.8 15.9 25.6 18.5 4.6 23.9 36.5 28.7 15.6 17.0 26.3

Exports in the first era 43

Exports contribution to the Great Depression As discussed previously, the global trading situation in the interwar years had reached a state of hazard, given the use of exchange controls and increased protectionism that was ripe for a major negative economic shock to be transmitted around the world and considering the international linkages that had developed during the first era of globalization. It is possible to apply a similar measure of export contraction to the decline in GDP that occurred during the Great Depression and see what fraction of the decline in exports is relative to the decline in GDP. Again, with value-added GDP, one could actually accurately measure the fraction of decline in domestic production due to final export demand. Nevertheless, the export contraction measure will be indicative of the role of exports in the downturn. While care was taken in interpreting the export expansion measure when examining economic growth over longer periods of time as causation cannot and should not be inferred, in the case of the Great Depression, the shock emanated in the United States and spread worldwide, and in the end, whether caused directly by decreasing worldwide demand given the drop in worldwide income or indirectly by protectionist internal policies in response to this drop, the decline in trade and export demand around the world was an external shock to most economies and the means by which the downturn was transmitted globally. It is an example of the importance of external demand and how its reduction can dramatically reduce economic growth, or in this case, cause negative growth. The United States emerged as the largest creditor nation as early as 1926 (Kenwood and Lougheed, 1971, p. 196). The situation was quite different from the earlier period when the United Kingdom served as the largest creditor nation and facilitated balance of payments issues by being willing to lend. In the latter situation, the system worked since the United Kingdom had large surplus with primary product export countries, which allowed it to lend to competitor nations experiencing balance of payment deficits. In the US case, it had surpluses with competitor nations and deficits with primary product-exporting nations. Thus, when the stock market crashed in 1929, US imports of primary products declined, and its investment around the world declined along with the repatriation of US funds (Ibid., pp. 194–204). Irwin (2012, pp. ix–xi) argues that one reason for the spread and depth of the Great Depression was that countries were on the gold standard and, as a result, had no policy levers to combat the downturn: maintaining the gold standard took away monetary policy, and conventional wisdom of the day argued that austerity measures and a balanced budget were necessary during the downturn, which precluded the use of fiscal policy. The author argues Spain and China were able to avoid downturns due to being off the gold standard during the period (Ibid., p. 3). With the loss of policy tools, only trade policy was left, but choking off trade to deal with balance of payments crisis became the transmission mechanism for the Great Depression. The United States was the first to respond to the crisis by raising tariffs with the

44  Exports in the first era Smoot–Harvey tariff of 1930. Irwin (2012) provides an excellent recount of the protectionist policy actions during the period which broke the trade linkages that existed across nations and, as a result, created the largest decline in worldwide external demand in history. Although it represents an episode in the negative direction, an examination of the Great Depression can nonetheless provide a measure of the importance of exports to economic growth process, which means a decline in this case. Irwin (2012, pp. 136–138) highlights the important feature that the response to the Great Depression led to growth of preferential trading blocks, with the United Kingdom being the worse culprit focusing on trade in the commonwealth. This essentially resulted in a breakdown of the trading system into bilateralism which led to the further fall in world trade and growth (Grimwade, 1989, p. 267). Bhagwati (2008) compares the parallel between this regionalism in the aftermath of the Great Depression and the proliferation of RTAs in our current era. Table 3.8 presents estimates for the exports contraction measure, in this case given the downturn, as a share of the decline in GDP during the Great Depression where the period is defined by the peak of GDP, which in almost all cases is 1929, until the trough or lowest level of GDP before it begins to turn up again. The data are from Mitchell (2007) used earlier. Countries in the table are grouped by region. For Asia, the estimates show that exports decline by onethird of the decline in GDP. In North America, the estimate is close to 20 percent for the larger nation and up to 50 percent for smaller nations. Estimates in the table generally display this feature of larger nations having smaller export contraction estimates than small nations. Estimates in Europe vary from a low of 18.4 percent in the Bulgaria to 103.7 percent in Ireland. France, Germany and Italy show estimates of one quarter. In 10 of the 17 European countries listed, the percentage is over 40 percent, including the United Kingdom at 75.5 percent. In all cases, the export contraction measures are greater than the simple export ratio, suggesting the export expansion measures can be a better indicator for measuring the importance of exports in economic activity. In Russia and Spain, while experiencing export decline, their nominal GDP actually grew over the period. While GDP data even on a nominal basis are not available for most countries in the nineteenth century, Mitchell (2007) does provide export data in local currency units for much of the developing world during the Great Depression. While not an ideal measure, Table 3.9 gives the growth rates for the same period of decline that the majority of nations in the region experienced in Table 3.8. What is striking is the almost universal decline in exports across all countries in every region of the world. Even though GDP numbers are not available for the period, results in Table 3.8 suggest that these countries around the world experienced significant GDP decline with a large portion of it caused by the export decline, as presented in Table 3.9. Table 3.10 presents export expansion measures using data from Fouquin and Hugot (2016). Results for overlapping countries here vary much more than in previous comparisons of estimates during the first era of globalization using the two datasets. There are large differences where the estimates are significantly lower

Table 3.8 Export expansion measures during the Great Depression using data from Mitchell (2007) Country

Period

GDP period growth rate

Export expansion measure

Export ratio start of period

Exports period growth rate

Asia      India Indonesia Japan Korea Taiwan

1929–1931 1929–1934 1929–1931 1929–1931 1929–1931

−1.8 −58.2 −9.8 −21.6 −23.6

229.2 28.4 38.5 39.6 32.2

8.9 22.3 16.0 23.6 26.5

−45.9 −74.2 −43.2 −36.2 −28.8

−29.3

8.6

8.1

  −30.9

−43.1 −25.4 −58.2 −13.9 −34.1 −46.1

24.3 54.6 19.4 57.0 18.3 7.6

19.2 27.9 18.9 24.9 12.9 5.1

−54.6 −49.7 −60.0 −31.8 −48.4 −68.2

  Oceania Australia 1929–1932 North/Central Amercia   Canada 1929–1933 Cuba 1930–1933 Guatemala 1930–1933 Jamaica 1929–1934 Mexico 1929–1932 US 1929–1933 South America   Brazil

1929–1932

−28.0

19.4

15.4

−35.2

Europe   Austria Belgium Bulgaria Czechoslovakia Denmark France Germany Greece Hungary Ireland Italy The Netherlands’ Norway Russia Spain Sweden Switzerland UK Yugoslavia

1929–1934 1930–1934 1929–1934 1929–1935 1929–1932 1929–1935 1929–1932 1929–1931 1929–1934 1929–1933 1929–1934 1929–1935 1929–1932 1929–1935 1929–1935 1929–1933 1929–1936 1929–1933 1929–1934

−25.7 −25.7 −37.5 −18.3 −11.9 −41.0 −36.1 −13.3 −31.1 −16.8 −28.2 −27.9 −11.1 834.6 8.2 −17.4 −19.8 −11.2 −43.2

42.8 72.3 18.4 93.7 76.8 24.4 27.0 46.6 31.7 103.7 24.3 71.3 37.9 −3.3 −43.3 43.8 61.4 75.5 15.6

18.1 39.3 11.4 27.9 27.9 14.5 17.0 15.5 16.1 29.2 10.6 30.9 17.3 45.5 7.9 18.8 21.0 17.1 13.2

−60.8 −47.3 −60.4 −61.2 −32.8 −69.1 −57.4 −40.2 −61.1 −59.6 −64.6 −64.5 −24.3 −60.2 −44.9 −40.5 −58.0 −49.5 −51.0

Africa South Africa

  1929–1932

−22.2

20.3

7.8

  −57.4

Source: Author’s calculations based on Mitchell (2007)

Table 3.9 Export growth rates during the Great Depression using data from Mitchell (2007) Country

Period

Exports Country period growth rate

Asia China Iran Malaya Philippines Sabah Sarawalk Sri Lanka Syria Thailand Turkey South Yemen

  1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931 1929–1931

  −10.4 −36.6 −54.3 −36.8 −38.2 −50.7 −42.8 −39.0 −39.1 −18.1 −37.2

Oceania  New Zealand Western Samoa New Caledonia Hawaii French Polynesia Fiji

1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932

−37.6 −38.0 −53.3 −22.8 −51.0 −2.7

North/Central America  Barbados 1929–1932 Costa Rica 1929–1932 Dominican Rep 1929–1932 El Salvador 1929–1932 Guadeloupe 1929–1932 Haiti 1929–1932 Honduras 1929–1932 Martinique 1929–1932 Newfoundland 1929–1932 Nicaragua 1929–1932 Panama 1929–1932 Trinidad & Tobago 1929–1932

9.8 −47.9 −53.6 −62.2 40.7 −57.1 −35.7 −35.2 −12.6 −59.6 −51.2 −38.4

South America  Brazil Argentina Bolivia Chile Colombia Ecuador Guyana Netherlands Ant Paraguay Peru Suriname Uruguay Venezuela

−35.2 −40.6 −62.6 −87.9 −44.9 −43.0 −13.8 −41.1 −4.4 −49.4 −46.2 −50.5 −14.0

1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932

Period

Exports period growth rate

Europe Albania Poland Portugal Romania

  1929–1932 1929–1932 1929–1932 1929–1932

  −66.7 −61.5 −26.2 −42.3

Africa Algeria Angola Benin British Somaliland Cameroon Egypt French Eq

1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932

  −3.4 −29.1 −63.9 −49.2 −47.8 −54.5 −21.1

Africa Gambia Ghana Ivory Coast Kenya Madagascar Malawi Mauritius Morocco Mozambique Niger Nigeria Réunion Senegal Sierra Leone South Africa Sudan Tanzania Togo Tunisia Zaire Zambia Zanzibar Zimbabwe                  

Source: Author’s calculations based on Mitchell (2007)

1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932 1929–1932

−51.6 −34.0 −55.9 −37.0 −27.3 16.0 −47.2 −44.4 −40.0 −61.0 −47.2 −14.0 −70.6 −41.1 −57.4 −49.8 −44.3 −65.5 −38.8 −61.3 193.6 −47.5 −54.6                  

Table 3.10 Export expansion measures during the Great Depression using data from Fouquin and Hugot (2016) Country

Period

GDP period growth rate

Export demand contribution

Export ratio

Exports period growth rate

Asia India Indonesia Japan Korea, Rep. Taiwan

  1929–1934 1929–1933 1929–1933 1929–1933 1929–1933

  −34.6 −34.2 −40.4 −40.3 −42.6

 

 

8.8 29.1 10.5 19.3 35.1

  −50.8 −52.0 −6.5 −32.0 −41.9

Oceania Australia New Zealand

  1929–1932 1929–1933

−43.0 −43.0

-0.3 31.2

11.2 33.2

  1.2 −40.4

North/Central America  Canada 1929–1933 Cuba 1929–1933 Guatemala 1929–1933 Honduras 1929–1930 Jamaica 1929–1934 Mexico 1929–1934 United States 1929–1934

−39.5 −14.9 −69.9 −1.7 −13.9 −52.6 −38.4

22.7 195.7 10.7 −62.9 55.0 9.1 7.8

18.2 45.3 12.9 12.5 24.6 12.2 4.9

  −49.2 −64.6 −57.8 8.7 −31.1 −39.5 −60.7

South America  Argentina Brazil Chile Colombia Uruguay

1929–1934 1929–1931 1929–1932 1929–1931 1929–1933

−38.1 −54.1 −47.3 −46.1 −55.3

25.6 12.5 21.1 6.5 10.2

20.0 15.4 14.2 10.2 15.4

  −48.7 −43.9 −70.3 −29.6 −36.6

Europe Austria Belgium Bulgaria Denmark Finland France Germany Greece Hungary Ireland Italy The Netherlands Norway Portugal Russia Spain Sweden Switzerland UK

  1929–1933 1929–1931 1929–1931 1929–1933 1929–1932 1929–1931 1929–1931 1929–1933 1929–1931 1929–1933 1929–1931 1929–1931 1929–1933 1929–1931 1929–1931 1929–1931 1929–1933 1929–1931 1929–1932

−6.0 −1.3 −14.7 −22.3 −30.6 −7.5 −26.2 −25.5 −6.0 −34.2 −14.9 −4.5 −18.0 −6.4 82.8 −31.6 −16.9 2.1 −10.0

193.4 582.1 11.6 51.3 30.6 67.0 15.3 45.0 111.2 49.0 19.3 197.3 24.5 20.6 −0.3 12.8 56.3 −316.6 77.7

18.4 35.6 114.2 27.9 24.1 14.5 16.4 21.5 16.1 28.2 10.7 30.7 15.6 5.3 4.6 7.9 21.7 22.0 15.5

  −63.5 −22.0 −1.5 −41.0 −38.9 −34.9 −24.4 −53.4 −41.2 −59.4 −26.9 −29.3 −28.3 −25.1 −5.4 −51.1 −43.9 −30.9 −50.0

Africa Egypt South Africa Zimbabwe

  1929–1932 1929–1931 1929–1931

−10.4 −11.6 −37.1

123.2 68.3 37.3

26.7 15.1 30.0

  −48.1 −52.6 −46.1

13.0 44.3 1.7 15.3 34.5

Source: Author’s calculations based on Fouquin and Hugot (2016)

48  Exports in the first era as in the case of India, Japan, Korea, Germany and Ireland, and where results are significantly higher as in the case of Indonesia, Cuba, Austria, Belgium, France, Hungary, the Netherlands and South Africa. This actually deals with one of the major disagreements on the cause and spread of the Great Depression. Many believe the gold standard and in particular the United Kingdom’s insistence to reenter the gold standard at an artificially high rate was one of the main causes. Given the role of the United Kingdom in the exchange rate system, it is not surprising that data measured in British pounds, as is in Fouquin and Hugot (2016), would give very different estimates than those based on local currency measures as in Mitchell (2007). This is especially true as many went off the gold standard just prior to recovering from the Great Depression, and some believe that was what allowed countries to finally recover from the Great Depression (Eichengreen, 1992). In the cases where GDP growth decline is larger in Table 3.10 than in Table 3.9, and the export expansion measure is smaller, this reflects an appreciation of the Pound relative to the domestic currency. Japan and India provide the most extreme example in the sample: in local currency, the decline in GDP is much smaller relative to measures in British pounds, and there is a much larger percentage in export declines. Another example is the case of Spain where the difference is so substantial that in local currency, there is no decline in GDP, and in British pounds, GDP declines by 31.6 percent. Several authors have pointed to Spain (and China) as an example of countries which avoided many of the ill effects of the Great Depression since they were not on the gold standard. Of course, having all measures in a common currency allows for a more common comparison in purchasing power, but it does depend on the currency used. The United Kingdom left the gold standard in 1931 with others following. At the same time, there was a significant increase in protectionism as countries experienced the balance of payments issues including the Smoot–Hawley Tariff in the United States in 1930 and the Imperial Preference policies of Great Britain favoring the commonwealth countries. Whether through decline in export volumes related to protectionist policies or overall decline in external demand or exchange rate movements as countries abandoned the gold standard, the decline of the international trading system played an integral role in the transmission and depth of the Great Depression around the world.

An era of nation building and growing interconnectedness The first era of globalization was truly an era of nation-state building, and the expansion of global trade played an important role in this regard. The spread of the industrial revolution from the United Kingdom to the rest of Europe, and then further industrialization in these first movers and its spread to the United States and Japan, allowed nation-states to garner economic power to solidify their nations. Of course, there were wars and conflicts and borders adjusted, but over time, nation-states emerged and consolidated their territory.4 The supply side forces undoubtedly played the primary role in the expansion of economic growth

Exports in the first era 49 in the newly developed world, especially in the form of new technologies that saw the establishment of new production methods based on increased mechanization and advances in energy, communication and transport. The chapter highlighted how the expansion in textile manufacturing production with the emergence of the industrial revolution and then the move toward metal products played an important role in the economic growth process in the developed world. This is a path of development that Japan and Italy followed later in the period and the one, we will see later, that they continued on and that others would follow in the postwar era, as the other nineteenth- century advanced nations would find other export industries with the new technological production, communication and transportation developments to come. While the supply side factors highlighted in traditional growth theory were the primary forces behind growth, an increase in demand was necessary to facilitate this growth, and in this regard, the export expansion measures gave an indication of the contribution between domestic demand and external export demand in supporting the growth that occurred in the nineteenth century. The first part of the chapter which provided an overview of the evolution of trade policy in the nineteenth century showed a proliferation of trade treaties that is similar in resemblance to what has occurred in the last quarter decades and suggests another dimension of similarity between the two eras of globalization not often discussed. The shift of exports to textile and the metal products in the main trading countries over the period also points to the importance of exports as a feature of the growth process. Export expansion estimates based on data from Maddison (2001) allowed for an initial comparison between this early era of globalization and the current era and suggest that the current era indeed exhibits greater importance of exports in the limited number of major trading nations included in the sample. The examination of the Great Depression at the end of the chapter showed just how connected nations had become as a result of globalization in the nineteenth century and the reliance on external demand to support levels of economic progress achieved.

Notes 1 McCarthy argues that one can even think of the Roman Catholic Church and its expansion as the first international religion involving cross-border business resembling multinational corporations (ibid., p. 71). 2 Later in the nineteenth century, other Spanish colonies in the Pacific would also gain their independence including Guam (1898), the Philippines (1898), Micronesia (1899), Northern Mariana Islands (1899) and Palau (1899). 3 When the change in GDP is small in a given period, the denominator of the export contribution measure will be small, and thus, even small changes in export demand could result in a large contribution measure. While accurate, growth was marginal and thus the contribution measure should be interpreted accordingly with regard to its reflection on the importance of exports in the growth process. 4 In fact, war and military might were an important feature of economic expansion of markets during the nineteenth century, where military and economic competition often went hand in hand.

4 Exports, trade policy and economic trends in the postwar era

After two major wars in the first half of the twentieth century. The leading nations of the world, primarily under the leadership of the United States, were ready to organize the international trading system to avoid the negative aspects experienced in the World War I and events in the interwar years leading up to the World War II. This chapter first provides context to the current era of globalization by reviewing the evolution of trade policy and international relations during the period. Figure 4.1 provides world exports to gross domestic product (GDP) ratios in both goods and goods and services for the time periods analyzed: 1960–1973, 1973–1990, and 1990–2010. The period leading up to 1973 saw an acceleration of export growth, while there was much less progress in expanding trade from 1973 to 1990, and then a significant expansion in the final period. As we stand at a potential inflection point with backlash to globalization being experienced in the leading nations of the two eras of globalization, namely the United States and the United Kingdom, it is timely to understand the forces of globalization that led to current levels of integration: namely, the evolution of trade policy and its current state.

The evolution of trade policy in the postwar era Just as the first era of globalization was driven in part by the spread of the industrial revolution and the trade it generated across the world which supported the emergence and solidification of the nation-state as the dominant institutional power, the current era of globalization is likewise in many regards due to the spread of industrialization around the world and the growth in international trade across nations deciding to enter the global trading system, the number of which has progressively increased in the postwar era. Early on in the aftermath of World War II, advanced nations had greater interest in supporting the development of poorer nations, especially in light of the Cold War, with tensions between the Western world and the Soviet Union, and economic growth becoming the primary goal of nations in what Kenwood and Lougheed (1971, p. 250) called an “age of growthmanship.” Chapter 2 outlined the important international institutions established after World War II to facilitate trade promotion, balance of payments stability and

The postwar era 51 35

30

percent

25

20

15

10

5

0 1960

1965

1970 1973

1980

1985

merchandise

1990

1995

2000

2005

2010

2016

good and services

Figure 4.1 World exports as a percentage of world GDP Source: WTO (2017b)

economic development including the General Agreement on Tariffs and Trade (GATT; with its important the Most Favored Nation [MFN] clause), the International Monetary Fund (IMF) and the World Bank. The decline in world trade and the deterioration of the world trading system into regional trading blocs in response to the Great Depression was the major motivation for the United States to create institutions and agreements that would foster greater multilateral cooperation and liberalization and avoid any repeat of the trade policy disaster (Irwin, 2012, p. 139). In fact, the original Bretton Woods System included the proposal for an International Trade Organization, which the US Congress would not ratify. The compromise between the United States and United Kingdom became the GATT framework (Gibb, 1994a, pp. 7–8). The multiple rounds of trade negotiation under GATT played a critical role of reducing trade barriers across countries in a multilateral manner that proved to be very effective for several decades with tariffs falling from on average 40 percent in 1948 to 5 percent in 1987 (Ibid., p. 13). The GATT system was supported by essentially a fixed exchange rate system with currencies pegged to the dollar, which provided stability for the first several decades after the war (Buckman, 2005, p. 39). In the mid-1950s, the US stance became more reluctant to push further on trade liberalization, and this led to the establishment of the European Community (EC) in 1958 and the European Free Trade Area (EFTA) in 1960 (Grimwade, 1989, p. 36). While Europe became an important force in advancing trade liberalization, it also presented early challenges to the important

52  The postwar era nondiscrimination approach of GATT with the emergence of these regional trading blocs. The example and threat of the European trade blocs, often referred to increasingly as “Fortress Europe,” led to other regional blocks including the Latin American Free Trade Association in 1961, the Central American Common Market in 1961, the Customs Union of West African States in 1966, the Economic and Customs Union of Central Africa 1964, the Southern African Customs Union in 1969, and the Association for Southeast Asian Nations in 1967. Many of the regional trade agreements (RTAs) established in the 1960s and 1970s in Latin America, Africa and the Middle East were ineffective and became dormant after some time (Yeung et al., 1999, p. 2). The United States did respond to the formation of the European trade blocks with congress passing the Trade Expansion Act in 1962, which led to the Kennedy Round in GATT from 1964 to 1967, a period where trade grew much faster than output (Ibid., p. 37). Every round of GATT negotiations has been led by the United States with the Congress granting power to the president to negotiate; however, US leadership has waned as protectionist attitudes increased in the 1970s and most recently with the election of President Trump (Ibid., p. 366). This leadership void has been one of the challenges to further success of trade liberalization along the multilateral dimensions through the GATT framework and later under the leadership of the World Trade Organization (WTO). In the postwar era, many countries regained their independence and were suspicious of GATT, given it was an organization formed by most of the colonizing countries (Yeung et al., 1999, p. 3). As the number of RTAs increased, much of the developing world viewed them as a feature of the already rich and fast-growing developing economies and the poorest nations are often left out, particularly from Africa, the Middle East, the former Soviet Union (Ibid., p. 6). There are essentially three waves of countries gaining independence and entering the global trading system at different paces. The first are the nations in Asia that were previous colonies of the United Kingdom, France, Netherlands, Japan, Portugal, Australia and United States listed in Table 4.1. Many of these occurred shortly after the war, notably Taiwan and Korea with the defeat of Japan, which had been occupied by Japan even prior to the beginning of the war. Table 4.2 gives the list for African nations’ date of independence. A significant number of countries emerged independent from colonial rule under France and the UK during the 1960s. The colonial era had seen European powers seizing land throughout the continent with Germany joining in quite late when it emerged as a nation. In 1884–1885, the Berlin Conference was held where Africa was divided between Britain, France, Belgium, Spain, Portugal and Germany to avoid infighting among the European powers. Following Germany’s defeat in World War I, its colonies were divided among the other European victors. When India was able to achieve its independence, it was simply a matter of time before African nations would as well. Ultimately, the European colonizers were reluctant to engage in war to maintain their African colonies. The connection between colonizer and colony though would be important in trade policy developments in years after independence. While the newly independent nations and much of the

The postwar era 53 Table 4.1 Asia and Pacific Islands countries independence Country

Year (Colonizer)

Afghanistan Brunei Burma Cambodia Ceylon Guam Hong Kong India Indonesia Korea, Dem Rep Korea, Rep Laos Macau Malaya New Guinea North Borneo Palestine Papua New Guinea Philippines Sarawalk (Malaysia) Singapore Taiwan Vietnam

1919 (UK) 1984 (UK) 1948 (UK) 1953 (France) 1948 (UK) 1898 (Guam) 1997 (UK) 1947 (UK) 1945 (Netherlands) 1945 (Japan) 1945 (Japan) 1952 (France) 1999 (Portugal) 1957 (UK) 1962 (Netherlands) 1963 (UK) 1948 (UK) 1975 (Australia) 1946 (US) 1963 (UK) 1963 (UK) 1945 (Japan) 1945 (France)

developing world were skeptical of the GATT framework and its true intentions, many did begin entering the trade negotiations over time. One of the complaints by the developing world under GATT was the problem of dumping and export subsidies, which bothered primary producing and exporting countries the most (Kenwood and Lougheed, 1971, p. 276). The Generalized System of Preferences (GSP), which required a change to the nondiscrimination clause in GATT, was introduced in 1971 due to the United Nations Conference on Trade and Development (UNCTAD), where developing countries wanted preferences for their exports. GSPs were gradually introduced by developed nations over time, although its benefits have been widely contested (Grimwade, 1989, p. 331). The effect of GSPs on exports in developing nations is tested in Chapter 6. The third wave of independence came much later and is associated with the end of the Cold War with the defeat of Communism and the dissolution of the Soviet Union. Table 4.3 lists the countries that were satellites of Soviet Union and the post-Soviet states that emerged from the dissolution of the Union in 1991. The table also lists those states that had been largely separated from the West and were separate Communist states. In each of these stages of independence, a new set of nations engaged the international trading system, some more than others and better equipped than others. Just as the first era of globalization saw the integration of newly formed nation-states or newly independent states,

54  The postwar era Table 4.2 African countries independence Country

Colonizer (Year)

Country

Colonizer (Year)

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon

France (1962) Portugal (1975) France (1960) UK (1966) France (1960) Belgium (1962) France (1960)

UK (1964) France (1960) France (1960) UK (1968) France (1956) Spain (1969) Spain (1956)

Cameroon (South)

UK (1961)

Cape Verde Central African Republic Chad Comoros Congo, Dem Rep Congo, Rep Côte d’Ivoire

Portugal (1975) France (1960)

Malawi Mali Mauritania Mauritius Morocco Morocco Morocco (Northern Zone) Morocco (Southern Zone) Mozambique Namibia

France France (1960) UK (1961) Belgium (1962) Portugal (1975)

Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Libya  Madagascar

France (1977) UK (1922) Spain (1968) Ethiopia (1993) Italy (1941) France (1960) UK (1965) UK (1957) France (1958) Portugal (1973) UK (1963) UK (1966) UK (1951) France (1960)

Niger Nigeria Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe  

France (1960) France (1975) Belgium (1960) France (1960) France (1960)

Spain (1958) Portugal (1975) South Africa (1990)

France (1960) Britain (1976) UK (1961) UK (1960) UK (1910) UK (1956) UK (1968) UK (1961) France (1960) France (1956) UK (1962) UK (1964) Britain (9180)  

especially in Latin America during the early nineteenth century, the emergence and independence of nation-states in the current era of globalization played an important role in the expansion of the global trading network over time. Figure 4.2 shows the number of GATT/WTO accessions by year and the cumulative number of members since 1948 through 2016. In 1948, there were 18 countries that accessed into GATT and began the process of expanding the global trade network. More nations went through the accession process shortly after, and this is the first major wave following the war. The second wave can be seen in the 1960s and corresponds to the new independent African nations emerging as outlined. The final significant jump up occurred in the early 1990s

The postwar era 55 Table 4.3 Post-Soviet countries engaged Post-Satellites

Post-Soviet states

Newly engaged (Communist)

Albania Poland Bulgaria Romania Czechoslovakia Germany (East) Hungary                

Estonia Latvia Lithuania Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Belarus Moldova Ukraine Russia Armenia Azerbaijan Georgia

Afghanistan Angola Benin Burma Cambodia China Congo Ethiopia Mongolia Mozambique Somalia South Yemen      

180

20

160

18

14

120 total in force

12 100 10 80 8 60

6

40

number entered in force by year

16

140

4 2

0

0 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

20

Figure 4.2 GATT/WTO accession statistics Source: WTO (2017c)

with the dissolution of the Soviet Union. Just as in the first era of globalization, newly liberated or emerging states engaged in the global trading order to solidify their position and increase their economic opportunities. There is a steady increasing trend in-between these three jump periods. This role of newly engaged

56  The postwar era nation-states joining the global community after periods of conflict or subjugation has not been discussed widely, but is clearly an important force in the expansion of globalization in the postwar era. After an initial period of great liberalization of trade in the early postwar era, the environment turned into an era of greater protectionism in the 1970s and 1980s, mostly accomplished by non-tariff barriers which led to slower trade growth and economic growth (Grimwade, 1989, p. 30). Addressing this feature, Grimwade (Ibid.) concludes that “countries have begun to forget the significance of the link between liberal trade and output growth.” These new protectionist policies were often instituted under the guise of “adjustment policies,” which protected import competing domestic industries (Ibid, pp. 379–383). It was also in 1971 when the gold standard was abandoned and a period of uncertainty ensued as currencies were no longer fixed and linked to the dollar (Buckman, 2005, p. 26). The two subsequent oil shocks and Latin American debt crisis in the 1980s which especially impacted Mexico and Argentina also brought great fragility to the global trading system (Ibid., pp. 26–27). It is in this environment, however, that the East Asian Tigers (Singapore, Taiwan, Hong Kong and South Korea) emerge abandoning import substitution and pursuing an export-oriented approach to development, followed later by Thailand and Malaysia, and then China (Ibid., p. 29). Trade policy is closely tied to the fundamental perspective of a nation on the importance of exports in the development and growth process. In an era of growthmanship, the bottom line is what factors drive economic growth. In the immediate aftermath of World War II, there remained strong sentiment in the belief that nations should develop their own manufacturing sector and, based on the infant industry argument, should provide protection against import competition for these nascent industries. This policy of import substitution was pervasive in most of the developing world. The strategy in the first phase was to protect consumer goods and form domestic producers. In the second phase, the strategy was to provide protection for local intermediate, capital, and consumer durable goods which also required control of foreign exchange so that only essential international goods were purchased. The infant industry argument provided the theoretical justification for protection of these industries so that they could develop to the point where they could compete internationally. There were several problems experienced in the practical application of the policy, including excess demand for intermediate goods; scarcity of foreign exchange; the need for financing from abroad due to low savings at home; and the creation of monopoly power domestically, preventing other local producers to emerge, just to name a few (Grimwade, 1989, pp. 326–328). The newly industrialized countries (NICs) of Asia were small countries that stood in stark contrast to much of the developing world as they abandoned import substitution to become major manufacturing exporters based on an outward orientation. A common trait among them is their export-oriented policy. One of the main differences between the Asian NICs and European and South American NICs is the latter’s large population base which allowed them to protect

The postwar era 57 their industries through tariffs and try to build comparative advantage in capitalintensive industries based on domestic demand (Grimwade, 1989, p. 318). The Asian NICs did not have large domestic markets, and the only way to expand production in manufacturing was through an export-oriented approach (Ibid.). Many initially focused on labor-intensive industries such as textiles, just as the first developed nations including Germany and Italy did and subsequently Japan in the first era of globalization, and as the wage levels in their economies increased, they moved into capital-intensive and ultimately skill-intensive goods, which was the path the advanced countries of the nineteenth century pursued in furthering their economic development in the postwar period (Ibid., p. 319). While exports played an important role in Japan’s transition into a developed economy, it was not the primary source of growth (Ibid., p. 274). The Asian NICs is the first instance where exports play the leading role in economic development, and the distinguishing feature compared to others was their opendoor approach to foreign multinational enterprises (MNEs): Japan only allowed licensing agreements and joint ventures when it opened up to FDI (ibid., p. 275). The splitting up of the production process has increased in degree and intensity as we move further into the twentieth century and the more labor-intensive parts continue to be produced by developing countries (Ibid., p. 86). An important part of this global production network is the growth and role of MNEs and the FDI they bring to a foreign country. Technological advances in production techniques, transportation, communi­ cation and energy sources was of course the main driver of economic growth during the postwar era just as in the nineteenth century. All of this allowed production to become more efficient and in many ways made the world seem smaller: news and information was transmitted at higher speeds, and it was now possible to have a global network production system that could be managed given these technological advances. Some of these same advances made expanding export markets increasingly easier as transport times and costs continued to fall. The increasing computing power of computers has also led to increasing automation, a feature that will increase in speed and coverage in the future. While demand was critical to facilitating the substantial gains in economic growth, these supply side growth factors were the main force behind worldwide growth. With the growth of manufacturing exports from Japan and the Asian NICs, a new form of protectionism in the 1970s aimed primarily at them began to emerge (Grimwade, 1989, p. 85). This new protectionism instead of using tariffs, as in the past, involved largely quantity restrictions of past import quotas and voluntary export restraints were early used policies, and later local content agreements became prominent. In the 1980s, Japan truly dominated the international market for manufacturing exports and became the largest creditor nation in the world. The other developed nations began placing greater pressure on Japan to revalue its currency and the final agreement in 1985 became known as the Plaza Accord. Some contend the Plaza Agreement and the subsequent realignment of currencies laid the seed for the real estate bubble, its subsequent burst in Japan in the early 1990s and the several decades of economic malaise that followed.

58  The postwar era Beginning in the 1990s, the multilateral trade liberalization process came under the auspices of the WTO in 1995, providing greater ability for dispute resolution and also now included services and intellectual property, which were fast becoming important new knowledge industries for trade and the new frontier for evolving trade patterns and trade policy in advanced nations. However, the WTO failed to advance multilateral reductions in trade barriers as effectively or at anywhere near the same pace as in previous periods, which led to a proliferation of RTAs and preferential trade agreements on a bilateral and multilateral basis, as was shown in Chapter 2, Figure 2.1. The expansion of RTAs has dominated international trade and the organization of economic activity in the last several decades, and not the WTO (Yeung et al., 1999, p. 2). Most of the multi-country regional trading blocs, just as in the case of GATT and WTO trade negotiations, are based on the concept of comparative advantage where countries produce goods for which they have comparative advantage and trade for other goods and services. In many cases, domestic politics play a critical role in the success or failure of the trade agreements as they always result in winners and losers (Pahre, 2008a, p. 14). However, in the regional blocs, this scheme and interaction based on comparative advantage plays out on a regional basis, and there is great concern over the trade creation and trade diversion impacts. In addition to this new wave of regionalism helping to promote trade liberalization after a period of increased protectionism, the Washington Consensus also pushed the agenda. The Washington Consensus was the beneficial view on the part of the World Bank and IMF during the 1980s and 1990s of structural reform and liberalization of trade and investment, which led to their like-minded prescriptive policies given to recipients of economic assistance. The 1997 Asian Financial Crisis undermined this view after prescribed measures including austerity policies made the situation in affected countries worse, leaving them with greater debt. While the Washington Consensus was no longer present to promote trade liberalization, the 1997 crisis did promote greater regionalism as economies looked to regional means of addressing crises, as it was observed most had a strong regional dimension to them. Michalak (1994a, p. 38) argues that the inability of GATT and the WTO to address the negative effects of increased competition and increased flow of capital from trade liberalization has resulted in the proliferation of RTAs and regionalism as an alternative path to promote free trade. Ultimately, there is the belief among many in the WTO that the RTAs can support multilateral trade liberalization (Gibb, 1994a, p. 17). The allowance of RTAs was one way to combat growing protectionism of the 1970s and 1980s, again largely aimed at Japan and the Asian NICs (Ibid. p. 18). An increasing important element in the expansion of global trade and RTA agreements are the role of MNEs. These are the agents through which much of the capital is allocated around the world and production decisions are made. Their growth in size and number is proof of the fact that production is now an international system and no longer contained within a country’s borders. Michalak (1994a, p. 46) argues that the emergence of RTAs and regionalism rises out of the crisis of GATT and the lack of any international mechanism to manage supply and demand: the new regional trade blocs are the

The postwar era 59 new mode of regulation. According to the author, the coordination of regulatory policies between different states is the fundamental problem of multilateralism, and regionalism is an attempt to regain some control over lost governance over the MNEs (Ibid., p. 54). It’s also the case that regional trading blocs allow MNEs to take advantage of economies of scale, an important feature that new trade theory highlights for expanding trade. Thus, expanding markets is critical to MNEs success and RTAs serve an important role in this regard. The expansion of the EU over time from six nations to 28 as an initial and then growing threat and the United States, the staunchest proponent of multilateralism, entering into its own RTA in the early 1990s, were also major forces pushing others to follow and create their own RTAs (Yeung et al., 1999, pp. 35–39). These are a few of the varied reasons that can be attributed to the explosion in the number of RTAs, especially after 1990. The final section of this chapter examines the RTAs in existence across regions more closely. The last successful GATT round, the Uruguay Round took place between 1986 and 1993. Major new areas of tentative agreement were reached including Trade Related Aspects of Intellectual Property Rights (TRIPS) which was led by the US pharmacy, chemical and software MNEs; Trade Related Investment Measures (TRIMS) which called for elimination of hindrance to FDI based on local content agreements, championed by the United States, EU, and Japan and their MNEs; General Agreement on Trade in Services (GATS) which developing countries claimed was a backdoor for developed MNEs to privatize government services; the Agreement on Textiles and Clothing which laid out a timetable for full liberalization of textile trade, especially calling for the developed countries to open their markets (the United States and EU continued to argue for the need for protective quotas so that the industry doesn’t disappear in their countries); and the Agreement on Agriculture where developed countries agree to reduce domestic support and subsidies and lower tariffs (one method they have avoided this is by juggling classification of products and creating confusion of which goods the agreement applies to) (Buckman, 2005, pp. 50–61). After the initial euphoria of completing the Uruguay Round faded, it was clear countries in the developing world were not happy with the agreement. In 1996, a meeting was convened in Singapore to begin discussing issues that would be addressed in the next round of trade negotiations. The Singapore issues became hotly contested, and they continue to be the main stumbling block to reaching agreement in the current Doha Round. The issues are ones raised and emphasized by developed countries and their MNEs, which include investment issues such as addressing the rights of foreign investors, where India and China are the strong objectors; a call for governments to treat foreign companies the same as local companies; government procurement access for foreign companies, which was agreed upon during the Uruguay round, but since it was voluntary, few have followed through; and trade facilitation by governments as MNEs argue border issues entail large costs, which can make FDI prohibitive (Buckman, 2005, pp. 63–65). It is clear many of these issues deal with access for developed countries

60  The postwar era MNEs into developing country markets and involve their partnerships with their governments to facilitate trade liberalization. MNEs are mostly from high-income countries, and by 2005 the largest 500 MNEs control nearly 70 percent of world trade (Ibid., p. 93). Their growth and roles are discussed in greater detail in the concluding chapter. In any case, this approach to multilateral trade liberalization on the part of advanced nations and their MNEs has resulted in a stalemate due to new emerging economic powers such as India, China and Brazil rejecting the Western approach. Subsequent meetings have been contentious and often met with large public protests as well. In several instances, the meetings have simply broken down. Many of the problems that GATT has been unable to resolve involve interindustry (between different industries) trade issues based on comparative advantage. There are fewer obstacles in the area of intraindustry (within the same industry) trade which often entails trade in manufactures between countries. Here bilateral RTAs can be a means for similar advanced nations to liberalize trade and take advantage of economies of scale. Accordingly, intraindustry trade tends to be much less contentious. In fact, as Japan developed, and its production and exports became more balanced, much of the criticism directed at the country dissipated, as it has for the other Asian NICs as well (Grimwade, 1989, p. 402). Of course, Japan’s poor domestic performance since 1990 has also meant much lower growth rates and less dominance of global manufacturing export markets. China began to engage the global trading system at the end of the Cold War with small steps. In 1978, under the leadership of Deng Xiaoping, it announced a major step at reform intended to introduce market principles. It is not surprising that this coincides with the emergence of the East Asian Tigers and the continued advancement of the Japanese economy on the global stage. The reforms outlined two phases: the first was the de-collectivization of agriculture, the allowance of business startups and opening gradually to foreign investment; and the second entailed privatization and the growth of the private sector. In 2001, China entered the WTO, overcoming its final hurdle to fully engage in the global trading system. The country focused its trade on low-skilled labor-intensive goods, particularly textile exports just as previous countries had followed in their development process, and its exports exploded especially with its entry into the WTO. China has been the focus of criticism for most countries including the advanced nations during the last several decades, many countries which have substantial trade deficits where the majority of trade is interindustry in nature. Other emerging economies on the world stage have been India, Brazil and South Africa. The leading opponents to multilateral trade liberalization have continued to be India and Brazil due to their belief that such liberalization has largely just helped developed nations. They also strongly believe that current efforts to liberalize trade in services would hurt them as their domestic service industries could not compete with developed nations (Ibid, p. 426). It is in this light that the most recent development in trade policy is what can be seen as a backlash against globalization in the United States and United Kingdom. In June 2016, the British voters approved a referendum for the United

The postwar era 61 Kingdom to leave the EU. Of course, the seeds of discontent were present from much earlier on as the United Kingdom was not an original member of the EU. It has always been one of the EU countries most interested in retaining aspects of sovereignty, such as exercising an opt-out clause to maintain its own currency. In the same year, several months later, US citizens elected President Trump, who had as one of his main campaign promises to get the United States out of one of its signature multilateral regional agreement called the Trans Pacific Partnership. Here again the seeds were germinating for some time since US entry into the North American Free Trade Agreement (NAFTA) and the major opposition from the manufacturing labor sector in the country. These recent developments place great uncertainty on the future direction and prospects of globalization. In their research, Bordo and Rousseau (2012) find trade’s impact on economic growth is much stronger in the postwar era than before 1930. The authors attribute this to GATT, the creation of the European Common Market, and the elimination of capital controls in 1973. On this latter point, Ghosh and Qureshi (2016) highlight how a change in the policy stance on the part of the US government toward using capital controls for dealing with balance of payments problems put pressure on other countries to abandon such policies after 1973. This combated increasing protectionist sentiments at the time. Many question how much advance in trade liberalization can be achieved in the absence of US leadership, especially in the multilateral dimension. Even more concerning, the rhetoric coming out of Washington, DC, contains some of the most protectionist and isolationist sentiments expressed by any government around the world: it is well beyond just a lack of leadership.

The proliferation of RTAs: an overview across regions Figure 2.1 in Chapter 2 displayed the dramatic increase in RTAs, especially after 1990. The previous section discussed probable forces that led to this proliferation of RTAs in the most recent period, as well as how the existence of RTAs emerged in the first place in the GATT/WTO system. This section turns to an examination of actual RTAs across regions of the globe. The detailed examination and comparison of RTA formation across countries and regions can provide further context on an important part of trade policy that nations are devoting increasing effort to. We begin with Asia. The early postwar period saw Japan’s emergence as a global economic power and later the rise of the Asian NICs. A very important part of this success was the Cold War climate and the US desire to demonstrate the success of the democratic capitalist system in achieving high growth rates and standards of living. Toward that end, the United States set up a triangular trading network between itself, Japan and Southeast Asia to spread the benefits of economic growth throughout the region (Hodder, 1994, p. 235). The United States was an early major donor to the region, and later Japan would become the largest bilateral donor to many countries throughout the region (Feasel, 2015). By the early 1990s, Japan’s trade with East Asia surpassed that with the United States, and by 1995, Japan produced

62  The postwar era more in other Asian nations than it exported from Japan (Ziltener, 2012, p. 87). This is indication of Japan’s important role as an engine for economic growth and development in Asia, taking up what the United States had initiated in the aftermath of World War II. Many of these Asian nations continued to pursue export-led growth strategies with Western markets as the destination for their exports. The US leadership in trade liberalization helped them to further achieve these goals. Table 4.4 provides a list of bilateral and multilateral RTAs in force for the regions of East Asia, Southeast Asia and Oceania. In terms of multilateral regional agreements, one of the earliest and most important was in Southeast Asia, the

Table 4.4  Regional trade agreements in East Asia, Southeast Asia and Oceania, 1950–2017 East Asia Asia Pacific Trade Agreement (APTA) – Bangladesh, India, Lao PDR, Republic of Korea and Sri Lanka (1976); accession of China (2002) China (13) – Australia (2015); Korea (2015); Iceland (2014); Switzerland (2014); Costa Rica (2011); Peru (2010); Singapore (2009); New Zealand (2008); Pakistan (2007); Chile (2006); ASEAN (2005); Macao (2003); Hong Kong (2003) Chinese Taipei (6) – New Zealand (2013); El Salvador/Honduras (2008); Nicaragua (2008); Guatemala (2006); Panama (2004) Hong Kong (4, EFTA) – Macao (2017); Chile (2014); EFTA (2012); New Zealand (2011); China (2003) Japan (14, ASEAN) – Mongolia (2016); Australia (2015); Peru (2012); India (2011); Vietnam (2009); Switzerland (2009); Philippines (2008); ASEAN (2008); Brunei Darussalam (2008); Indonesia (2008); Thailand (2007); Chile (2007); Malaysia (2006); Mexico (2005); Singapore (2002) Korea (12, EU, ASEAN, EFTA) – Colombia (2016); China (2015); New Zealand (2015); Vietnam (2015); Canada (2015); Australia (2014); Turkey (2013); United States (2012); Peru (2011); EU (2011); ASEAN (2010); India (2010); EFTA (2006); Singapore (2006); Chile (2004) Southeast Asia Association of Southeast Asian Nations (ASEAN) – Indonesia, Malaysia, Philippines, Singapore, and Thailand (1967); Brunei Darussalam (1984); Vietnam (1995); Laos, Myanmar (1997); Cambodia (1999) ASEAN Free Trade Area (AFTA) (1993), (6) – Australia/New Zealand (2010); India (2010); Korea (2010); Japan (2008); China (2005) Brunei Darussalam–Japan (2008) Lao PDR–Thailand (1991) Malaysia (6) – Australia (2013); Chile (2012); India (2011); New Zealand (2010); Pakistan (2008); Japan (2006) Singapore (11, Gulf Cooperation Council, EFTA) – Chinese Taipei (2014); GCC (2013); Costa Rica (2013); Peru (2009); China (2009); Panama (2006); Korea (2006); India (2005); United States (2004); Australia (2003); EFTA (2003); Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (2003); Japan (2002); New Zealand (2001) Thailand (6) – Chile (2015); Japan (2007); New Zealand (2005); Australia (2005); India (2004); Laos (1991)

The postwar era 63 Trans-Pacific Strategic Economic Partnership – Brunei, Chile, Singapore and New Zealand (2006) Vietnam (3, Eurasian Economic Union ECU – Belarus, Kazakhstan and Russia) – ECU (2016); Korea (2015); Chile (2014); Japan (2009) Oceania Australia (9, ASEAN) – China (2015); Japan (2015); Korea (2014); Malaysia (2013); ASEAN (2010); Chile (2009); Thailand (2005); United States (2005); New Zealand (1983); Papua New Guinea (1977) Melanesian Spearhead Group (MSG) – Fiji, Papua New Guinea, Solomon Islands and Vanuatu, and the Kanak and New Caledonia (1994) New Zealand (7, ASEAN) – Korea (2015); Chinese Taipei (2013); Hong Kong (2011); Malaysia (2010); ASEAN (2010); China (2008); Singapore (2001); Australia (1983) Pacific Island Countries Trade Agreement (PICTA) – Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu (2003) Papua New Guinea/Fiji–EU (2009) Papua New Guinea–Australia (1977) South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) – Australia, Cook Islands, Fiji, French Polynesia, Kiribati, Marshall Islands, Micronesia, Nauru, New Caledonia, New Zealand, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu (1981) Source: WTO RTA database (2017)

Association of Southeast Asian Nations (ASEAN), which came into force in 1967. In contrast to the EU, which pursued an institutional approach to regionalization, the ASEAN approach is based on relationships (Yeung et al., 1999, p. 77). This partly reflects the great diversity of culture, religion (Muslim, Buddhist, Christian and Confucianism) and thought in ASEAN in contrast to the common heritage of Western thought and philosophy in Europe (Ibid., p. 78). All ASEAN countries were former European colonies except for Thailand, and all were invaded by Japan in World War II. Of the five founding members, Singapore has been the most successful in its trade expansion and development efforts. Unlike its fellow members, Singapore has also negotiated 11 other bilateral agreements since 2001, RTAs with the Gulf Cooperation Council consisting of six Arab states in the Persian Gulf and the EFTA. Thailand and Malaysia have followed Singapore’s example and have also increased bilateral RTAs. ASEAN expanded with new members after the fall of the Soviet Union with Vietnam, Laos, Myanmar and Cambodia joining during the 1990s. Thailand established an RTA with Laos well before Laos joined ASEAN, and this is due to the proximity of the two countries and the large role in trade that each country serves for each other. Although a new comer, Vietnam shows similar patterns increasing RTAs over the last decade. Another early multilateral RTA was The South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA), which came into force in 1981 in Oceania. This involved many smaller states in Oceania increasing

64  The postwar era economic ties with its two largest regional economies, Australia and New Zealand. In 2003, several Pacific Island countries established a multilateral RTA amongst themselves as well. The two larger economies, Australia and New Zealand, after expanding ties with each other in 1983 through the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), since 2000 have also increased the number of RTAs focusing primarily in the East and Southeast Asia region. Another early multilateral RTA in Asia is the Asia Pacific Trade Agreement (APTA), which is listed in the table in the East Asia region since the two largest economies are Korea and China. APTA was an agreement that came into force in 1976 at the urging of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) to promote economic relations among its developing country members. Other than this, all RTAs in East Asia have occurred since 2000. RTAs have expanded greatly exhibiting what could be called an RTA competition among the largest three nations of Japan, Korea and China, with Taiwan and Hong Kong also doing so at a slower pace. Japan and Korea have established RTAs with similar regional partners and often within a few years of each other and most clearly exhibits a level of competition. The creation of RTAs has various motivations, but the primary one being the expansion of trade and often with the primary intention of increasing export markets. As such, the expansion of RTAs especially in a bilateral fashion is good indication of an export-oriented strategy by a country. Japan has preferred to expand trade liberalization on a bilateral basis. It is also the case that countries experiencing trade diversion are also more apt to participate in RTAs (Yeung et al., 1999, p. 22). Thus, it is not clear if the proliferation across Asia since 2000 is more a reflection of efforts to integrate and promote exports or to avoid the negative consequences of trade diversion from others RTAs. Clearly given the number of RTAs, both forces are at work. Korea has established RTAs with particular large economies that Japan has not, likely due to Japan being an equal competitor with these economies: these are China, Canada, United States, and EU. It’s also the case that Japan and Korea do not have an RTA together. In terms of increasing ties with China, Japan has pursued a multilateral approach where the three nations of China, Korea and Japan decided in 2012 to pursue discussions on establishing a free trade agreement. Tensions between the nations involving history, including varied representations of Japan’s actions during occupation and the war, and territorial disputes have made it difficult to make progress and reach a conclusion to the agreement. Meanwhile China and Korea concluded an RTA that came into force in 2015. In terms of trade with the United States, Japan also ultimately decided to pursue a multilateral approach as well. The Trans-Pacific Strategic Economic Partnership, listed in the Southeast Asia region of the table, was a multilateral interregional trade agreement between Brunei, Chile, New Zealand and Singapore that was concluded in 2006. A few years later in 2008, the United States under President Bush joined the negotiations aimed at expanding the agreement. From this point forward, the United States took leadership of what was called the Trans Pacific Partnership (TPP) negotiations. South Korea declined an invitation to participate in TPP

The postwar era 65 negotiations in 2010, claiming it already had agreements with most member countries. In 2013, Japan finally became the twelfth member to join TPP and in doing so materially increased its scale, impact and significance. The value ascribed to TPP by Japan for both economic and geopolitical reasons is evident from its willingness for the first time to engage in a far-reaching trade agreement that would increase external access to its agricultural and services markets, something it has been very reluctant to consider to the degree covered in TPP and in a multilateral setting. Figure 4.3 shows the countries that were involved in TPP negotiations and the vast region of the Pacific that would be covered under the planned agreement. In negotiating TPP, the members agreed to one of the furthest-reaching trade pacts covering numerous sensitive areas that have been obstacles to trade liberalization. A few noteworthy areas include labor standards; environmental issues including addressing illegal activities damaging the environment; an agreement to provide for investor–state dispute settlement allowing a foreign investor to sue a country for losses suffered due to state action, something MNEs believe is important for their protection of property, ownership, overall rights and the free movement of their capital, arguing this would be a stimulus for FDI between TPP members; intellectual property protection including copyright protection and the requirement for enforcement; requiring government procurement contracts over a certain amount must be equally accessible to all

Figure 4.3 Countries formerly involved in the Trans Pacific Partnership (TPP) talks

66  The postwar era foreign companies operating in the country, equal to domestic companies access; and significant access to trade in services across countries. The advances that TPP put in place and that the parties had reached agreement on went beyond simple tariff reduction and addressed many of the issues that were sticking points in WTO trade rounds. The advances were the most significant harmonization of trade rules in decades in such a large group of countries and would serve as a model of advanced integration, second only to the EU. US President Obama stressed that TPP would allow the United States and its partners to be a major player in setting the rules for the global economy moving forward. For the members of TPP, this would mean that not only will it be easier to access each other’s markets for goods and services, but production could be strewn across member countries. This could especially benefit some of the developing countries in the group that have already become important links in global value chain of production, namely Mexico, Malaysia and Vietnam. At the same time, the potential loss of production in some countries would be one of the greatest challenges to the realization of TPP, especially in the United States. The issue was a major issue in the US presidential elections in 2016 and even though both candidates expressed reservations about TPP, one was more forceful and made withdrawing from TPP one of his main promises. The backlash due to the ill effects of globalization allowed Donald Trump to capitalize on the frustration and win the election. On his first day in office, President Trump signed an executive order withdrawing the United States from TPP and in so doing ended an era of consistent worldwide leadership toward greater liberalization and harmonization throughout the postwar era. Japan continued moving forward with TPP, without the United States, and the remaining nations signed the agreement in March 2018, at the same time the Trump administration announced increased tariffs on steel and aluminum imports. Of course, the agreement’s influence and significance is much diminished without the US. Japan also concluded trade negotiations with the EU in December of 2017 on what will become the world’s largest free trade agreement. For both Japan and EU, this is a clear statement against the US position of increasing protectionism and signs that the momentum of trade liberalization will continue and the United States will simply be left out. Although United States has taken a significant step back from trade integration discussions in Asia, security concerns are a major issue in the region and the United States continues to play a critical role and in this regard has a dominant position largely through bilateral relations in the region (Hodder, 1994, p. 245). For both the United States and Japan, as well as the other TPP members, the emergence of China as an economic superpower as exemplified by it surpassing the United States to become the world’s largest economy in 2014, was an important consideration to establish TPP to counter and contain China’s growing scale and influence. China has shown great reluctance to liberalize in the rules and standards that the proposed TPP agreement addressed, including protection of intellectual property and its enforcement and reform of its stateowned enterprise, an important part of China’s economy. China is involved in its own negotiations for a regional free trade area in the Asia–Pacific called

The postwar era 67 the Regional Comprehensive Economic Partnership (RCEP) with a total of 16 countries involved. The negotiations were formally launched at the ASEAN Summit in 2012 and involved the ten countries in ASEAN and the six countries with which ASEAN has created free trade agreements with: Australia, China, India, Japan, New Zealand and South Korea. The 20th round of negotiations took place in October 2017 in Korea. India has been one of the main roadblocks in concluding RCEP as there are great concerns within the country about the impact on domestic industries of such an agreement. Negotiating partners have gone as far to ask India to make the necessary concessions in tariff reduction or to drop out of the trade negotiations. South Korea is also involved in the RCEP negotiations. Figure 4.4 displays a map of the RCEP members in Asia. The scope of the countries involved is impressive. ASEAN countries can be seen in the figure given their involvement and prominent role in the negotiations. Although not involving any countries from the Americas such as TPP, the agreement would include China, Japan, Korea and India and would create a significant force in the global trading system. In exiting TPP, the United States has relegated its leadership role and influence in the global trading system to others. In this environment, RCEP has taken on increased significance. Further evidence of China’s increasing leadership is the Shanghai Cooperation Organization, which was established in

Figure 4.4 Countries involved in the Regional Comprehensive Economic Partnership (RCEP) agreement talks

68  The postwar era 2011 including the countries of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan. India and Pakistan joined as full members at the groups’ summit in 2017. Figure 4.5 shows the scale of the organization and, although Mongolia appears to be a glaring omission in the center of the group, China concluded bilateral negotiations with Mongolia for the latter to become part of the APTA, which also includes Bangladesh, India, Laos, Korea and Sri Lanka, all whose relative location can be seen in the figure. A final important regional organization in the region is the Asia Pacific Economic Cooperation (APEC), which was established in 1989 to foster greater economic cooperation among the nations of the Asia–Pacific and in response to the increase in regional trading blocs around the world at that time. In fact, in 2010, the members of APEC agreed to pursue the creation of the Free Trade Area of the Asia–Pacific (FTAAP), mostly due to the lack of progress in the Doha Round of WTO negotiations. Member states who would belong to FTAAP are shown in Figure 4.6. Progress on the FTAAP, however, has been much slower in the consensus-based approach of APEC with its 21 member nations, including China. Given the election of President Trump, it is not likely much progress will occur in the next several years. The diversity and size also make the process of coming to agreement in APEC very difficult and time consuming. It is however committed to multilateralism and not regionalism (Hodder, 1994, p. 244). Major challenging issues for APEC

Figure 4.5 Countries involved in the Shanghai Agreement

The postwar era 69

Figure 4.6 Countries involved in APEC and the Free Trade Area of the Asia–Pacific (FTAAP)

include national domestic constraints, disputes over territory, and great diversity and heterogeneity in culture and approaches; lack of formal institutionalization and more of a reliance on honor and trust in Asian tradition; greater sensitivity of economies with enlargement; the vastly different sizes of member economies (Yeung et al., 1999, pp. 62–66). The evolution of the structure of trade in APEC has evolved over time with a lower emphasis on manufacturing exports from the United States and Japan, a deepening of the industrialization process in the next-tier Asian NICs as they moved into high technology manufactures, where ASEAN nations move into capital-intensive low technology manufacturing exports and China into labor-intensive manufacturing (Yeung et al., 1999, p. 67). The greatest fear of the countries in the regions is a rise in protectionism. That is why they have been so aggressive at pursuing RTAs to lock in agreements that will prevent a rise of protectionism. While cooperation is important in the East and Southeast Asia, integration is less so and, as such, regionalism is less likely to advance along the lines of the EU (Hodder, 1994, p. 248). For these countries, their firms, MNEs and FDI are important and require predictable and smooth trading environment unfettered by any central regional authority (Ibid.). At the same time, the Asian Financial Crisis in 1997 showed the effectiveness and need for some degree of regional cooperation.

70  The postwar era The crisis also showed that while the countries had created tremendous success based on an export orientation, there was increasing recognition and desire to reduce their dependency on external demand and the need to rely more on domestic demand through higher wages and increased consumption (Ziltener, 2012, p. 99). This recognition is especially stressed in China. Table 4.5 lists RTAs for South Central and West Asia. One of the earliest multilateral RTAs in the region is the Economic Cooperation Organization (ECO) which was initiated by Iran, Pakistan and Turkey in 1985. The organization Table 4.5 Regional trade agreements in South Central Asia and West Asia, 1950–2017 South Central Asia Azerbaijan (3, GUAM) – GUAM Organization for Democracy and Economic Development (Georgia, Ukraine, Azerbaijan and Moldova) (2003); Ukraine (1996); Georgia (1996); Russia (1993) Common Economic Zone (CEZ) – Belarus, Kazakhstan, Russian Federation and Ukraine (2004) Economic Cooperation Organization (ECO) – Iran, Pakistan and Turkey (1985); Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan (1992) Eurasian Economic Union (EAEU) – Belarus, Kazakhstan and Russia (2015); accession of Armenia (2015); accession of Kyrgyz Republic (2015) EAEU – Vietnam (2016) India (10, ASEAN, MERCOSUR) – Japan (2011); Malaysia (2011); ASEAN (2010); Korea (2010); Nepal (2009); MERCOSUR (2009); Chile (2007); Bhutan (2006); Singapore (2005); Thailand (2004); Afghanistan (2003); Sri Lanka (2001) Kazakhstan (6, EAEU) – EAEU (2015); Armenia (2001); Georgia (1999); Ukraine (1998); Russia/Belarus (1997); Kyrgyz Republic (1995) Kyrgyz Republic (5) – accession into EAEU (2015); Uzbekistan (1998); Moldova (1996); Kazakhstan (1995); Armenia (1995) Pakistan (4) – Malaysia (2008); Mauritius (2007); China (2007); Sri Lanka (2005) Sri Lanka (2) – Pakistan (2005); India (2001) South Asian Free Trade Agreement (SAFTA) (2006); accession of Afghanistan (2011) South Asian Preferential Trade Arrangement (SAPTA) – Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka (1995) Tajikistan–Ukraine (2002) Treaty on a Free Trade Area between members of the Commonwealth of Independent States (CIS) Russia, Ukraine, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan and Kazakhstan (2012) Turkmenistan (4) – Georgia (2000); Armenia (1996); Ukraine (1995); Russia (1993) Uzbekistan (3) – Kyrgyz Republic (1998); Ukraine (1996); Russia (1993) West Asia Armenia (4) – accession into EAEU (2015); Kazakhstan (2001); Ukraine (1996); Turkmenistan (1996); Moldova (1995) Bahrain–United States (2006) Commonwealth of Independent States (CIS) – Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan (2012)

The postwar era 71 Georgia (6, GUAM) – GUAM Organization for Democracy and Economic Development (Georgia, Ukraine, Azerbaijan and Moldova) (2003); Turkmenistan (2000); Kazakhstan (1999); Armenia (1998); Azerbaijan (1996); Ukraine (1996); Russia (1994) Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates (2003) GCC – Singapore (2013) Israel (3, EU) – Mexico (2000); EU (2000); Canada (1997); United States (1985) Jordan (3, EFTA, EU) – Canada (2012); Singapore (2005); EFTA (2002); EU (2002); United States (2001) Lebanon–EFTA (2007); EU (2003) Oman–United States (2009) Palestinian Authority–EU (1997) Pan-Arab Free Trade Area (PAFTA) – Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman and Palestinian territories, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen (1998) Syria–EU (1977) Turkey (17, EU, EFTA) – Moldova (2016); Malaysia (2015); Mauritius (2013); Chile (2011); Jordan (2011); Serbia (2010); Montenegro (2010); Georgia (2008); Albania (2008); Egypt (2007); Syria (2007); Morocco (2006); Tunisia (2005); Palestine Authority (2005); Bosnia and Herzegovina (2003); Macedonia (2000); Israel (1997); EU (1996); EFTA (1992) Source: WTO RTA database (2017)

expanded to include Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan in 1992, a first attempt by former Soviet satellites to expand economic ties beyond their former union members. Figure 4.7 provides a map of for the ECO countries shaded in. Similar to ECO’s expansion, the table of RTAs shows that much of the RTA expansion in South Central Asia involved regional agreements, especially after the fall of the Soviet Union and the emergence of the new independent states. For many of these countries, their development in the post-Cold War era was very much along colonial patterns where they would export agricultural and raw material products to Russia and import manufactured goods (Bradshaw, 1994, p. 149). Ties were initially solidified on a bilateral basis as the table shows early RTAs between these countries. After 2000, this was accomplished through multilateral RTA agreements such as the Common Economic Zone in 2004, the Commonwealth of Independent States (CIS) in 2012, and the Eurasian Economic Union in 2015. All of the member states in these RTA agreements can be found in Figure 4.7. An important point here concerning the RTA lists based on the WTO RTA database: the date listed in the table represents the most recent level of trade agreement. In the case of the CIS for example the Commonwealth was established in December 1991 between Belarus, Russia and Ukraine, and the date of 2012 in the table is when a free trade area (FTA) finally came into force between the nations listed. Another RTA established in this regard is the Organization for Democracy and Economic Development in 2003 with Georgia, Ukraine, Azerbaijan and Moldova as

72  The postwar era

Figure 4.7 Countries involved in the Economic Cooperation Organization (ECO)

members. The member states of these RTAs can also be found in Figure 4.7, although the states are not shaded in as only ECO members are. Another multilateral RTA established in the region is the South Asian Preferential Trade Arrangement (SAPTA), established in 1995 by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka to promote trade liberalization among its members. The group was successful in finally establishing a Free Trade Agreement, SAFTA, in 2006, which Afghanistan joined in 2011 (the member states can also be seen in Figure 4.7). An interesting note here is the India’s engagement in the RTA formation process. There is a clear preference on India’s part to pursue trade liberalization in a bilateral fashion. In larger multilateral negotiations, it has been more reluctant to give in and has been a roadblock to increased integration. The opposition appears to be stronger the more expansive the level of multilateral involvement and the more diverse the level of economic development of the negotiating countries: it was mentioned earlier that India has been a hindrance to concluding RCEP negotiations and at the WTO negotiations, it is one of the staunchest opponents to liberalization efforts promoted by the advanced nations. In West Asia, for the countries of Armenia and Georgia, we see similar RTA patterns as former Soviet satellites using RTAs to increase ties with other former satellites and Russia. In the Middle East, we also see the EU’s increasing

The postwar era 73 engagement with countries in the region. In the Arab world, an important dimension of RTA expansion is the effort to increase economic ties with other Arab nations. In this regard, an early organization that has continued to play an instrumental role is the Organization of Islamic Cooperation (OIC). A fire in the Al-Aqsa Mosque in Israel-controlled Jerusalem in 1969 sparked outrage in the Muslim world. The following year, the First Islamic Conference of Foreign Ministers was held in Saudi Arabia, and it ultimately led to the formation of what is now the OIC in 1972. Figure 4.8 shows the nations in the OIC and just how expansive the geographic coverage is for the 57-member organization, stretching from the tip of South America, through Africa, West Asia, South Central Asia and Southeast Asia. The charter in 1972 set the goal to strengthen the solidarity and cooperation among the Member States. A Parliamentary of the OIC Member States was established in 1999 headquartered in Tehran, Iran, and an Islamic Summit of heads of nations and kings is held every three years. As a result of the Arab community stretching across different continents presenting integration efforts across the Arab world necessarily involves describing RTAs that stretch across regions. A more regional body in the Arab world with a longer history is the Arab League or League of Arab States. The Arab League was established in Cairo, Egypt, in 1945 with six members and has grown to 22 members in Northern Africa and the Arabia part of West Asia. From the Arab League emerged an early economic integration attempt in the Arab world, the

Figure 4.8 Countries involved in the Organization of Islamic Cooperation (OIC)

74  The postwar era Pan-Arab Free Trade Area (PAFTA), also known as the Greater Arab Free Trade Area (GAFTA), including the 18 nations listed in Table 4.5. All of these nations can be found in Figure 4.8. Another multilateral RTA in West Asia is the Gulf Cooperation Council (GCC) including countries in Arabia. The organization was created in 1981 and an official RTA went into force in 2003. In 2011, Saudi Arabia proposed the GCC become an economic union, one of the main reasons for which to combat the growing influence of Iran, but not all members were supportive. In 2017, an air, land and sea blockade was launched by the neighbors of Qatar, led by Saudi Arabia, claiming that Qatar had funded and supported terrorists. Saudi Arabia insisted that Qatar support its efforts to challenge Iran in the region. Iran has recently invited Qatar to a parliament speakers meeting of the OIC, which of course the other GCC members are also members of. The United Arab Emirates also recently announced a new political and economic alliance with Saudi Arabia suggesting the GCC will not be a functioning body moving forward. While Arab identity has allowed opportunities for increased ties and linkages across the Arab world, religious differences have led to disintegration of relations between nations in some cases and even conflict. Of the world’s Muslim population, estimates are that 90 percent are Sunnis: some governments such as Saudi Arabia, Bahrain and the United Arab Emirates are Sunni. Iran and Iraq governments are Shiites in contrast, and the Saudi’s feel that Qatar has been supporting Iran and cannot be trusted any longer. One of the increasing challenges in the world is the rise of terrorism that has shown it can strike anywhere. Religion-inspired terrorists have come from Shia Islam and Sunni Islam, and thus the differences in the branches of Islam are not necessarily a factor in this regard. Increasing globalization has not reduced the threat of terrorism and, quite the reverse, the technological advances and perceived threat to religious and cultural traditions that globalization presents has only increased the emergence of non-state actors in spreading sentiment of malcontent and fear, in some cases with state support. One of the most outward-oriented countries in West Asia is Turkey. That table shows that Turkey has established 17 RTAs and also has agreements with the EU and EFTA and was a founding member of the ECO. The EU and EFTA agreements came early in the 1990s, while the vast majority of its RTA expansion has been after 2000, with a focus within the region and Northern Africa. Turkey is a member of the North Atlantic Treaty Organization (NATO) alliance and thus has close ties with its European allies. In 1987, Turkey began its bid to become a member of the EU. It has been a long road, but recent events make it unlikely to occur soon. In 2016, a failed coup attempt was followed by purges by the Turkish government, which have raised serious concerns and recent tensions over pro-Kurdish and anti-Turkey rallies in Germany. Table 4.6 lists the RTAs in North and Central America. One of the oldest multilateral RTAs in the Americas is the Central American Common Market (CACM), which came into force in 1961 with the four Central American nations of Guatemala, Honduras, El Salvador and Nicaragua. Panama joined the common market in 2013. Although established very early on, one of the challenges of

The postwar era 75 Table 4.6 Regional trade agreements in North and Central America, 1950–2017 North America North American Free Trade Agreement (NAFTA) – Canada, Mexico and United States (1994) Canada (9, EFTA, EU) – EU (2017), Ukraine (2017); Korea (2015); Honduras (2014); Panama (2013); Jordan (2012); Colombia (2011); Peru (2009); EFTA (2009); Costa Rica (2002); Chile (1997); Israel (1997) Mexico (7, EU, MERCOSUR, CACM, EFTA) – MERCOSUR (2016); Panama (2015); CACM – Central American Common Market (2012); Peru (2012); Japan (2005); Uruguay (2004); EFTA (2001); EU (2000); Israel (2000); Chile (1999); Colombia (1995) United States (11) – Panama (2012); Colombia (2012); Korea (2012); Peru (2009); Bahrain (2006); Morocco (2006); Australia (2005); Chile (2004); Singapore (2004); Jordan (2001); Israel (1985) Central America Caribbean Community and Common Market (CARICOM) – Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Trinidad and Tobago (1973) CARIFORUM – Antigua and Berbuda, the Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Lucia, Saint Vincent and the Granadines, Saint Kitts and Nevis, Suriname, and Trinidad and Tobago (1992) CARIFORUM–EU (2008) Central American Common Market (CACM) – Guatemala, Honduras, El Salvador, and Nicaragua (1961); accession of Panama (2013) CACM (3, EFTA, EU) – (Costa Rica and Panama) – EFTA (2014); EU (2013); Mexico (2012); Dominican Republic – US (2006); Dom Rep (2001) Costa Rica (7) – Colombia (2016); Singapore (2013); Peru (2013); China (2011); Panama (2008); Canada (2002); Chile (2002) Cuba–El Salvador (2012); accession into LAIA (1999) Dominican Republic (2, CACM) – CACM – US (2006); CACM (2001); Panama (1987) El Salvador (5) – Cuba (2012); Honduras/Chinese Taipei (2008); Panama (2003); Chile (2002) Guatemala (4) – Chile (2010); Colombia (2009); Panama (2009); Chinese Taipei (2006) Honduras (6) – Canada (2014); Colombia (2009); Panama (2009); Chile (2008); El Salvador/ Chinese Taipei (2008) Nicaragua (3) – Chile (2012); Panama (2009); Chinese Taipei (2008) Panama (13) – Mexico (2015); Canada (2013); United States (2012); Peru (2012); Nicaragua (2009); Guatemala (2009); Honduras (2009); Costa Rica (2008); Chile (2008); Singapore (2006); Chinese Taipei (2004); El Salvador (2003); Dominican Republic (1987) Source: WTO RTA database (2017)

the CACM was that the countries were pursuing an import substitution policy, protecting particular industries, and benefits across members were unequal (Gwynne, 1994, p. 194). In addition, Central America in the 1970s and 1980s was an area of conflict largely with pro Communist forces battling US-backed

76  The postwar era opponents. This was true in Nicaragua, El Salvador and Guatemala. Honduras was heavily dependent of the United States and was a key ally during the period. Panama was ruled for much of the 1980s by a brutal dictator Manuel Noriega who was ultimately overthrown by a US invasion in 1989. We see after 2000 that many of the countries begin engaging in RTA formation with regional neighbors and Taiwan on a bilateral basis. Panama has been the most aggressive in this period. The US formed a multilateral RTA with the CACM in 2006: the EU created an RTA with CACM in 2013 and the EFTA in 2014. An important step in greater regional coordination was achieved with the establishment of the Central American Integration System (CAIS) in 1993, extending earlier cooperation for regional peace, political matters and economic development. Early members included Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama. Belize joined in 2000, and the Dominican Republic became an associated state in 2004 and a full member in 2013. Figure 4.9 shows the geographical configuration of the CAIS members. In 1968, the Caribbean Free Trade Area was established with 12 members. In 1973, the group enlarged and formed the Caribbean Community and Common Market (CARICOM). What started as a collection of English-speaking states has expanded to include states whose main language is other than English. Nine members of CARICOM belong to the Organization of Eastern Caribbean States with its own common currency and central bank. In 2008, a group of CARICOM

Figure 4.9 Countries involved in the Central American Integration System (CAIS)

The postwar era 77 nations and the Dominican Republic entered an economic partnership agreement with the EU. These are states that have signed on to the Georgetown Agreement. This Agreement was signed in 1975 and created the African, Caribbean and Pacific Group of States composed of 79 African, Caribbean and Pacific states, known as ACP states, who would work with the EU to promote increased cooperation and technical assistance from the EU. The actual policies were implemented under what became named the Lome Convention, which came into force in April 1976 and managed trade and assistance relations between the EU (then EC) and the ACP countries. From a very early stage, the EU engaged nations globally in extensive outreach, interaction and support, and the ACP group was key in Africa, the Caribbean and for small Pacific states. Another important regional body in the Caribbean is the Association of Caribbean States established in 1994 with 25 members. Its mission is to promote trade among its members. In North America, the North American Free Trade Agreement (NAFTA) was a major turning point not just in the hemisphere, but worldwide as the largest economy in the world had entered into a regional multilateral RTA, with a developing country. In June 1990, President Bush launched “Enterprise for the Americas Initiative,” which many interpreted as movement toward the objective of a hemispheric FTA. Together with the expansion of the EU, NAFTA’s establishment in the mid-1990s became a major force in nations seeking to form RTAs not to be left out from the increasing integration occurring. This impetus is likened to the nineteenth-century phenomenon described before in chapter 3 where the emergence of Germany as a nation-state led to a proliferation of trade treaties as nations did not want to be left out of the integration that was occurring. This was especially true as most German bilateral treaties at the time did not include MFN clauses, a similar feature of current RTAs. NAFTA created a regional trading bloc where the three partners were allowed to achieve geopolitical and commercial interests and to counterbalance the RTAs existing and emerging throughout the world (McConnell and MacPherson, 1994, p. 165). The US need for low-cost inputs was always present and given its physical proximity, Mexico was more attractive than Asia in this regard. While there was serious opposition in Canada, there was the belief that a US–Mexico FTA would undermine Canadian trade with its largest partners and thus believed they must participate (Ibid., p. 178). Thus, the motivation and strategy for integration was in stark contrast to the EU. Table 4.6 shows that all three members of NAFTA have been active in forming RTAs with other countries, again as in many other regions with greater emphasis in the post-2000 period. Both the EU and EFTA engaged Mexico early on and were able to establish RTAs in the early 2000s. The EFTA’s RTA with Canada went into force in 2009 and the EU’s in 2017. Japan formed an RTA with Mexico also quite early in 2005 and began discussions on an economic partnership agreement with Canada in 2012, but were put on pause as Japan focused on TPP negotiations which included Canada. With the exit of US in TPP talks, Canada pressed for a resumption of negotiations with seven rounds having been completed. The US benefit of low-tariff barriers is being challenged by the

78  The postwar era top global trading nations in its own backyard as RTAs are concluded with its NAFTA partners. One of the earliest RTAs, arising almost parallel to the EC and EFTA was the Latin American Free Trade Association (LAFTA) with 11 members, and it was founded in 1960 as the first major attempt at regionalism in Latin America. Table 4.7 gives the RTAs in force in South America. The agreement eventually faded, however, as there were tensions between the larger and smaller members (McCarthy, 2006, p. 118). LAFTA was carried out under the policy of import substitution; thus, industrial firms were protected within a country, and this was one reason for its demise. Eventually regionalism is dropped as an agenda, and in 1980, LAFTA is renamed Latin American Integration Association (LAIA), and it focused on more modest goals of sectoral coordination (Gwynne, 1994, p. 197). In the LAIA, which came into force in 1981, there was the possibility of signing agreements between only two or more member countries, resulting in a significant increase in the number of regional cooperation agreements signed and enforced, in contrast to LAFTA.

Table 4.7 Regional trade agreements in South America, 1950–2017 Andean Community – Bolivia, Colombia, Ecuador and Peru (1988) Latin American Integration Association (LAIA) – Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Panama, Peru, Uruguay and Venezuela (1981); accession of Cuba (1999) Pacific Alliance – Chile, Colombia, Mexico and Peru (2016) Southern Common Market (MERCOSUR) – Argentina, Brazil, Paraguay, Uruguay and Venezuela (1991) MERCOSUR (3, SACU) – Chile (2017); Mexico (2016); Southern African Customs Union SACU (2016); India (2009) Argentina–Brazil (2016) Brazil–Argentina (2016) Chile (21, MERCOSUR, EU, TPSEP, EFTA) – MERCOSUR (2017); Thailand (2015); Hong Kong (2014); Vietnam (2014); Nicaragua (2012); Malaysia (2012); Turkey (2011); Guatemala (2010); Colombia (2009); Australia (2009); Peru (2009); Honduras (2008); Panama (2008); Japan (2007); India (2007); Trans-Pacific Strategic Economic Partnership TPSEP – Brunei, Singapore and New Zealand (2006); China (2006); EFTA (2004); Korea (2004); United States (2004); EU (2003); El Salvador (2002); Costa Rica (2002); Mexico (1999); Canada (1997) Colombia (6, EU, Northern Triangle) – Ecuador (accession to Peru and EU) (2017); Korea (2016); Peru, Ecuador and EU (2013); United States (2012); Canada (2011); EFTA (2011); Honduras (2009); Northern Triangle – El Salvador, Guatemala and Honduras (2009); Chile (2009); Mexico (1995) Ecuador (Accession to) Colombia and Peru–EU (2017) Peru (10, EU) – Ecuador (accession to Peru and EU) (2017); Colombia and Ecuador – EU (2013); Panama (2012); Japan (2012); Mexico (2012); Korea (2011); EFTA (2011); China (2010); Canada (2009); Singapore (2009); Chile (2009); United States (2009); Mexico (2004) Source: WTO RTA database (2017)

The postwar era 79 In 1988, four of the members of LAIA, Bolivia, Colombia, Ecuador and Peru, decided to integrate further and established the Andean Community. The predecessor of the Andean Community was the Andean Pact established in 1969 with its current members and Chile. Venezuela joined in 1976, which was the same year Chile left the Pact. The Andean Pact suffered, just as the CACM in Central America, due to the inward-looking stance of member countries given import substitution policies, which meant benefits were uneven and smaller countries experiences greater degrees of trade diversion (Gwynne, 1994, p. 194). The other South American members of LAIA namely Argentina, Brazil, Paraguay and Uruguay, with the addition of Venezuela formed MERCOSUR (in Spanish is Mercado Común del Sur), which came into force in 1991. One of the main challenges for MERCOSUR has been tension between Argentina and Brazil and the fact that their macroeconomic policies are often uncoordinated and at odds with each other (Gwynne, 1994, pp. 203–204). Over the years, the Andean Community and MERCOSUR have worked to combine, and MERCOSUR members became associate members of the Andean Community in 2005 and Chile in 2006. The Andean Community members and Chile are also associate members of MERCOSUR. In 2004 the formal announcement of the South American Community of Nations was established with 12 states, including members of the Andean Community and MERCOSUR, plus Chile, Guyana and Suriname. In 2008, the constitutive treaty for the Union of South American Nations (USAN) was signed and became the name of the proposed body. In 2011, enough countries ratified the treaty in their respective countries, and the treaty came into force. Figure 4.10 gives a map of the member of USAN. Several of the member states are aiming to create an FTA.1 If this is indeed accomplished, it would be a level of integration that would rival the EU and RCEP. The general trend toward multilateral regional RTAs leading to further integration across these bodies in South America is a reassuring feature that the proliferation around the world of RTAs may indeed be a vehicle ultimately toward greater integration and trade liberalization. The list of RTAs in the region shows that outside of the multilateral agreements, Chile has been the most aggressive in establishing RTAs with other regions around the world. Peru and then Colombia show similar patterns, although less intensive than Chile. All three also have RTAs with the EU, which we have seen is always eager to expand trade networks where it can. Members of MERCOSUR, in contrast, have fewer RTAs and have acted collectively with countries or other multilateral RTA bodies outside the region. As the next chapter will show, the countries in South America are generally much more dependent on agriculture, livestock and/or energy exports. In contrast to East and Southeast Asia, and Europe, there is no economy that has served as the engine of growth in the region leading the climb up the value-added manufacturing export ladder of development. The United States, while providing considerable economic assistance and being the largest trading partner to the region for most of the postwar period, has not served this role. While sentiment varies

80  The postwar era

Figure 4.10 Countries involved in the Union of South American Nations (USAN)

around Latin America on whether further integration with the United States is desirable, there is recognition that the large northern neighbor can serve as a greater engine for regional development, but America’s attitude toward regional integration was often not clear in the postwar era given its rhetoric and history (Gwynne, 1994, pp. 205–206). The most recent election of President Trump and the rhetoric coming out of Washington, DC, including threats of ending NAFTA, suggest that for the time being, neither regionalism nor multilateralism is on the US agenda. During the 1980s and the Latin American debt crisis, many Latin American countries were looking toward multilateral trade liberalization through GATT to make things better due to the fact that the largest expansion in trade volume was not regional, but rather with developed nations such as the United States and Japan. The reality however was that interregional trade was dominated by agriculture whereas intraregional trade was dominated by manufacturing goods (Gwynne, 1994, p. 202). The multilateral focus would thus support trade based on comparative advantage which largely meant meat, agricultural and energy exports for Latin America, but it would not help the countries expand manufacturing exports. Asian NICs pursued an outward-oriented export strategy focused on increasing exports of manufacturing products to overcome this very point.

The postwar era 81 Trade between North American and Latin America saw southbound goods were technology intensive and high-value added, while northbound goods tended to be lower value added, if any from manufacturing at all (McConnell and MacPherson, 1994, p. 186). In fact, Latin American expansion of RTAs over the years had both economic and political motivations: to increase growth, but also to combat US hegemonic dominance (Gwynne, 1994, p. 189). Examination of the RTA history in Latin America shows the record of multilateralism on a regional basis was more successful than bilateral regionalism. The latter was only successful during colonization era, which was imposed by Spain and Portugal in the nineteenth century (Gwynne, 1994, p. 190). After independence of nations in the first era of globalization as discussed in Chapter 3, multilateralism and free trade went hand in hand and were supported by immigration and capital flows from Europe and the United States (Ibid., p. 191). Thus, countries were more comfortable pursuing a multilateral approach based on historical experience. Table 4.8 gives the list of RTAS for western, northern, central and southern Europe. The main integrating force on the continent and a model of unprecedented achievement in this regard is the EU. Both the EU and EFTA’s expansion of RTAs are truly on a different scale: combined, they account for more than 60 RTAs. Discussion of RTA formation history in other regions has shown both bodies have been very active and engaged with countries around the world through trade negotiations and liberalization. Of course, they have been a major force behind multilateral liberalization through GATT/WTO as well, at times prodding a reluctant United States to increase the pace and breadth over the postwar era. The EFTA has been the route for those wishing to stay outside the strict rules to be members of the EU for various reasons. The original founding members of the EFTA in 1960 were Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom, and they were known as the “outer seven.” Only two remain, and Iceland joined in 1970 and Liechtenstein in 1991. The others eventually joined the EU. The EU as a model of integration is contrary to most efforts at integration being pursued by nations around the world. McCarthy (2006, p. 164) observes that the two largest common markets in the world are the United States and EU. Competing with and not being dominated by the United States was of course one of the primary motivations behind the EU’s formation in addition to the threat of the Soviet Union. The United States is based on its constitution, and the EC emerged from the Treaty in Rome in 1957, which was implemented in 1958. Critical points in the building of the common market were the Single European Act of 1987, which created the single market and court; the treaties of Maastrict (1991) that outlined the process for monetary union; Amsterdam (1997) on security; Nice (2000) also on security and governance; and the constitution in 2004 (Ibid., pp. 164–182). The European Community was envisioned as having permanent institutions that were supranational where individual states gave up their sovereignty to become a member and, in this manner, stood in stark contrast to the GATT framework where all nations retain sovereignty (Wise, 1994, p. 78). In the EU

82  The postwar era Table 4.8 Regional trade agreements in Europe, 1950–2017 Europe EC/EU (28) – Croatia (2013); Bulgaria and Romania (2007); Malta, Cyprus, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Slovenia and Hungary (2004); Austria, Sweden and Finland (1995); Spain, Portugal (1986); Greece (1981); Denmark, Ireland, United Kingdom (1973); Belgium, France, Italy, Luxembourg, The Netherlands, and West Germany (1958) EU (38, SADC, CACM, Eastern and Southern Africa EPA, CARIFORUM) – Canada (2017); Ecuador; accession to Colombia and Peru (2017); Ghana (2016); Southern African Development Community (SADC) – 15 Southern African States (2016); Côte d’Ivoire (2016); Georgia (2014); Moldova (2014); Cameroon (2014); Ukraine (2014); Central American Common Market (CACM) (2013); Colombia, Peru and Ecuador (2013); Eastern and Southern African States EPA – Mauritius, Madagascar, Seychelles and Zimbabwe (2012); Korea (2011); Serbia (2010); Papua New Guinea/Fiji (2009); CARIFORUM 15 Caribbean States (2008); Bosnia Herzegovina (2008); Montenegro (2008); Albania (2006); Algeria (2005); Egypt (2004); Lebanon (2003); Chile (2003); Jordan (2002); San Marino (2002); Macedonia (2001); Mexico (2000); Israel (2000); Morocco (2000); South Africa (2000); Tunisia (1998); Palestine Authority (1997); Faroe Islands (1997); Turkey (1996); Andorra (1991); Syria (1977); Norway (1973); Iceland (1973); Switzerland/Liechtenstein (1973) EFTA–European Free Trade Association – Liechtenstein, Norway and Switzerland (1960); accession of Iceland (1970) EFTA (25, SACU) – Georgia (2017); Bosnia and Herzegovina (2015); Central American Common Market – Costa Rica, Panama (2014); Hong Kong (2012); Montenegro (2012); Ukraine (2012); Colombia (2011); Peru (2011); Albania (2010); Serbia (2010); Canada (2009); Southern African Custims Union SACU – Botswana, Lesotho, Namibia, South Africa and Swaziland (2008); Egypt (2007); Lebanon (2007); Korea (2006); Tunisia (2005); Chile (2004); Singapore (2003); Jordan (2002); Macedonia (2002); Mexico (2001); Morocco (1999); Palestine Authority (1999); Israel (1993); Turkey (1992) EFTA–European Free Trade Association – Iceland, Liechtenstein, Norway and Switzerland European Economic Area (EEA) – EU + 3 EFTA (Iceland, Liechtenstein and Norway) (1994) Faroe Islands (3) – Iceland (2006); Switzerland (1995); Norway (1993) Iceland–China (2014) Iceland–Faroe Islands (2006) Switzerland–China (2014) Switzerland–Japan (2009) Source: WTO RTA database (2017)

model, countries must give up sovereign powers such as border control and monetary authority. While the United Kingdom was granted an opt-out clause on the monetary authority, it appears its citizens could not support the open-border requirement, which the EU is adamant on. Further efforts at fiscal policy control and coordination are increasing as well in the EU, and centralization to a supranational body of as many as possible of the functions that governments normally perform. The EC formation process started gradually, first with the 1950 French

The postwar era 83 proposal for a European Coal and Steel Community, which reflected federalist aspirations linked to national interests, then the subsequent European Atomic Energy Community and the EEC established in 1957 (Ibid., p. 80). The United Kingdom refused to join and instead helped establish the EFTA in 1960, where it could still provide preferences to members of its the commonwealth (Ibid.). Shortly thereafter, the United Kingdom did apply for membership to the EC based on fears it would be dominated by the United States, but France blocked its entry into the EEC based on the United Kingdom’s differing vision of the EEC, where states would retain some aspects of sovereignty (Ibid., p. 81). The United Kingdom did enter the EEC along with Denmark and Ireland in 1973, but the different visions on the degree of integration between members remained (Ibid., p. 82). The United Kingdom’s decision to withdraw from the EU in 2016 based on an approved referendum confirms France’s early suspicion of the United Kingdom’s ultimate willingness to integrate along lines envisioned from the EC’s conception: this shows, however, the tension between different visions for the union remained unresolved for decades. The EU has formed numerous trading agreements with developing countries. Early agreements included former colonies of France and member of United Kingdom’s commonwealth. The GSP in 1971 also led to the EC liberalizing trade with other developing countries in Africa, Asia and Latin America where zero tariffs for a range of manufactured and semi-manufactured goods from developing countries were allowed, but also had import quotas on imports of low-wage labor that would threaten EC jobs (Wise, 1994, p. 84). While this liberalization was important, 60 percent of trade still took place between EC members in 1990 (Ibid., p. 86). The EU, as a union, emerged after the 1991 Maastricht Treaty and while representing a significant advance for France, Germany and others who were pressing for the greatest degree of integration, Denmark and the United Kingdom obtained an opt-out from using the Euro and were able to maintain their own currencies. Up until the early 1990s, the EC largely focused on its own internal expansion to achieve its size and inclusion (Yeung et al., 1999, p. 71). After that, the EU expanded its ambitions to increase ties beyond Europe trying to promote movement of goods, people and capital and represents a postWesternism which is in contrast to the coherent view of the West in the past (Buhari-Gulmez, 2012, p. 68). The EU negotiated associate member status for states, including Mediterranean countries, Eastern Europe and the former Soviet Union countries (Yeung et al., 1999, p. 40). The EU experienced a significant expansion in 2004 when it welcomed a large number of these countries into full membership. The top rows of the table show the expansion of the EU through the years to its current 28 members. In 1994, the EU and 3 members of the EFTA formed an RTA to create the European Economic Area, finally integrating more formally between the two groups. In 1949, Stalin announced the Council for Mutual Economic Assistance (CMEA), which was essentially the Soviet Union managed economic system that included Bulgaria, Czechoslovakia, Hungary, Poland and Romania. The reality was that operation was essentially each Eastern European state linked to

84  The postwar era Russia, and there was little integration between each other (Michalak, 1994b, p. 114). After the fall of the Soviet Union, the CMEA continued to operate, and in 1989 it instituted hard currency payments for international transactions (Ibid., p. 117). In January 1991, the CMEA was unanimously dismantled ending any coordinated group integration efforts. In 1993, the Central European Free Trade Agreement (CEFTA) listed in Table 4.9 was established between the Czech Republic, Hungary, Poland and Slovakia and was modeled after the EFTA, which accepted many of the Eastern European members as associate members in 1992 and 1993 (Bulgaria, the Czech Republic, Hungary, Poland, Romania and the Slovak Republic). While the Czech Republic and Hungary were eager to work toward joining the EC, Russia voiced opposition, and certain members of the EC were concerned about the increased competition membership of their Eastern European neighbors would bring. Eastern European nations were instead encouraged to form their own regional integration. The reality however was that trade between Eastern European nations was not extensive and instead, just like other moderately developed countries, they pursued greater ties and integration with developed countries (Ibid., p. 123). In 2004, the EU added 10 members, mostly from Eastern Europe, in its largest market expansion in history after the nations followed a decade of outlined reforms and procedures to ready for entry. The remaining members of the CEFTA are listed in Table 4.9. Table 4.9 Regional trade agreements in Eastern Europe, 1990–2017 Eastern Europe Central European Free Trade Agreement (CEFTA) – Albania, Bosnia and Herzegovina, Macedonia, Moldova, Montenegro, Serbia and Kosovo (2007) Common Economic Zone (CEZ) – Belarus, Kazakhstan, Russian Federation and Ukraine (2008) Commonwealth of Independent States (CIS) – Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan (1994); FTA (2012) Eurasian Economic Union (EAEU) – Belarus, Kazakhstan and Russia (2014); accession of Kyrgyz Republic (2015); accession of Armenia (2014) EAEU – Vietnam (2017) GUAM – Georgia, Ukraine, Azerbaijan and Moldova (2003) Albania–Turkey (2008) Bosnia and Herzegovina–Turkey (2003) Moldova (3) – Turkey (2016); Kyrgyz Republic (2016); Armenia (2004) Montenegro–Turkey (2010) Russian (7) – Turkmenistan (2013); Uzbekistan (2013); Azerbaijan (2012); Serbia (2012); Belarus/Kazakhstan (2012); Georgia (2001) Serbia–Turkey (2010) Macedonia–Turkey (2001) Ukraine (13) – Canada (2017); Montenegro (2013); Belarus (2008); Moldova (2008); Tajikistan (2008); Macedonia (2008); Kazakhstan (2008); Azerbaijan (2008); Uzbekistan (2008); Turkmenistan (2008); Armenia (2004); Georgia (2001); Kyrgyz Republic (1999) Source: WTO RTA database (2017)

The postwar era 85 In December 1991, the Commonwealth of Independent States (CIS) was started by Belarus, Russia and the Ukraine. Additional members listed in Table 4.9 joined afterwards, and a trade agreement formerly came into force in 1994. These were all satellite countries in the former Soviet Union, and these former republics were much more dependent on trade with Russia than with each other (Bradshaw, 1994, p. 148). With the dissolution of the Soviet Union and the end of central planning, inter-republic trade collapsed falling by 50 percent (Ibid., p. 150). Periods of extreme inflation where the Russian Ruble went from 1 pound to 1 ruble in the mid-1980s to 1 pound to 1,569 rubles in 1993 exacerbated the situation (Ibid., p. 151). Energy trade was at the heart of inter-republic trade and was integral to Russia’s dominance over the republics (Ibid., p 155). In March 1993 Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan agreed to form a customs union and in July of the same year Belarus, Russia and Ukraine agreed to create an economic union (Ibid., p. 158). The CIS only emerged through members’ bilateral agreements with each other (Ibid.). In 2012, the CIS FTA was formally entered into force. The table shows that Ukraine was one of the most active in forming RTAs in the region with former Soviet members. The country has ambitions to join the EU, and along with Georgia and Moldova, the countries have been working toward that end. In 2003, the three formed an RTA together with Azerbaijan that has the acronym GUAM (first three letters of country names ordered appropriately). Ukraine became the center of conflict between pro-Western elements and proRussian rebels in April 2014, after Russia annexed Crimea. A ceasefire was established in February of 2015 with the rebels occupying significant territory in eastern Ukraine. The future is uncertain as the country is split and lies at the intersection of tensions between Western nations and Russia. It has unfortunately become another example that the greatest threat and danger to the benefits created from trade expansion arising from trade liberalization and the forces of globalization is war. Table 4.10 provides a list of RTAs that are in force in Africa. The lack of development and economic success in Africa is a challenge to the global community. It is a continent where trade liberalization and regional integration has not created much success as in parts of Asia and Eastern Europe. Patterson and Afilalo (2008, p. 193) point to French-speaking Africa as an example where regional integration pushed by France and the EU during the 1980s and 1990s has led to greater inequality and unemployment, and to increased conflict. The authors attribute this to the fact that no redistributive mechanism was included in structural policy changes implemented. In West Africa, the Economic Community of West African States (ECOWAS) comprising 15 nations was founded in Nigeria in 1975. Only Liberia was not a colony, others being colonies of France, United Kingdom or Portugal. Figure 4.11 provides a map of the member countries shaded in gray. A revised treaty for the group was signed in 1993 in Cotonou. Within ECOWAS, the West African Economic and Monetary Union (UEMOA) was created consisting of eight countries in 1994, as shown in Table 4.10. They share the same CFA franc, which is guaranteed by France.

86  The postwar era Table 4.10 Regional trade agreements in Africa, 1950–2017 Africa Agadir Agreement – Egypt, Jordan, Morocco and Tunisia (2007) Algeria–EU (2005) Cameroon–EU (2014) Common Market for Eastern and Southern Africa (COMESA) – Burundi, Comoros, R. Congo, Djibouti, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe (1994); accession Egypt (1999) Côte d’Ivoire–EU (2016) East African Community (EAC) – Kenya, South Sudan, Tanzania and Uganda (2000); accession Burundi and Rwanda (2007) Eastern and Southern Africa States Interim EPA: Mauritius, Madagascar, Seychelles and Zimbabwe – EU (2012) Economic and Monetary Community of Central Africa (CEMAC) – Cameroon, Chad, Central African Republic, Equatorial Guinea, Gabon and Republic of Congo (1999) Economic Community of West African States (ECOWAS) – Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo (1993) Egypt (1, EFTA, EU) – EFTA (2007); Turkey (2007); EU (2004) Ghana–EU (2016) Mauritius (2) – Turkey (2013); Pakistan (2007) Mauritius–Pakistan (2007) Morocco (2, EU, EFTA) – Turkey (2006); US (2006); EU (2000); EFTA (1999) South Africa–EU (2000) Southern African Customs Union (SACU) – Botswana, Lesotho, Namibia, South Africa and Swaziland (2004) SACU – MERCOSUR (2016); EFTA (2008) Southern African Development Community (SADC) – Angola, Botswana, Democratic Republic of Congo (DRC), Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe (2000); accession of Seychelles (2015) SADC–EU (2016) Tunisia (1, EFTA, EU) – Turkey (2005); EFTA (2005); EU (1998) West African Economic and Monetary Union (UEMOA) – Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo (2000) Source: WTO RTA database (2017)

The CFA franc zone actually has 14 total members with six belonging to the Central African Economic and Monetary Community (CEMAC). Five members of ECOWAS signed an agreement to establish the West African Monetary Zone based on reforms and a common currency, the eco. All 15 members expressed concrete interest in creating a common currency. The members set up strict rules, just as the EU did, for the common currency to go into effect including all countries to achieve single-digit inflation of 5 percent or less and budget deficits to GDP ratios of 4 percent or lower. It is an ambitious plan and it follows the EU model, suggesting that former French colonies are more open to following the EU model of integration, which may be a result of the language and cultural

The postwar era 87

Figure 4.11 Countries involved in the Economic Community of West African States (ECOWAS)

assimilation France stressed during colonization. The common currency has not been successful to date as countries could not achieve the targets set. For East Africa, in 1961 the East African Common Services Authority was created and lasted until 1967 and was then replaced by the East African Community (EAC). The EAC collapsed in 1977 due to the benefits of the agreement being unequal across members (McCarthy, 2006, p. 114). In 1999, a new EAC agreement was signed by Kenya, Tanzania and Uganda. Tanzania also belongs to the South African Development Community (SADC) which was founded in 1992. Kenya, Uganda and Tanzania help set up the Common Market for Eastern and Southern Africa (COMESA) in 1993. COMESA launched an FTA in 2000 with aim to become a customs union. Tanzania withdrew from COMESA in 1999. Figure 4.12 shows the member states of COMESA shaded in, but also contains the names of member states in the EAC and SADC not shaded in. To some degree, the overlapping membership exhibited a desire to merge all three groups. In fact, the member states of COMESA, the EAC and SADC agreed in October 2008 to negotiate a Tripartite Free Trade Area (TFTA). There have been several challenges, and the deadline of 2016 was not met. Twenty-one of 26 members have signed the agreement, but only Egypt and Uganda have ratified it, whereas 14 are required to bring the agreement into

88  The postwar era

Figure 4.12 Countries involved in the Common Market for Eastern and Southern Africa (COMESA)

force. Nonetheless, there has been great progress and, perhaps even to a greater degree than in South America, it appears smaller multilateral RTAs groupings will join to create larger integrated regions of trade liberalization. There is greater sentiment across nations toward monetary union as well, perhaps due to the close colonial ties with Europe. However, as in all cases of efforts to form an economic union, issues of sovereignty and the loss of sovereign powers become a major hurdle to overcome. In 1965, the Central African Customs and Economic Union (CACEU) was established among five countries sharing a French colonial heritage. As shared in Chapter 3, the French colonial administration stressed assimilation with France and created the Federation of West Africa and Federation of Equatorial Africa (McCarthy, 2006, p. 134). The Federation disappeared when the countries received their independence in the 1960s. The CFA franc zone is one bond that remained strong. The CACEU was the successor of the Federation of Equatorial Africa. In the 1990s, CACEU transformed into the Economic and Monetary Union of Central African (CEMAC), which launched in 1998 (listed in Table 4.10 and can be seen in Figure 4.12). CEMAC belongs to the Economic Community of Central African States (ECCAS), which came into force in 1985 to form a wider economic community of Central African states. In 2003, the EU signed a financial

The postwar era 89 agreement with ECCAS and CEMAC conditional on the two groups merging into one. The EU presence in Africa is significant and very influential in regional integration efforts. One other RTA of EU influence is the Eastern and Southern African states interim economic partnership agreement listed in Table 4.10 that came into force in 2012 and that provides duty- and quota-free access to the EU market for exports from Mauritius, Madagascar, Seychelles and Zimbabwe. China’s presence in Africa has also increased significantly in the past decade. China’s support has come in the form of loans to African nations without the prescriptive policy or reform requirements that Western aid comes with. In 2003, China’s loans were less than $2 billion, just under $4 billion in 2008, and exceeded $16 billion in 2013. The group of advanced nations called the Development Assistance Committee provides substantial aid to Africa as well. In 2014, the United States was the top donor with $9.3 billion in net disbursements. This gives an idea of the level of support China is providing African nations. Some argue this is simply China’s effort to gain access to needed natural resources and to create markets for its exports. While its presence in the continent has increased, and it is estimated that nearly 250,000 Chinese workers are in Africa, it is surprising there has not been one formal RTA through the WTO established with any African nation. It appears that the loans and Chinese MNEs can gain access without any formal trade liberalization. The South African Customs Union (SACU) was established in 1910, with an updated agreement made in 1969 after Botswana, Lesotho and Swaziland gained independence from the United Kingdom in or shortly after 1966. All members of the Union are heavily economically dependent on South Africa and were essentially part of Apartheid’s foreign policy where South Africa operated as the central production hub, the location for capital accumulation, and the other members serviced the center. Namibia, the final member of the Union, gained independence in 1990 through the United Nations as a former territory of South Africa and a colony of Germany prior to that. In the early 1990s, there were major changes that opened the opportunity for regionalism to expand in Africa. Some of the main forces were the collapse of the Soviet Union and the reality that economic support would no longer be available to African nations from Russia, also indicating the model of central planning model had been discredited, and the announcement that South Africa would abandon the Apartheid system (Gibb, 1994b, pp. 209–210). The number of countries that were either Communist or supported economically by the Soviet Union is in double digits and represents a substantial reorientation of economic policy in Africa. Additionally, the West was beginning to apply greater conditionality on aid in terms of governance reform and trade liberalization and “fortress Europe” represented by an expanding EU, all fostered a new climate and prospect for advancing regionalism. After the formation of the Government of National Unity in South Africa in April 1994, the members of SACU agreed to reform the agreement with a consensus agreement achieved in 2000. SACU created RTAs with EFTA in 2008 and MERCOSUR in 2016 after reforming its own agreement.

90  The postwar era The South African Development Coordination Conference (SADCC) was established in 1980 by Angola, Botswana, Mozambique, Tanzania, Zambia and Zimbabwe to reduce dependence on South Africa (Ibid., p. 217). Beginning in 1989, President of South Africa de Klerk announced a change in trade policy from one emphasizing import substitution to export orientation, which eventually was embodied in its export promotion policy titled “General Export Incentive Scheme” (Ibid., p. 218). In 1994, the institution of majority rule and the downfall of Apartheid in South Africa opened the country up to the rest of the world. The Southern African Development Community (SADC) was established in 1992 with South Africa joining in 1994. Members are listed in Table 4.10 and can be found in Figure 4.12. South Africa also created an FTA with the EU in 2000, and it continues negotiations on other trade agreements with regional and global trading partners (McCarthy, 2006, pp. 135–136). There is much less intracontinental RTA activity among the Northern African nations. The Agadir Agreement is an instance of a regional multilateral RTA in the North. The agreements were signed by the four participating nations of Egypt, Jordan, Morocco and Tunisia in 2004 and came into force in 2007. Algeria also established an RTA agreement with the EU in 2005, another case where a former French colony was increasing closer ties. Egypt, Morocco and Tunisia also established RTAs with both the EU and EFTA in the 2000s, with Morocco and Tunisia being former French colonies, and Egypt being one of the United Kingdom. These northern states in Africa, beyond trade liberalization with the EU, have looked toward the rest of the Arab world at efforts of coordination. This was discussed in the RTA section of West Asia.

An era of increasing integration through different channels This chapter has outlined the evolution of trade policy around the world in the current era of globalization following World War II. There were always centrifugal (protectionist) and centripetal (integration) forces at work, with one dominating the other at different periods, as will always be the case. The early postwar era saw the latter dominating the former as countries in the aftermath of the war were looking to avoid shortcomings of the global trading system experienced in the interwar era. New nations looked to be integrated into the global GATT system, cautiously at first, but not wanting to be left out. While many developing countries looked inward to develop and industrialize, a few in Asia began looking to increasing export demand to support domestic expansion into manufacturing production that could be sold abroad. This all occurred in the context of a great advance in multilateral trade liberalization in the different GATT rounds of trade negotiation. GSP programs allowed under GATT also saw advanced nations providing preferences to developing nations to allay their fears about the costs of greater integration. In the 1970s and 1980s, the centrifugal protectionist forces began dominating. Non-tariff trade barriers emerged, and a growth of regionalism commenced. The

The postwar era 91 multilateral regionalism was most pronounced and successful in Latin America and Africa, where import substitution policies were most staunchly practiced. Why regionalism was more pursued and successful in these regions should be examined more closely, but strong colonial ties and practices may be one of the reasons, and in the case of Africa, old colonial influences pushed things along. While numerous and reflecting potential progresses toward greater regional integration among existing RTAs, it is not clear whether this trade integration has been beneficial for member states. For most of the nations in Latin America and Africa there continues to be a reliance on agriculture, animal and energy sectors as the main export markets, and industrialization has proceeded at a slower rate. This is especially relative to Asia where nations one after another turned to export markets to support their drive to industrialize. In the rapid expansion of RTA formation during the most recent decades, these have been mostly bilateral among the fast-growing GDP and export countries. The next several chapters will turn to the data in an attempt to gain a clearer picture of whether the multilateral trade liberalization under GATT and WTO and the RTA proliferation discussed in the chapter actually increases exports, and determine the impact of increased exports on economic growth in this current era of globalization.

Note 1 In the top northern section, there is one state that is not shaded in on the map. This is French Guiana, a territory of France and as such is governed by the EU.

5 Exports and economic growth A new assessment of the postwar era

Chapter 3 examined the importance of exports in the evolving economic activity and relations during the nineteenth century, utilizing the export expansion measure outlined in Chapter 2. This section applies the same methodology to examine the importance of exports in the postwar era. The previous chapter provided context for this exercise. After two major wars in the first half of the twentieth century, the victors in the war formed an international trading system to avoid the negative aspects experienced in the World War I and events in the interwar years. As Figure 4.1 suggests, the current era of globalization can be broken down into three time periods that will be analyzed: 1960–1973, 1973–1990 and 1990–2010. The period leading up to 1973 saw an accelerated export growth, while there was much less progress in expanding trade from 1973 to 1990. Progress in these two periods on trade liberalization was accomplished primarily through multilateral negotiation in the General Agreement on Tariffs and Trade (GATT) framework and as such, it is where trade policy focused. At the same time, other trade agreements were emerging often in the form of larger multilateral agreements on a regional scale. This sowed the seeds for the rapid proliferation of regional trade agreements (RTAs) in the final period under examination, where multilateral trade liberalization slowed significantly, and bilateral and multilateral RTAs dominated trade policy. This resulted in faster growth of exports in countries around the world in this most recent period. Given the much wider availability of data in the postwar era relative to that for the nineteenth century, the analysis will be done separately for the four large regions classified as Asia, Americas, Europe and Africa. The regional classification will largely follow that of the United Nations with Oceania included in the Asia category. While the first part of the chapter utilizes gross export measures as was done in Chapter 3, the final section of the chapter expands the analysis using recent value-added export measures to conduct a demand side growth accounting exercise to decompose the increase in real gross domestic product (GDP) in countries between 1997 and 2011 into that fraction attributable to domestic demand and external (or export) demand. This allows for an accurate measure of the contribution of export demand in supporting the level of GDP expansion over the period. Results from value-added exports are compared to those derived using gross value of exports and give some sense of the challenges

A new assessment of the postwar era 93 in using most trade data that are available to measure the importance of exports in supporting economic growth.

Export expansion measures in the postwar era Just as in the case of the nineteenth-century study, there is also the issue of multiple data sources when the gross value of exports is used. However, all data are in real terms in this first section. This section will primarily use real data from the World Bank’s World Development Indicators (World Bank, 2017a). Merchandise exports and exports of goods and services will be the two categories of exports used, as service industry exports are becoming an increasing part of overall exports. The merchandise exports data is collected based on international customs statistics, while the exports of goods and services are developed based on a balance of payments basis. As such, one cannot assume the difference in the two measures is purely reflective of service industry exports, and it is possible that the measure of exports contribution from goods and services is less than that of merchandise exports due to data issues. Additionally, there is the issue of varying purchasing power across countries. The Penn World tables developed by Feenstra et al. (2015) provide estimates of merchandise exports and various measures of purchasing power parity (PPP) national statistics. Export expansion measures are reported only for countries which have data for all three periods under examination: 1960–1973, 1973–1990 and 1990–2010. First, data from the World Bank merchandise exports are utilized. Next, data for PPP are utilized where countries’ data are unavailable or missing from the World Bank data. Finally, measures based on data for exports of goods and services are presented for the final period, where available. For Tables 5.1 through 5.4, an asterisk is used next to the country’s name if the data are based on PPP measures. Table 5.1 provides estimates for the export expansion measure for countries in Asia. Again, the measure is the ratio of increase in real exports divided by the increase in real GDP. While it is preferable to call this measure the contribution of export demand to total demand over the period, this is not what the export expansion estimates measure, given that the data are not for value added and are instead on a gross value basis, including value of inputs. The next section will present estimates using value added for a limited period. Nonetheless, the export expansion measure will give a measure of the relative increase in a country’s export markets relative to the increase in domestic production over the period under examination and thus give indication of the role exports played in facilitating economic growth in the period. The top row shows data for the world. Table 3.3 in Chapter 3 also had estimates based on real data from Maddison (2001), which overlap and show the export expansion measure for the world was 13.3 percent between 1950 and 1973 and 16.6 percent between 1973 and 1992. These are quite consistent with the 15.4 percent and 20.1 percent during similar periods in Table 5.1, a reassuring confirmation. For the 1990–2010 period, the worldwide expansion of exports relative to GDP increases to around one-third, 34 percent. The number is even higher examining exports for goods

Merchandise exports

3.2 4.8 −0.6 3.9 6.0

South Central Asia 6.1 India 3.4 Iran 11.5 Nepal 2.0 Pakistan 6.2

8.0 3.6 4.1 9.1 8.0

3.1

6.5 3.3 7.7 7.5

  4.4 5.0 8.7 9.1 11.3

5.5

5.8 6.5 4.2 4.5 4.1

5.8 3.8 6.5 4.5

10.5 3.7 0.9 5.5 4.0

2.8

7.4 3.0 8.2 17.0 21.8

  24.2 28.5 73.1 14.1

  4.2 39.1 8.5 32.3 35.8

15.4

11.4 7.3 −45.1 4.7 12.4

80.9 17.8 164.3 32.2

22.1 33.4 9.8 23.0 41.9

20.1

17.5 16.3 26.5 5.1 10.5

83.1 32.5 150.0 77.8

27.5 47.9 36.9 53.0 72.0

34.0

16.0 13.2 21.7 5.3 12.1

77.9 25.8 148.8 56.7

26.1 175.3 14.0 42.6 56.6

23.4

1960–1973 1973–1990 1990–2010 1960–1973 1973–1990 1990–2010 Exports– (1) (2) (3) (4) (5) (6) GDP ratio 2010 (7)

Real GDP annual growth rate

  7.0 5.3 9.9 7.8

Southeast Asia Malaysia Philippines Singapore Thailand

East Asia China Hong Kong Japan Korea Taiwan*

World

Region/Country

Goods and services

8.4 3.4 3.8 8.9

52.3 14.7 108.8 42.7

24.4 134.5 12.5 37.9

15.5

25.7 27.5 17.8   19.7

  116.6 62.7 262.5 100.3

  45.3 40.8 54.3 63.4  

43.3

23.0 21.5 27.3 10.8 15.8

  101.0 47.3 223.9 72.9

  41.0 205.2 16.1 45.9  

28.7

Exports 1990–2010 Exports– percent (9) GDP ratio manuf. 2010 (8) (10)

Table 5.1 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Asia

  4.7 5.9 6.7 4.3

Oceania Australia Fiji Papua New Guinea New Zealand*

3.1 2.2 1.1 1.4

5.2 3.9 5.3 4.5 3.2 2.0 4.1 3.1

4.3 5.3 5.7 3.7   19.9 17.6 57.0 16.5

  11.2 19.7 15.0 8.0 9.6 56.2 22.1 43.1

19.7 31.2 17.8 11.7 25.3 4.8 77.6 37.2

2.5 26.0 23.2 22.0

Source: Author’s calculations based on World Bank (2017a); * indicates data using Feenstra et al. (2015).

  7.1 8.9 4.7 5.4

West Asia Cyprus* Israel Jordan* Turkey 18.6 26.8 59.1 29.8

8.5 24.9 20.0 15.6

4.5

3.1 8.0

2.8 23.3 19.6 12.3   25.8     40.3

  40.3   40.1 31.6   18.5     30.0

  49.7 41.0 47.6 21.6

South America Argentina* Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela, RB

3.8 3.5 7.6 3.4 5.6 5.0 5.6 5.0 1.0 4.6

3.8 1.3 3.8 3.7 4.2 4.1 5.5 1.0 1.8 1.5

  6.0 3.5 2.7 3.6 3.8 −1.3 2.1

Central America  Belize 5.5 Costa Rica 6.4 Guatemala 5.7 Honduras 5.0 Mexico 6.7 Nicaragua 6.1 Panama 7.6

3.0 3.0

 

6.6 3.8 3.1 5.1 3.4 3.1 3.5 4.7 3.2 2.6

  4.9 4.8 3.7 3.7 2.7 3.1 5.6

  2.4 2.5

 

  −2.3 40.6 7.5 −0.1 11.2 12.8 8.1 2.6 −9.4 4.7

  54.4 27.3 22.8 39.1 2.7 23.5 12.4

26.6 6.5

 

22.3 12.3 5.6 48.5 22.3 22.0 8.9 24.9 46.3 108.1

  26.9 15.8 12.0 33.4 28.4 −4.3 −1.1

23.7 9.0

1973–1990 (5)

1960–1973 (4)

1990–2010 (3)

1960–1973 (1)

1973–1990 (2)

Merchandise exports

Real GDP annual growth rate

North America  Canada 5.2 US 4.6

Region/ Country

  35.5 30.2 25.4 47.9 46.9 42.5 54.3

28.1 11.6

  13.6 44.8 11.9 36.3 10.7 34.0 19.4 31.7 15.0 −13.8

 

1990–2010 (6)

  13.5 32.6 9.1 32.7 13.8 25.1 15.1 24.1 16.7 16.7

  34.2 26.0 20.5 39.5 28.4 37.2 38.1

  24.0 8.5

Exports– GDP ratio 2010 (7)

  4.9 2.1 3.4 4.1 3.1 2.5 2.4 3.3 4.3 0.7

  0.5 15.8 8.7 9.8 21.6 2.7 5.0

  11.8 5.7

Exports percent manuf. (8)

Table 5.2 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Americas

  54.9 56.8 23.2 40.8 54.3 62.1 48.5

44.3 20.0

  22.7 40.8 22.1 42.9 19.8 32.8   27.6 43.0 −20.8

 

1990–2010 (9)

  18.8 32.6 13.9 36.8 16.1 24.5 56.9 22.1 30.6 22.1

  54.8 45.6 24.8 50.5 28.3 35.5 68.7

  31.4 12.4

Exports– GDP ratio 2010 (10)

Goods and services

  3.1 3.6

0.5

  6.7 7.0

4.3

5.1

  1.4 5.5 53.2

  136.3 13.3 −146.0

  −33.3 45.1 60.2

  −65.3 3.0

Source: Author’s calculations based on World Bank (2017a); * indicates data using Feenstra et al. (2015).

Carribean Bahamas, The Dominican Republic Trinidad and Tobago 52.2

  8.9 12.5 16.2

  5.6 8.5 100.3

  48.2 31.7

86.4

  44.1 30.2

Merchandise exports

3.6 4.3 4.8 5.5 4.9 4.4 4.1 3.3

6.1 7.9 5.4 1.8 7.1 7.3

Northern Europe Denmark Finland Iceland Ireland* Norway Sweden United Kingdom

Southern Europe Greece Italy Malta* Portugal Spain

2.8 1.6 2.9 6.6 3.2 2.7

2.3 1.9 3.1 3.8 3.9 3.4 2.0 2.1

2.4 2.5 2.3 2.6 2.5 2.9 2.3 1.7

1.6 2.1 1.0 4.3 1.8 2.5

2.3 1.7 2.0 2.7 5.3 2.6 2.1 2.1

1.6 2.1 1.9 1.7 2.3 5.2 2.3 2.3

12.4 7.7 16.5 60.7 13.6 7.0

18.9 15.8 20.6 20.6 41.8 26.2 26.0 16.8

26.0 19.1 63.1 16.6 22.6 61.9 39.7 24.2

18.2 14.0 17.3 51.8 33.1 17.1

26.6 43.1 17.4 23.8 101.8 38.3 25.9 20.6

35.7 38.1 79.2 22.7 64.7 50.0 49.2 107.5

34.7 11.4 51.6 36.4 20.4 29.3

29.3 38.9 47.3 49.8 83.8 33.5 52.0 18.0

68.5 67.3 143.3 27.0 114.4 48.6 115.0 87.9

Source: Author’s calculations based on World Bank (2017a); * indicates data using Feenstra et al. (2015).

5.3 4.8 5.0 5.5 4.6 4.1 5.2 4.7

19.7 9.3 21.0 40.1 20.7 17.8

24.0 30.2 28.1 34.8 76.6 30.5 32.5 17.3

37.2 39.1 84.3 19.8 63.4 49.4 68.7 58.2

  3.8 17.3 29.8 15.6 12.9

  18.2 21.5 5.1 44.7 5.5 24.3 11.8

  31.4 63.2 15.5 30.3 30.0 39.1 29.2

54.0 43.1 68.2 71.0 56.0 45.8

62.4 98.9 89.2 52.0 127.1 41.0 90.6 44.9

100.9 94.5 137.7 55.6 117.3 237.0 127.5 121.5

26.5 22.3 25.5 85.8 30.6 25.7

37.1 51.2 42.0 38.1 94.5 40.3 47.0 27.2

45.3 52.1 77.6 26.8 43.6 177.1 72.5 60.3

Exports– GDP ratio 2010 (10)

Goods and services

1960–1973 1973–1990 1990–2010 1960–1973 1973–1990 1990–2010 Exports–GDP Exports 1990–2010 (1) (2) (3) (4) (5) (6) ratio 2010 percent (9) (7) manuf. (8)

Real GDP annual growth rate

Western Europe Austria Belgium France Germany* Luxembourg* The Netherlands Switzerland*

Region/Country

Table 5.3 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Europe

Merchandise exports

  4.0 6.3 1.1 7.4

North Africa Algeria Egypt* Sudan Tunisia*

  4.2 6.5 3.7 5.9

2.3 0.0 5.2 3.7

3.8 4.5 0.9 3.5 4.1 4.4 1.0 3.3

0.0 3.4 5.1 7.7

 

  5.1 1.2

3.6 6.8 2.3 5.5 2.4 6.0 3.5 6.3

  2.5 1.7

 

  2.8 6.7 6.2 3.1

6.4 −0.6 3.0 1.6

  2.3 1.8

0.6 3.1 2.1 3.9 4.1 3.1 4.5 −1.5

 

  31.9 19.3

20.6 22.6 15.6 28.7 34.0 6.0 38.3 24.3

  32.3 14.2 0.2 8.4

1078.0 10.3 19.6 53.3

 

  16.4 −16.2

3.1 5.8 −1.3 22.4 −3.1 20.2 −1.3 18.1

  20.0 −2.2 −10.0 16.2

21.3 −1409.0 48.8 26.7

 

 

  54.9 10.1 23.6 48.6

43.1 17.4 131.4 122.5

  13.8 4.0

−6.9 14.0 18.5 17.7 6.0 71.9 32.5 −19.6

  35.4 8.0 17.4 30.1

33.8 25.8 78.3 60.5

  16.4 7.0

5.0 12.9 13.2 19.7 5.2 41.3 35.5 34.0

 

1960–1973 1973–1990 1990–2010 1960–1973 1973–1990 1990–2010 Exports– (1) (2) (3) (4) (5) (6) GDP ratio 2010 (7)

Real GDP annual growth rate

Middle Africa Cameroon Central African Republic Chad Congo, Dem. Rep. Congo, Rep. Gabon

East Africa Burundi Kenya Madagascar Malawi Rwanda Seychelles Zambia Zimbabwe

Region/Country

Goods and services

  0.6 5.2 0.1 28.3

    23.9  

  1.2 0.2

0.3 4.5 6.3 1.8 0.4 4.5 2.2 12.4

 

  11.2  

27.9 44.4   8.8   72.9 16.9

  34.0 46.7 37.0 75.7

  −123.0 84.5 19.3

   

(Continued)

  40.0 35.9 27.7 62.6

  27.0 82.1 62.0

  17.2 10.5

  10.0 25.9 32.5 38.0 8.4   44.0 42.5

Exports 1990–2010 Exports– percent (9) GDP ratio manuf. 2010 (8) (10)

Table 5.4 Export expansion measures (change in exports as a share of overall GDP change) for the postwar era, Africa

Merchandise exports

  2.9 2.6 8.2 2.7 4.3 5.9 0.7 5.1 1.5 3.8 7.2

  12.1 6.2 5.4

  3.0 3.8 2.4 1.1 −6.0 2.2 1.8 0.9 2.5 1.5 2.4

  11.0 4.8 2.3   4.2 5.8 1.7 5.0 2.1 3.8 3.2 5.3 3.6 1.8 2.2

  4.5 3.9 2.6   9.8 9.9 37.2 26.5 139.3 86.1 45.4 35.7 8.7 18.1 17.2

  37.9 9.5 15.6   24.1 6.2 16.7 −38.1 7.4 45.0 25.3 175.4 13.4 15.6 19.1

  49.5 12.1 20.4   21.2 23.9 89.3 30.4 −396.0 49.4 30.2 11.0 20.0 −5.1 57.4

  29.3 64.9 29.2   18.4 17.7 45.9 24.7 17.2 47.8 20.1 22.8 16.7 13.2 30.8

  36.7 40.1 24.3

1960–1973 1973–1990 1990–2010 1960–1973 1973–1990 1990–2010 Exports– (1) (2) (3) (4) (5) (6) GDP ratio 2010 (7)

Real GDP annual growth rate

Source: Author’s calculations based on World Bank (2017a); * indicates data using Feenstra et al. (2015).

West Africa Benin Burkina Faso Côte d’Ivoire Ghana Liberia Mauritania Niger Nigeria Senegal Sierra Leone Togo

Southern Africa Botswana Lesotho South Africa

Region/Country

Table 5.4 (Continued)

  0.9 1.6 7.4 5.1   0.0 2.8 1.5 7.0   20.0

  29.2 24.9 11.8

  27.1 22.9       19.7   39.4 21.8 33.0 29.8

  19.0 84.5 29.8

  22.0 20.0     36.7 39.2   40.4 25.1 15.9 39.7

  33.4 50.7 23.9

Exports 1990–2010 Exports– percent (9) GDP ratio manuf. 2010 (8) (10)

Goods and services

A new assessment of the postwar era 101 and services at 43.3 percent. This suggests a significantly greater role for exports in the growth process than the exports-to-GDP ratio, which is near 25 percent for both measures, also shown in the table in columns seven and ten. The first group of countries are in East Asia and have experienced some of the fastest economic growth during the period. Their remarkable progress and success in the postwar era is one of the main reasons that export-oriented growth became a widely discussed issue and led to numerous countries following and abandoning the unsuccessful strategy of import substitution. The first three columns of the table show the remarkable high growth rates for the East Asian economies over all three periods in the current era of globalization, with the one exception being the annual average compounded growth rate of 0.9 percent shown in column three for Japan during the last several decades. The export contribution measures for the East Asian countries are all largest in the most recent period depicted in column six with all over 25 percent, even in Japan where overall growth has been slower. Korea and Hong Kong are around 50 percent for the most recent period, with Taiwan at 72 percent, and all three countries had over 30 percent export expansion in the early period between 1960 and 1973. These numbers confirm the three East Asian Tigers being the first developing countries to pursue an export demand growth process at an early stage in the postwar era: this is especially significant as these countries were among the few that would eventually achieve a high level of manufacturing exports as a percentage of total exports, 134.5 percent for Hong King in 2010 and 37.9 percent for Korea, also shown in the table in column eight. In the table, the export expansion measure is larger when exports of goods and services (instead of just merchandise exports) are used for all countries in East Asia for the 1990–2010 period, except for Hong Kong (column nine versus column six). The next group of countries are in Southeast Asia and also include additional countries that pursued an export-oriented growth strategy. Singapore, the final East Asian Tiger, shows even larger numbers of exports expansion measures, 164.3 percent during 1973–1990 in column five and 150 percent over the period 1990–2010 in column six. This is a feature of highly export-oriented economies where the export expansion measure and the export to GDP ratio can be greater than 100, as is the case for Singapore in the table. This is due to export-oriented economies like Singapore importing goods that can already have significant value added, that are then processed, completed and exported. Here the value added for the country is just a fraction of the gross value of the export from the country, and it is difficult to disentangle what the actual increase in foreign demand was that supported increased production in the domestic economy. Value-added exports overcome this problem. Nonetheless, the export expansion measure indicates that the increase in export sales for Singapore was greater than the entire increase of the GDP for the country. Again, as most countries imports and exports are similar in levels, this does not mean domestic demand decreased, but it does mean the country expanded its export market by more than total expanded domestic production during the same period. The revenue from the export sales allows for the purchase of inputs from abroad, but likely also allows for the purchase

102  A new assessment of the postwar era of other imports that can diversify domestic consumption so that those goods do not have to be produced domestically. This is especially true if goods that are exported are higher in value added. Ideally, value-added measures of exports are used to allow for a true demand growth accounting where the contribution of domestic demand and external demand (exports) could be assessed in the overall growth process. Data covering longer periods of time are necessary to do this. The use of exports to support increases in domestic economic activity points to a significant difference between export-oriented growth and import substitution as a development strategy. With import substitution, the country protects its industry from import competition and relies on domestic demand to pursue industrialization. In an export-oriented growth strategy, such as the Tigers pursued, a nation opens its economy to international trade and depends on external demand in the form of exports to support industrialization efforts. As economies rely more on an export-oriented approach to industrialization, they will observe similar patterns to the East Asian Tigers in their export-to-GDP ratio and export expansion measure. Table 5.1 for the rest of Asia show that Malaysia, Philippines, Thailand, Nepal, Pakistan, Israel, Jordan, Australia and New Zealand all had export expansion measures near or above 15 percent in the early postwar period, as shown in column four. For Malaysia and Thailand, the export expansion measures increase in size significantly over the next two periods, suggesting an even greater focus on export-oriented growth, following in the footsteps of the Tigers. Israel, Jordan and New Zealand show similar patterns, but much smaller, although New Zealand’s numbers near 40 percent for both periods are quite high and consistent with the country’s efforts to liberalize trade, even unilaterally over the period. Nepal, Pakistan, Philippines and Australia show a decline in export expansion during 1973–1990, which, as mentioned earlier, was a period of increased protectionism in some regions globally. Generally, export expansion estimates are highest across countries in the most recent 1990–2010 period, as shown in column six, and this is confirmed when exports of goods and services data are used instead, as shown in column nine. This suggests the expansion of RTAs since the 1990s may have led to sizeable export expansion in the Asian region generally, but especially in East and Southeast Asia. High-export expansion estimates for Fiji and Papua New Guinea are consistent with the high dependence on small island economies on trade to expand growth opportunities. The policy of import substitution was pursued most strongly in developing countries in Latin America and Africa. Table 5.2 shows export expansion estimates for the Americas. For the early period 1960–1973, the values for South American countries, with the exception of Bolivia, are all below 15 percent in column four. In contrast, the export expansion measure for Central American countries in the same period is 20 percent or higher except for Panama and Mexico, whose 2.4 percent measure is especially low. The smaller size of the Central American countries and proximity to the United States may have been a significant reason for their higher export expansion measures even during a time when the region was generally implementing import substitution policies. For the 1973–1990 period, the export expansion measures in column five generally increase in size

A new assessment of the postwar era 103 in Central and South American countries, but it is also true that growth rates in column two are lower than the previous period, which could mean exports expanded by the same amount compared to the previous period, but domestic output increased less than previously. This still can reflect a greater dependence on export demand, assuming much of this increase in exports expansion represented a value-added increase during the period. For all Central American countries and most South American countries, the export expansion measures are largest in the most recent period in column six. However, for all these countries except for Costa Rica and Mexico, the manufacturing exports to overall exports ratio in column eight are in single digits suggesting the exports expansion has been in primary agriculture and energy sectors. Even if these Latin American countries have moved toward an export-oriented growth approach, they have not done so in the manufacturing sector, and the import substitution policies have not resulted in a sizeable expansion in manufacturing exports even as late as 2010, as indicated by the ratio in column eight measures. Mexico with the North American Free Trade Agreement (NAFTA) in 1994 is an outlier in comparison to the rest of Latin America. This feature of Latin American economies lies in stark contrast to the manufacturing export ratio for East Asia, Southeast Asia and even West Asian countries listed in Table 5.1. South Central Asian economies in the previous table are more similar to the Latin American economies in this regard. Canada’s export expansion measures would indicate about a quarter of domestic production expansion is supported by exports during all three periods, again if the increase in exports is similar to value-added increases. The US estimates display the great size of the US economy and its unique position in not being as dependent on export expansion to support domestic output growth. The 11.6 export expansion measure for the United States in the 1990–2010 period is among the lowest among all country estimates presented in Tables 5.1 through 5.4. This may seem surprising given the United States served as the main promoter of multilateral trade liberalization during the 70-year period following World War II. Of course, during the Cold War, trade liberalization was an effective policy given the challenge that Communism presented, and it was a geopolitical means to bring countries into the fold of the global market economy. Countries around the world, especially in parts of Asia, benefited greatly from this in terms of economic growth. It is also true that American multinational enterprises (MNEs) benefitted greatly from this policy stance, and it is another reason the United States promoted openness around the globe. However, even though the United States is not as reliant on exports to support economic growth, its export and import levels in dollars are among the largest in the world, and the impacts from its trade liberalization and openness policies over the years have resulted in distributional impacts within the country. This is one reason for the backlash and the election of a new president whose trade policies foster great uncertainty for the future of the country’s role in the global trading system. While the Asian Tigers and newly industrialized countries (NICs) are often pointed to as models of an export-oriented growth strategy, the most successful and broadest regional collection of countries that serve as the most comprehensive

104  A new assessment of the postwar era model of export-oriented growth is in Europe. The export-expansion estimates in Table 5.3 show that throughout Western, Northern and Southern Europe during all three periods, export expansion has played a significant part in the expansion of domestic output growth. And, in all cases except for Iceland, Norway and Greece, the ratio of manufacturing exports in total exports in column eight indicate that manufacturing exports have played an important role in this expansion. The emergence and then expansion of the EU has created a model of growth through not just trade liberalization, but also deep integration. Whether the EU can serve as a model for other regions is questionable given the question of whether countries in other regions would be willing to give up sovereign powers as the European nations have done. In fact, this has resulted in a backlash in the United Kingdom at a similar time as the US backlash where the UK citizens have voted to exit the EU. Nonetheless, as we saw in the previous chapter, there are regional blocs in Africa that are pursuing similar type and levels of integration. There is an important difference between the globalization backlash in the United Kingdom and the United States that should be kept in mind. While the United Kingdom does not want to be part of the EU, largely for the sovereign powers it would need to give up, chiefly among them, the ability to regulate its borders with other EU members, it is still keen on being an active member of the global trading system. In fact, it has indicated its expectation to place even greater emphasis on trade agreements given its withdrawal from the EU. Of course, according to export expansion estimates in Table 5.3, those of the United Kingdom are among the lowest in all three periods covered. The rhetoric from the United States in contrast largely centers on an unfair trading system that has benefitted nations around the globe at the expense of the US citizens. This is why the latter situation is more precarious for the global trading system. The situation in Africa is unique in many regards. First, it was in the 1960s when many African nations gained their independence from their colonial rulers. There were several nations that had to wait until the 1970s, as well, and several others that would reorient themselves with the fall of the Soviet Union, given their prior economic dependence on the Soviets. There were also various conflicts across the continent within and between nations as well in in the post-independence years. The export expansion estimates in Table 5.4 show varied experiences across countries in terms of GDP growth rates and export expansion. Generally, export expansion estimates between 1973–1990 are lower across countries, again likely due to increased protectionist sentiments and policies around the world and conflict in particular regions of the continent. While the numbers are larger in the early period in column four and later period in column six, as in the case for Latin America, much of the exports were in primary agriculture and energy, as can be seen by the low manufacturing export ratio in total exports in column eight. Again, the use of import substitution policies and eventual reorientation to exportoriented growth, to the extent it occurred in these countries, was not successful in expanding industrialization. Governance issues and corruption plague many of these nations, and the uncertainty makes it difficult to attract foreign investment.

A new assessment of the postwar era 105 Southern Africa is one region in the continent where export expansion has been larger recently and manufacturing exports as a percent of total exports are in double digits. This is largely a South Africa effect, as one of the most developed nations in the continent provides strong regional trade in the Southern African region. The Congo, Tunisia and Togo show similar numbers for the recent period. In the case of the Republic of Congo and Botswana, these are more city nations like Singapore on some level: actually, half the population of Singapore. Together with Togo too, as in the case of Singapore, it is difficult to know the actual value added in the exports statistics, although in the case of Singapore, it’s likely much higher given its per capita income levels. In all these cases, there is the situation of re-exports or entrepot trade where goods are simply foreign manufacturing goods brought into the country that are then exported to another country. In fact, there are instances of unilateral tariff reduction by Togo to promote this type of trade where foreign imported goods are brought into the country to avoid tariffs and then re-exported. This entrepot trade confounds the difficulty in obtaining an accurate measure of the importance of export demand in the growth process using existing trade statistics. The final table in this section is for countries in Asia and Eastern Europe who have reengaged with the global trading system after the fall of the Soviet Union. Table 5.5 provides export expansion estimates for these countries. Generally, the picture that emerges is that the economies are following their regional counterparts in East Asia and Europe in pursuing an export-oriented growth strategy. Export measures are double digit in many cases and even higher for Eastern Europe. This partially reflects the fact that growth rates are higher in Asia than in Eastern Europe. However, manufacturing exports are also higher as a percent of total exports in Eastern Europe, and this is due to the fact that there was a strong manufacturing presence in many of these countries prior to the end of the Cold War, although Vietnam did as well. The nations in South Central Asia generally have much lower export expansion, and this is also in part due to the fact that they are more resource-based exporting nations that appear to be trying to make the transition to diversifying toward manufacturing exports.

Exports across industries To obtain a picture of exports across industries, data for exports by industry were obtained from the United Nations Conference on Trade and Development (UNCTAD, 2017) database for selected countries. Industry definitions vary over time, and thus, two different samples were created. The first is based on the Standard International Trade Classification (SITC) system and compares the earliest year closest to 1960 to the distribution of exports in 1987. The second uses the Harmonized System (HS) and compares data for the year available closest to 1990 to that of 2015. Table 5.6 provides exports by industry for 19 countries. An important feature to be pointed out first is the percentage of manufacturing in the column labeled crude materials, except fuels. is the industry classification containing textiles, which the previous chapters emphasized was an important

106  A new assessment of the postwar era Table 5.5 Export expansion measures (change in exports as a share of overall GDP change) for the post-Cold War, Asia and Eastern Europe Region/Country

Real GDP annual growth 1990–2010 (1)

Merchandise exports 1990– 2010 (2)

Goods and services

Exports– GDP Ratio 2010 (3)

Exports 1990– percent 2010 manuf. (5) (4)

Exports– GDP ratio 2010 (6)

Asia   Bhutan 6.8 Kazakhstan* 1.6 Kyrgyz Republic* −4.7 Lao PDR 6.6 −2.7 Tajikistan* 2.7 Turkmenistan* Uzbekistan* 3.1 Vietnam 7.1

 

46.7 85.6 −4.7 30.1 −1.9 46.0 5.0 70.9

40.4 26.5 9.8 24.3 6.1 19.6 3.7 62.3

  28.1 5.0 14.1         40.3

 

40.4 30.5   24.3       62.3

  40.4 42.0 40.3 35.5 26.3   57.7 68.7

Eastern Europe Belarus* Bulgaria Czech Republic* Hungary* Moldova* Poland Romania Russia* Slovak Republic* Ukraine

  243.8 84.5 333.5 189.8 1.2 43.4 76.2 −252.8 200.3 76.2

20.6 41.3 67.6 80.7 13.3 33.3 29.5 19.5 63.6 29.5

  24.3 20.3 55.5 60.6 6.0 26.4 23.2 3.7 62.7 23.2

  6.2 37.5 203.3     62.2 107.6 153.7   107.6

  48.7 50.0 75.7 92.9 49.8 40.0 35.9 34.6 80.1 35.9

0.4 1.7 1.0 2.4 −3.0 3.8 1.5 −0.4 1.9 1.5

Source: Author’s calculations based on World Bank (2017a); * indicates data using Feenstra et al. (2015).

first industry for the earliest industrializing nations. The first era of globalization saw countries move from textile manufacturing exports to metal manufacturing exports, moving up the value chain. Surprisingly, countries in the underdeveloped world did not step in to increase textile production as the advanced economies moved into metals in the nineteenth century. This reflects the fact that it was an age of colonialism, and the production decisions in the enclave economies were made by the colonial powers. However, this is not true for Latin America where many nations had already gained independence. Table 5.6 shows that several developing nations by the early 1960s had large share of manufacturing exports in textiles or crude materials including Indonesia, Korea, Singapore, Thailand, Australia, Turkey, Mexico, Argentina and Brazil: one could also include Canada in the list. Some of these countries had already begun to enter the higher value-added industry of metals, which is included in the column labeled “Manufactured Goods by Materials”. Hong Kong and India are among the highest, although some part of this is re-exportation. The advanced nations already had larger shares of exports in this industry such as the United States, France, Germany, Italy and the

Year

 

1962 1987 1975 1987 1973 1987 1962 1987 1962 1987 1962 1987 1962 1987 1963 1987 1974 1988 1973 1987 1962 1987

Country

 

Hong Kong   India   Indonesia   Japan   Korea   Singapore   Thailand   Australia   Saudi Arabia Turkey   Canada  

41.4 95.8 4.5 4.4 18.5 21.2 8.1 9.1 2.0 32.3 134.1 137.3 13.8 23.1 12.9 14.0 78.3 27.6 5.1 11.7 14.6 21.9

Percentage

Manufac­ turing Exports– GDP Ratio

Crude materials, except fuels

Mineral fuels and related materials

12.0 3.5 36.4 19.6 12.0 11.9 7.4 0.7 38.9 4.6 17.3 6.5 50.0 36.9 39.8 22.1 0.1 1.5 48.0 25.2 19.0 8.7

6.1 2.9 12.9 7.8 32.8 11.2 3.2 0.7 37.6 1.0 35.8 5.0 44.2 8.9 41.8 28.2 0.0 0.7 30.2 5.1 29.0 15.9

0.3 0.5 0.9 4.2 50.1 50.1 0.4 0.4 4.9 1.6 17.1 16.2 1.4 0.7 3.1 19.1 99.8 82.9 3.7 2.3 8.8 10.0

Percentage of total manufacturing exports

Animal, agriculture and processed foods

6.3 4.7 2.7 4.7 0.4 1.5 5.3 5.0 1.7 2.8 2.8 6.2 0.1 1.7 1.5 2.0 0.0 11.1 1.1 6.6 3.3 5.0

Chemicals

28.1 18.4 32.1 39.4 3.6 19.1 42.2 13.2 10.9 21.6 11.0 7.5 1.7 16.5 7.8 11.6 0.0 1.7 11.9 26.2 28.5 16.7

Manufac­ tured goods by materials

Table 5.6 Manufacturing exports share 1960–1987 by SITC manufacturing industry, select countries

5.5 23.5 7.4 6.8 0.8 0.3 25.5 70.5 2.6 35.8 9.8 43.6 1.0 11.9 3.3 7.2 0.0 1.7 0.7 10.7 9.5 38.1

Machinery and transport equip.

41.0 45.6 7.4 15.7 0.1 4.3 16.0 8.5 3.4 32.5 3.2 9.2 0.5 22.5 0.9 2.5 0.0 0.3 4.4 23.7 1.5 3.6

Misc. manufac­ turing

(Continued)

0.9 0.9 0.3 1.9 0.3 1.6 0.0 1.0 0.0 0.1 2.9 5.8 1.1 0.9 1.9 7.4 0.0 0.1 0.0 0.2 0.5 2.0

Other manufac­ turing

 

1962 1987 1962 1987 1962 1987 1962 1987 1962 1987 1962 1987 1962 1987 1962 1987 1987 1987

 

Mexico   US   Argentina   Brazil   France   Germany   Italy   UK   Czech Republic Hungary

5.5 14.6 3.5 5.0 5.0 5.7 6.1 8.9 9.6 15.3   22.8 9.3 14.5 13.7 17.6    

Percentage

Manufac­ turing Exports– GDP Ratio

Crude materials, except fuels

Mineral fuels and related materials

36.5 13.0 18.7 9.7 71.4 55.9 69.9 30.1 14.3 15.2 2.0 4.8 15.5 6.5 6.4 7.3 2.9 18.4

31.2 4.0 10.3 8.3 23.6 9.1 26.3 12.7 7.9 3.9 2.5 1.8 3.6 1.6 5.1 2.4 0.9 4.3

4.6 41.7 3.8 3.2 1.1 1.5 0.6 3.6 3.8 2.3 5.4 1.3 5.6 2.4 3.7 11.0 6.1 4.2

Percentage of total manufacturing exports

Animal, agriculture and processed foods

Source: Author’s calculations based on UN Comtrade (2017)

Year

Country

Table 5.6 (Continued)

3.8 5.5 8.7 10.4 2.6 6.4 1.2 5.3 8.9 14.3 12.8 13.0 7.7 7.5 8.8 13.2 3.1 11.6

Chemicals

21.4 11.8 11.9 7.2 0.8 18.3 0.8 19.7 29.0 18.0 22.1 17.7 22.0 22.6 23.4 14.9 12.7 13.7

Manufac­ tured goods by materials

1.0 21.0 37.5 44.9 0.3 6.4 1.0 20.2 26.8 35.4 46.2 48.4 30.5 34.8 42.8 36.1 59.2 33.9

Machinery and transport equip.

1.5 3.0 6.7 7.9 0.1 2.4 0.1 7.5 8.7 10.2 7.9 10.8 14.7 24.3 6.6 12.3 15.2 12.0

Misc. manufac­ turing

0.1 0.0 2.4 8.3 0.0 0.1 0.2 0.8 0.6 0.7 1.0 2.2 0.5 0.2 3.1 2.8 0.0 1.8

Other manufac­ turing

A new assessment of the postwar era 109 United Kingdom; and, furthermore, had the largest shares of the exports in the high-value-added sector of machinery and transport equipment, which was the next sector where advanced nations moved in their march up the value-added line of export products. The developing economies in the early postwar era followed the advanced nations and moved into these same higher value-added sectors, reducing textile manufacturing exports over time, as the data for 1987 indicate. The advanced nations continued to increase their export shares in these sectors, especially in machinery and transportation equipment. The bottom row of the table shows that the Czech Republic and Hungary were able to do so, albeit in the Communist system and with much more inefficient production. Since the beginning of the industrial revolution, the first stage of a country industrializing has been the textile industry. In fact, this is true for the first Asian advanced country, Japan, as well. It is also true generally for the Tigers and other Asian NICs that followed. India and China also pursued this route. Over time, countries use their success to move up the value-added chain toward capital intensive, and then technology- and knowledge-intensive manufacturing exports. The challenge of this as a worldwide development strategy is if too many countries enter simultaneously, as Buckman (2005, p. 123) points out, that intense competition among developing countries could lead to lower wages as each try to achieve lower cost production, and also the global market could be flooded with low-skill-labor-intensive goods that will drive down the price and reduce terms of trade, lowering welfare in these countries. Asia’s success has often been likened to the flying-geese model of development, where different countries pursue moving along the valued-added chain in a harmonized and organized manner so that ultimately all gain. Of course, this requires coordination and cooperation, something the Asian nations seem to have achieved. Some argue that Japan’s role as a regional leader, especially through its Official Development Assistance policies, which is one of its strongest foreign policy tools, played a critical role in this regard (Feasel, 2015). China has become a major donor in Africa, and there is the possibility it could serve a coordinating role in the region for a similar development strategy. However, judging by percentage of manufacturing exports in total exports in many African nations in Table 5.4, it seems unlikely that it is. South Africa, however, might be serving such a role in Southern Africa. The EU is playing such a coordinating role in Europe on the largest scale. The remarkable progress of Korea needs to be highlighted here. In 1962, 38.9 percent of exports were in animals, agriculture, and processed foods: by 1987, the economy had fully industrialized, and this percent fell to 4.6 percent. There was similar progress in India, Thailand, Turkey and Mexico, although together with Indonesia, their export share in this industry remained in double digits in 1987. Argentina shows the least progress in this regard, and Brazil’s progress looks closest to that of Thailand: the three combined with Indonesia and India continue to have the highest percentages remaining in textile exports as well. The export by industry data for the most recent period in Table 5.7 confirms the continuing trend in industrialization in most of the countries. For all Asian

19.9 20.6 112.5

165.0 5.7 12.7 23.3 17.5 9.1 14.3 23.3 38.1 145.8 116.7 27.0 52.8 12.5 14.0 36.0 30.9 8.6 16.7

1992 2015 1993

2015 1990 2015 1997 2015 1990 2015 1990 2015 1990 2015 1990 2015 1990 2015 1991 2015 1990 2015

China   Hong Kong   India   Indonesia   Japan   Korea   Singapore   Thailand   Australia   Saudi Arabia Turkey  

Percentage

Minerals, fuels and related materials

Chemicals

Plastics, rubber, skins, wood etc.

1.9 16.8 11.9 11.5 20.8 0.7 0.9 3.8 1.3 5.6 3.0 29.4 14.3 20.9 16.5 0.7 1.8 23.3 11.7

12.4 3.0 3.4 0.2 7.5 12.8 27.8 25.4 0.6 2.0 1.4 6.4 18.3 12.6 1.3 4.5 29.0 51.0 91.9 76.1 5.4 5.4

6.6 1.4 1.0 1.4 7.8 12.5 2.8 5.5 5.0 7.5 2.5 6.5 5.0 10.1 1.1 4.7 8.2 5.1 3.1 7.4 4.7 4.0

4.9 4.7 3.0 5.0 6.8 4.8 16.4 12.0 4.2 5.9 10.2 7.5 6.5 5.5 10.0 13.6 3.7 2.4 2.2 8.0 8.4 7.1

7.6 7.0 10.9

Percentage of total manufacturing exports

Manufacturing Animals, exports–GDP food and ratio beverages

Year

Country

6.1 30.2 15.2 12.6 11.4 2.5 1.3 25.9 2.8 4.9 0.7 20.0 3.6 8.6 1.9 0.2 0.3 33.6 18.8

35.0 15.0 29.0

Textiles and footwear

Table 5.7 Manufacturing exports share 1990–2017 by HS manufacturing industry, select countries

15.0 0.4 15.7 0.5 4.2 1.0 2.7 0.9 1.1 0.4 2.1 0.9 6.0 0.3 6.5 0.1 0.5 2.4 10.0

1.5 3.7 0.8

Stone, materials, jewelry etc.

1.5 4.1 8.0 3.1 5.0 6.8 8.6 9.0 8.4 3.6 2.7 2.4 4.5 11.5 5.3 0.7 2.0 14.6 11.6

5.4 7.7 4.3

Metals

66.8 7.9 17.3 9.5 13.9 76.2 64.3 42.3 65.2 52.7 57.2 23.6 47.7 9.2 8.0 0.9 3.7 7.0 28.2

18.8 50.5 37.0

Machinery, transp., precision inst.

2.2 2.3 1.8 14.1 1.8 2.8 6.9 3.2 0.8 2.4 6.2 5.1 1.2 0.8 3.3 0.2 0.2 0.4 3.2

6.7 7.0 8.7

Other manufacturing

1990 2015 1991 2015 1991 2015 1994 2015 1990 2015 2000 2015 1994 2015 1991 2015 1994 2015 1993 2015 1993 2015 1997 2015 1996 2015 2000 2015

21.4 26.3 8.6 33.0 6.8 8.3 6.1 2.3 6.8 10.6 8.8 12.4 16.6 20.3 21.6 39.3 17.3 24.9 15.8 16.2 31.7 84.1 40.4 81.6 22.6 25.2 19.3 21.9

19.1 11.7 12.9 7.0 10.5 9.2 52.1 55.4 27.9 38.0 6.2 7.0 15.2 13.4 5.6 5.9 7.1 8.9 8.1 6.3 8.6 5.2 14.6 8.7 1.9 4.7 9.0 11.8

2.9 20.9 32.2 7.1 3.5 7.6 11.1 9.6 11.1 16.3 3.8 6.5 2.8 3.2 1.6 2.4 1.8 3.5 7.7 7.3 7.8 3.1 2.4 2.4 44.0 63.7 14.9 22.1

Source: Author’s calculations based on UN Comtrade (2017)

Canada   Mexico   US   Argentina   Brazil   EU 25   France   Germany   Italy   UK   Czech Republic Hungary   Russia   South Africa

3.8 6.8 6.5 2.8 8.4 10.8 5.6 4.8 4.9 5.2 12.6 15.8 12.2 16.1 9.7 12.9 5.3 9.7 12.2 15.6 7.0 4.2 5.2 8.8 5.3 5.2 7.0 6.9

15.4 10.7 3.5 3.7 9.1 7.8 8.0 8.4 8.9 9.1 7.5 6.9 9.8 9.0 9.6 8.5 9.7 10.2 7.0 5.4 10.2 9.1 8.8 8.5 5.8 4.3 7.6 5.2

2.2 0.9 2.8 2.0 3.0 1.8 4.3 3.4 7.8 1.8 4.4 2.9 5.4 3.7 5.7 2.9 16.0 9.3 4.6 3.3 9.1 3.0 8.9 1.9 1.0 0.2 2.5 1.7

6.4 4.8 1.8 2.8 0.7 4.6 2.0 1.9 0.8 2.4 1.6 5.4 1.9 2.4 1.5 2.0 4.0 4.8 1.2 12.4 5.4 2.2 1.6 1.7 0.3 2.6 0.7 15.6

11.6 7.4 6.5 4.1 4.4 4.6 6.9 8.7 17.2 8.0 5.4 5.7 7.8 6.8 8.8 7.4 8.6 9.3 6.4 5.0 17.3 9.1 7.1 4.5 18.2 9.6 17.1 11.8

8.8 30.3 31.8 65.9 52.7 48.5 8.5 7.2 19.0 16.8 50.4 45.8 42.1 43.6 50.5 53.9 39.0 39.5 46.8 39.6 27.7 58.4 46.0 60.6 7.4 5.8 17.9 23.4

25.0 6.5 0.8 4.7 5.8 5.2 0.2 0.7 1.9 2.3 4.6 4.1 2.0 1.8 6.3 4.0 6.2 4.8 3.7 5.1 6.1 5.7 5.5 3.0 16.0 3.8 15.3 1.5

112  A new assessment of the postwar era countries, the percentage of exports in machinery, transport, and precision equipment and instruments increased, except for Japan, which was still at 64.3 percent in 2015. We see data for China in this table confirming its pursuit of the same industrializing strategy: in 1992, it had a large share of exports in textiles and a beginning in machinery. By 2015, there is a reduction in textiles to 15 percent in 2015 and large expansion in machinery to over 50 percent of exports. Over this period, China’s remarkable progress stands in contrast to India and Indonesia, who in 2015 continued to have double-digit exports in agriculture and food products, only small double-digit share in machinery, and continued doubledigit shares of exports in textiles. Korea and Thailand transitioned from textiles to machinery over the period, although Thailand continued to have 14.3 percent of exports in agriculture and food. Turkey shows similar progress to Thailand in both regards, although its share of machinery exports did not increase as much as Thailand’s. Brazil and Argentina have the highest share of exports in agriculture and food, and for Brazil, its share of exports in machinery over the 25-year period actually declined. All three NAFTA countries maintain, or in the case of Mexico significantly increase, their share of machinery exports as is the case with the European nations, with the Czech Republic and Hungary displaying similar share increases as Mexico. The regional trade agreements and regional development forces are likely the main causes for this result. Indonesia, Saudi Arabia and Russia continue to be most dependent on energy exports, with exports in the industry labeled minerals, fuels and related materials accounting for over half of total merchandise exports in the latter two. Saudi Arabia has shown efforts to diversify increasing its share of manufacturing exports. In the case of Russia, its share of exports in manufacturing declines in all sectors except for stone, materials and jewelry. It is certainly plausible that this lack of success in the trade realm has led to the country’s return to an increasing reliance on military and potential land grabbing, as in the case of Crimea and attempts in Ukraine. For the energy-dependent countries, it is important to keep in consideration that by nature of a larger share of exports in energy, the share of manufacturing industries will naturally be lower, relative to other countries for any given year and for changes over time. The last nation listed in the table is South Africa, and interestingly, it resembles India most. The only difference is South Africa’s greater export share in energy and minerals and Indonesia’s larger share in chemicals and textiles. Both have increased their export shares in machinery. An increasingly important part of trade is in services. In the postwar era, the share of the economy in agriculture declined steadily in developed economies, and from 1970, the share of manufacturing began to decline, while the share of the economy-producing services has steadily increased (Grimwade, 1989, p. 51). Recent trade policy discussion often involves service industry issues, and developing nations are generally suspicious of advanced nations’ efforts to liberalize trade in the industry lest they lose domestic share to foreign MNEs. Table 5.8 gives an industry breakdown of service industry exports using data from UNCTAD and the Balance of Payment Manual 5 (BPM5) industry classification system. Data are for the nearest year where data are available relative to 2000 and 2015. For many

4.5 6.1 2.5 2.2 33.6

47.9 12.4 7.6 4.2 2.2 1.4 3.5 5.6 7.5 25.5 43.3 10.3 15.1 4.4 3.3 1.8

2000 2013 2000 2012 2005

2014 2007 2014 2004 2009 2000 2014 2006 2015 2000 2015 2005 2015 2000 2015 2008

World   China   Hong Kong   India   Indonesia   Japan   Korea   Singapore   Thailand   Australia   Saudi

51.7 22.7 24.7 60.9 62.5 41.9 34.4 55.7 46.1 69.5 50.0 72.6 83.3 75.4 77.5 88.5

54.1 44.3 65.4 46.5 50.0

2.4

1.7 2.7 1.4 7.2 8.0 1.2 0.8 1.1 1.1

2.3 2.6 4.4 0.9 1.5 0.3 0.9 1.0 4.0 4.6 8.4 6.7 12.3 13.0 0.6 0.9 1.3 0.9 0.2 0.3

2.0 2.2 2.0 6.4 0.5

Percentage of total service exports

Construc­ tion services

Percentage

Communi­ cations services

Transpor­ tation and travel

Service Exports– GDP ratio

Year  

Country  

11.0 5.6 4.7 0.1 0.2 4.4 5.2 5.0 2.2 9.9 19.4 0.2 0.1 2.5 0.9 6.2

8.2 9.3 0.6 2.7 9.1

Financial and insurance services

2.3 1.1 0.4 2.8

0.8 43.1 46.8

3.0 6.1 1.2 7.6 0.4

Computer and information services

Table 5.8 Service exports share 2000–2015 by EBOPS services industry, select countries

0.5 0.2 0.4 1.9 0.3 14.8 21.7 3.6 6.0 0.3 2.6 0.1 0.3 2.2 1.8

6.0 6.6 0.3 0.5 0.4

Royalties and license fees

33.8 23.8 19.8 23.0 19.7 25.6 27.3 18.6 27.0 19.3 26.4 24.8 14.8 11.3 16.2 0.4

21.4 26.4 25.2 34.8 37.3

Other business services

0.2 0.6 0.8 0.4 0.6 0.2 0.3 0.7 0.9 0.1 0.4 0.3 0.1 5.9 1.6

1.0 0.9 0.0 0.1 0.6

Personal, cultural and recreational services

(Continued)

0.1 0.4 0.4 2.5 4.2 1.4 2.6 2.7 1.0 0.5 0.2 0.8 0.6 2.6 1.7 2.6

2.0 1.6 0.9 0.5 0.1

Government services

Year  

2014 2003 2012 2004 2013 2014 2000 2014 2000 2013 2000 2015 2000 2012 2000 2009 2000 2009 2000 2012 2000 2009

Country  

Arabia Turkey   Canada   Mexico US   Argentina   Brazil   EU 25   France   Germany   Italy   UK  

1.7 6.5 5.1 4.9 5.0 1.6 2.8 4.1 1.7 2.6 0.8 0.9 3.2 5.0 5.9 7.3 4.3 7.3 5.0 5.0 7.4 11.2

88.9 85.5 87.1 42.6 36.4 81.0 50.6 37.6 82.0 48.4 65.3 68.0 50.7 36.2 61.0 45.5 46.2 36.1 65.2 52.8 34.1 23.7

2.9 1.2 1.0 3.8 2.0 0.9 1.4 5.1 3.5 1.4 0.7 2.7 1.9 3.2 1.7 2.5 1.7 2.0 2.3 5.3 2.3 2.9 0.6 0.3 0.1 0.2 4.6 0.3 3.2 2.5 3.5 5.6 5.1 5.7 2.4 0.8 0.2 0.9

4.1 3.1 0.3 0.9

Percentage of total service exports

Construc­ tion services

Percentage

Communi­ cations services

Transpor­ tation and travel

Service Exports– GDP ratio

Table 5.8 (Continued)

3.1 2.8 3.4 3.7 7.7 16.9 8.9 14.7 0.4 1.0 14.0 10.9 10.0 11.7 3.2 3.2 5.0 7.7 2.2 5.0 21.6 32.2

Financial and insurance services

2.4 3.1 3.0 11.0 0.7 7.4 3.3 6.6 1.0 1.9 4.6 6.3 0.8 2.5 3.6 5.0

6.8 8.9

Computer and information services

6.3 5.3 0.9 17.9 18.3 0.7 1.0 2.5 3.7 4.5 6.0 2.9 7.4 3.5 7.5 1.0 3.9 6.8 5.3

Royalties and license fees

23.2 31.5 24.0 31.9 29.1 32.1 24.3 28.1 28.3 27.4

15.7 17.9 6.6 33.0

0.7 1.5 0.9 30.3 34.3

Other business services

4.3 2.8 3.9 2.9 0.4 0.0 0.1 0.4 2.7 1.3 2.0 1.1 1.3 2.0 1.4 0.5 0.5 1.0 0.2 1.6 1.4

Personal, cultural and recreational services

4.4 0.6 1.7 2.4 1.7   2.3 2.9 3.2 1.3 10.9 5.0 2.1 1.1 0.7 0.6 4.2 2.1 1.0 1.5 1.5 1.4

Government services

2000 2014 2000 2010 2000 2010 2002 2015 2005 2015

11.2 10.9 13.0 14.9 4.7 5.3 3.9 3.6 4.2 4.2

64.1 54.8 65.5 47.3 56.7 42.1 70.9 50.8 88.1 80.1  

1.8 2.7 1.1 2.3 8.3 6.5 3.6 3.3

Source: Author’s calculations based on UN Comtrade (2017)

Czech Republic Hungary   Romania   Russia   South Africa

2.4 3.3 1.6 2.0 1.7 7.8 5.1 7.5 0.3 0.1  

5.6 1.5 2.7 1.0 7.5 1.9 1.9 3.7  

1.4 10.5 2.0 6.0 2.5 11.9 1.0 5.2

0.6 2.1 1.8 5.3 0.2 5.3 1.1 1.5 0.4 0.8

20.0 24.2 20.7 29.0 17.2 23.1 14.8 25.7 7.7 14.8

2.8 0.9 3.5 6.5 4.4 1.1 0.5 0.7 1.1 1.3

1.3 0.1 1.1 0.6 1.5 0.4 1.2 1.6 2.4 2.9

116  A new assessment of the postwar era European countries, data are presented with the ending year of 2009, as after that year, data for the industry of “Other Business Services” were not separated out. The first clear fact is the importance of transportation and travel services in overall service exports across all countries. This current era of globalization with cheaper and faster travel around the world has made the world closer and also led to the growth of the travel industry, which is the largest service export sector for every country listed in the table except for the United Kingdom and India. For the United Kingdom, financial and insurance services were the largest service export industry, and computer and informational services for India. While the latter fact is a well-known comparative advantage for India in services, the fact that it makes up nearly half of service exports for India and that the service exportsto-GDP ratio is nearly 8 percent is likely not as well known. Singapore and Hong Kong have the highest service export-to-GDP ratio, both almost at 50 percent. Both have double-digit share of service exports in financial and insurance services and together with the United States, United Kingdom, Mexico and Brazil seem to be the regional financial centers, at least judging by service exports in the industry. Both also have high shares in other business service exports, which is an important export industry in all countries as well, except Saudi Arabia and Turkey. Statistics for Mexico and Brazil were not available for this industry. The value-added data utilized in the next section include services exports, and they can shed further light on the relative importance of this industry in value-added export demand contribution to growth. A final noteworthy fact in the table is the high number for export share in royalties and license fees for the United States and Japan. This reflects the importance of the creative industries as significant export industries in these two countries. Examination of the service exports indicates another potential level of evolution in the value-added chain of export industries. Some of these knowledge- and skilled-based service industries have become the next rung in climbing the value chain of increasing growth and standards of living in a country.

Demand side growth accounting using value-added exports, 1997–2011 Data on value-added domestic production, or GDP, and value-added exports are crucial to estimating the demand side growth accounting framework outlined in Chapter 2. The World Bank provides data for value-added exports for goods and services for 1997–2011 on its website. Francois et al. (2013) provide documentation for the dataset and an explanation of the Leontief input–output matrices that allow for the value-added data estimation. Utilizing this dataset, this section presents estimates for export contribution to facilitating growth across countries over the period under investigation. These export contribution measures are also compared to the export expansion measures presented in the previous section based on the gross value of exports for merchandise and for goods and services, also from the World Bank. The value-added data are organized by industry; thus, they allow for the demand growth accounting

A new assessment of the postwar era 117 framework separating domestic and export demand contribution down to the industry level, where the increase in total value-added production and overall demand is decomposed into industry-level domestic and export increases in production and demand. This is estimated for a subset of countries in the full sample. As is the case with almost all trade data on an industry level, the data are in nominal terms expressed in millions of dollars. As data are available for a limited number of countries over the longer period, the chapter also presents value-added export percentages of total value-added production across industries for 118 countries for the year 2011. While the ratios do not represent a decomposition of demand over time, since they are value-added measures, they do provide an estimate of the importance of export demand across industries in these countries in the most recent year available. Domestic demand contribution to growth is simply one minus the export demand contribution measure, given the export measure are expressed in shares of overall GDP change. Although applying the accounting framework is straight forward, this is the first instance to the author’s knowledge where such an accounting procedure is applied to capture the relative importance of domestic and external export demand in the economic growth process covering more than a decade of economic growth across countries. Table 5.9 presents the export contribution measures across countries based on value-added export in each country. In contrast to previous export expansion measures, the percentages are all less than 100. One hundred minus the export contribution measure is the domestic demand contribution to supporting economic growth. For China, onefifth of output growth was supported by increased export demand between 1997 and 2011: this increased export demand supported 20 percent of the increase in domestic GDP in the country. For a country the size of China, this is indeed a sizeable impact of the global market for goods and services supporting China’s overall growth. For other countries in East and Southeast Asia, the estimates show that in Hong Kong, Taiwan and Singapore near or over two-thirds of GDP expansion was supported by increased value-added export growth. Korea, Malaysia, Thailand and Vietnam show numbers greater than one-third, pointing to sizeable dependence on export expansion to support economic growth. Numbers for the rest of Asia and Oceania are smaller, but still indicate doubledigit contribution from export demand. Export contribution measures for the Americas and Africa vary considerably across countries and could be compared to those of the rest of Asia outside of East and Southeast Asia. There is a set of faster-growing and higher-exportreliant economies such as Bolivia, Chile, Peru, Malawi, Mozambique, Zambia and Tunisia, where nearly a third of value-added production growth is facilitated by export expansion. In most of the other countries, the average of the export contribution measures is nearer to 20 percent. The US export contribution measure at 10 percent is not insignificant, given the size of the US economy. However, aside from Colombia and Zimbabwe, who experienced a decline in exports, the US measure is the smallest across countries, indicating a lesser relative reliance on exports in the growth process. Argentina’s export measure is the

  10.8 7.4 8.8 8.6 6.1 13.2

  7.0 12.0 10.3

  8.5 10.2

Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Vietnam

South Central Asia Bangladesh India Sri Lanka

West Asia Cyprus Turkey

  9.1 6.7  

  17.6 4.2 2.8 6.1 3.3

East Asia China Hong Kong SAR, China Japan Korea, Rep. Taiwan

Oceania Australia New Zealand  

GDP annual growth rate

Region/Country

17.6 26.5

35.8 15.3

22.6 14.8 13.1

16.2 45.1 15.0 63.6 49.0 46.7

  21.6 77.3 15.5 39.5 67.6

Export contribution measure

  17.4 25.8  

  33.6 16.1

  17.6 14.1 15.6

  17.9 51.3 19.6 63.2 42.3 42.8

  22.0 49.9 13.3 33.9 45.1

Export ValueAdded– GDP ratio

Table 5.9 Demand side growth accounting across regions, 1997–2011

Africa Malawi Mauritius Mozambique Tanzania Uganda Zambia Zimbabwe Morocco Tunisia Botswana South Africa Nigeria

North America Canada US Mexico South America Argentina Bolivia Brazil Chile Colombia Peru Uruguay Venezuela, RB

Region/Country

1.2 8.1 8.4 9.1 9.4 7.6 7.0 9.7

7.8 4.2 8.4

5.3 7.1 9.4 9.0 6.2 12.0 1 8.3 6.6 8.8 9.5 14.1

 

GDP annual growth rate

84.2 31.0 12.0 34.9 7.7 31.5 20.6 15.4

16.0 10.0 23.1

31.7 26.9 43.9 27.3 24.0 44.6 −39.2 23 34.4 29.0 19.5 23.7

 

Export contribution measure

  26.9 35.2 34.1 23.6 17.9 40.3 18.9 23.0 34.1 36.6 22.8 25.8

  20.8 9.9 23.6   19.9 27.3 10.4 31.6 10.1 24.2 20.7 18.2

Export valueadded– GDP ratio

4.7 12.9 6.1 8.9 14.4 12.9 6.0 4.2

Northern Europe Denmark Estonia Finland Ireland Latvia Lithuania Sweden UK 50.6 41.3 24.4 83.6 30.9 39.7 36.9 23.1

8.4 43.6 42.7 18.0 47.6 46.0 28.4 30.4

Source: Author’s calculations based on World Bank (2017b)

25.4 5.3 5.1 5.0 4.0 13.6 6.5 7.7

Western Europe Austria Belgium France Germany Luxembourg The Netherlands Switzerland 8.1 38.6 43.7 27.2 72.3 32.8 39.2 34.6 22.5

18.4 36.2 40.2 20.7 33.5 44.6 33.2 31.5

  15.9 8.9 6.3 4.4 7.7 6.9 7.7 7.7   12.0 10.6 9.4 11.0 11.9 11.1 12.4

Southern Europe Albania Croatia Greece Italy Malta Portugal Slovenia Spain Eastern Europe Bulgaria Czech Republic Hungary Poland Romania Russian Federation Slovak Republic

37.4 46.5 50.9 31.5 32.0 21.7 45.7

21.2 29.0 12.3 23.9 59.5 24.0 41.0 20.4   37.6 43.3 46 29.1 29.7 22.0 44.2

  21.2 30.9 13.4 22.1 58.8 24.8 39.5 20.6

120  A new assessment of the postwar era highest among all countries and an industry-level examination will be interesting to see the source of this larger value, especially given the value-added-exportsto-GDP ratio in the last column shows a much lower number of 19.9 percent. For Europe, the value-added estimates of the export contribution measures are near one-third on average for Western, Northern and Eastern European countries. Germany’s measure is near 50 percent, a large estimate given the size of the German economy. Comparing Germany’s contribution measure to its export expansion measure from the previous section is informative. The expansion measure using merchandise exports was 114.4 percent and was 117.3 percent using gross value of exports of goods, and goods and services, respectively, over double the exports contribution measure given here. The same is true for Singapore where the factor difference is even larger. The export expansion measures nevertheless did suggest a greater reliance on exports in these countries, relative to other countries in the world, which is borne out in the value-added data. However, in the current case, the contribution measure accurately captures the export contribution to the increase in overall demand and production. France in contrast to Germany had only 18 percent of its increase in value-added output supported by exports. The United Kingdom’s estimate of 23.1 percent export contribution is also among the lower values in the region and is more similar to most of the Southern European countries, with the exception of Malta, Slovenia and Russia. The rest of Northern Europe and, for that matter, Eastern European, are generally fast-growing and export-oriented economies similar to Western Europe. Certainly, foreign direct investment (FDI) from the rest of Europe to Eastern Europe, especially from MNEs, plays a key role in this regard. Ireland also has one of the highest export contribution values, but in contrast to Argentina, its value-added export share is more similar to its contribution measures. This raises an interesting feature of the comparison of export contribution measures and the valued-added exports to total value-added ratio in the last column: there is a greater similarity in most cases across countries, Argentina and Hong Kong being the biggest exceptions. This suggests that unlike in the case of export-to-GDP ratios based on gross value of exports, export-to-GDP ratios based on value-added exports can be a good indicator of the reliance on exports in the economic growth process, not only in the period in which the measure is provided, but also over longer periods prior to that time as examination here suggests.

Demand side growth accounting across industries While the previous section examined the breakdown in demand growth between domestic and external (exports) demand for the change in real GDP over more than decade, it is possible to perform the demand side growth accounting at the industry level, given the export value-added data are available at the industry level. This section will present results for select countries covered in the previous section. Table 5.10 shows results from such an exercise for the G7 countries. For each country, there are three rows of demand contribution estimates by industry: the first row represents domestic increases, the second row gives the

Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total

US

1.7 0.8 2.5 1.9 1.3 3.3 2.2 0.2 2.3 2.8 2.2 5.1 0.8 1.7 2.5 3.4 2.2 5.6 1.8 0.5 2.3

Agriculture and processed foods 2.1 0.9 3.0 3.3 5.3 8.6 −2.2 0.3 −1.9 1.4 1.0 2.4 0.1 2.9 3.0 2.2 2.1 4.3 1.2 4.2 5.4

Energy and mining 0.2 0.0 0.2 0.1 0.0 0.1 −1.1 0.0 −1.2 0.3 0.3 0.6 0.0 0.4 0.4 2.5 1.2 3.7 0.3 0.0 0.3

Textile, clothing and footwear

Source: Author’s calculations based on World Bank (2017b)

UK

Italy

Germany

France

Japan

Canada

Demand source

Country

3.5 3.4 6.9 2.9 4.0 6.9 −0.9 5.6 4.7 2.1 6.8 8.9 2.5 20.6 23.1 7.3 9.8 17.1 1.3 2.9 4.2

Higher VA manu­fac­ turing 1.9 0.4 2.4 1.4 0.2 1.6 0.0 0.4 0.3 0.7 0.6 1.3 1.0 1.6 2.6 2.0 1.4 3.4 1.9 0.3 2.2

Other manufac­ turing

Table 5.10 Demand side growth accounting by industry for the G7 economies, 1997–2011

11.3 1.1 12.4 11.8 1.1 12.9 15.5 4.1 19.7 −4.9 −1.3 −6.2 5.7 4.5 10.2 −10.4 −3.1 −13.5 12.9 1.3 14.2

Trade and transporta­ tion 20.8 3.0 23.8 21.8 3.7 25.5 23.8 3.6 27.4 44.9 7.0 51.8 15.9 13.5 29.4 31.6 9.1 40.6 32.7 12.6 45.4

Commercial services 48.5 0.4 48.8 40.8 0.4 41.1 47.1 1.5 48.7 34.7 1.3 36.1 26.5 2.4 28.9 37.6 1.1 38.8 24.7 1.3 26.0

Other services

90.0 10.0 100.0 84.0 16.0 100.0 84.5 15.5 100.0 82.0 18.0 100.0 52.4 47.6 100.0 76.1 23.9 100.0 76.9 23.1 100.0

Total

122  A new assessment of the postwar era share of increase due to exports on a value-added basis, and the third row is the combined percentage of industry value-added increase as a fraction of total valueadded increase in the overall economy. For all G7 countries, the results show the importance of the services sectors in growth. In all countries, the three last columns capturing the contribution of trade and transportation services, commercial services, and other services account for over two-thirds of the increase in total value added, with Japan at the highest at over 95 percent. Much has been made of Japan’s inefficient, but high-quality customer care, service industry: the results here point to its importance in its current low-growth environment and why it is one of the most protected of its domestic service industry. Across all countries, the largest contribution to services growth is in the domestic market and not the international sphere. Contributions from exports in services to overall growth is larger in European nations with the United Kingdom just over 15 percent and Germany at 20.4 percent: this is the sum of the three services industry contributions for demand from exports. In both cases, commercial services, which includes business services, was an important industry with 12.6 of overall contribution in the United Kingdom and 13.5 percent in Germany. Given these numbers and potential growth opportunities, it is not surprising advanced countries have continued to pursue and press for trade liberalization in the services industry in the World Trade Organization (WTO) multilateral negotiations. In higher value-added manufacturing, all countries except the United States in the table have higher contribution to value-added output growth in the industry from exports than from domestic demand with Germany’s exports in higher value-added industry accounting for an incredible 20.6 percent of the increase in overall value added in the economy over the period. Higher value-added manufacturing includes the following industries: chemicals, metals, transportation equipment and machinery. While measures for all other G7 countries are in single digits, the fact that exports contribution is greater than domestic is testament to the importance of the international market in this industry. For the United States, the domestic and export contribution is near equal. The higher valueadded manufacturing contribution for the United Kingdom, while larger than the domestic contribution, at 2.9 percent is lower than for all other countries in the table. We see a similar importance of the service industry in the increase in value added output for the BRICS countries shown in Table 5.11, with the lowest being China at 52.8 percent and the highest South Africa at 78.2 percent. In contrast to the Germany and the United Kingdom in the previous table, the export contribution in the services sectors are much smaller, although the total is 10.6 percent in South Africa. This indicates that domestic demand is much more important in supporting growth in the service sector in the BRICS. This reliance on service sector growth in the domestic economy is one of the main reasons why these large, and in many regards most successful developing economies, are against liberalization of the services sector, despite the insistence of the advanced nations in multilateral negotiations. These countries fear international MNEs

Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total

Brazil

4.6 2.8 7.4 7.6 0.6 8.2 16.2 1.7 17.9 9.1 2.2 11.3 3.5 0.6 4.0

Agriculture and processed foods 2.8 2.9 5.7 3.1 10.8 13.8 4.3 2.0 6.4 6.4 2.3 8.7 0.6 1.9 2.5

Energy and mining

Source: Author’s calculations based on World Bank (2017b)

South Africa

China

India

Russia

Demand source

Country

0.5 0.1 0.6 0.3 0.0 0.3 0.9 0.6 1.4 1.0 1.5 2.5 1.1 0.0 1.0

Textile, clothing and footwear 6.6 2.1 8.8 4.8 2.4 7.1 5.3 2.2 7.5 13.2 8.0 21.2 5.6 6.2 11.7

Higher VA manufac­ turing 1.5 0.3 1.8 1.1 0.4 1.4 1.1 1.1 2.2 2.1 1.4 3.5 2.2 0.4 2.5

Other manufac­ turing 17.6 2.0 19.6 27.7 4.6 32.3 20.5 2.7 23.2 11.4 3.0 14.3 10.1 4.9 15.0

Trade and transporta­ tion

Table 5.11 Demand side growth accounting by industry for the BRICS economies, 1997–2011

20.0 1.6 21.6 8.6 2.3 10.9 10.9 4.3 15.2 12.7 2.8 15.6 28.3 5.5 33.8

Commercial services

34.3 0.2 34.5 25.3 0.7 26.0 25.9 0.3 26.2 22.4 0.4 22.9 29.3 0.2 29.5

Other services

88.0 12.0 100.0 78.3 21.7 100.0 85.2 14.8 100.0 78.4 21.6 100.0 80.5 19.5 100.0

Total

124  A new assessment of the postwar era would step in to capture some of this domestic demand in services and domestic service providers would not be able to compete against them. China has the largest contribution from higher value-added manufacturing with 21.2 percent of overall value-added increase, attributable to the sector. This is consistent with China’s continued industrialization growth strategy. 10.9 percent of the overall increase in value added is supported by exports in the manufacturing sector, and 21.6 percent by increases in total value-added exports. This indicates that 78.4 percent of the increase in valued added is due to domestic demand, suggesting that while the external sector is important for supporting growth, it is not overly reliant on the export sector: the fact that China’s growth rate during the Great Recession of 2008 was over 9 percent is testament to this. South Africa also had double-digit contribution from higher value-added manufacturing with exports demand surpassing domestic demand increases. For the other BRICS countries, exports in manufacturing are significantly lower and may suggest a continued reliance on an import-substitution-type policies, but certainly does not reflect a successful export-oriented one. The table also shows in all BRICS countries except for South Africa, agriculture and energy sectors had double-digit contribution to increased value added. The domestic sector was the major source of this growth, with the exception of Russia, where energy sector’s exports overall contribution was 10.8 percent. We now turn to an examination of other the fast-growing and high-export contribution countries across regions shown in Table 5.9. First, in Asia, measures of export contribution by industry in Table 5.12 show the service sector was the major source of total value-added increase over the period with the exception of Vietnam, whose agriculture and energy sector accounted for 45.4 percent: in Vietnam, energy exports accounted for 13.9 percent. Hong Kong, Taiwan and Singapore have also been successful in expanding their export-oriented growth strategy to commercial services, similar to Germany and the United Kingdom. Export contribution numbers here are all in double digits, with Hong Kong the highest at 26.1 percent. These economies are now at the cutting edge of export-oriented growth in the highest value-added industries. In addition, for Hong Kong and Singapore’s exports in trade and transportation, services are extensive with 40.2 percent and 20 percent of overall value-added increase being attributed to each, respectively. The most telltale sign of an export-oriented growth strategy across all these fast Asian economies are the export contribution measures in higher-value-added manufacturing: in every single country, the export measure is greater than the domestic demand contribution measure. In five of the seven countries, the measure is in double digits, and in four over 20 percent, 40.4 percent in Taiwan. Vietnam, although the latecomer, is on its path of pursuing the Asian model of development. Turning to the fast-growing and high-export-reliant nations in South America and Africa, Table 5.13 shows that Bolivia, Chile and Zambia are similar to other nations with services accounting for over 50 percent of valued-added increase: in Zambia, the number is very high at 83.4 percent, with 33.3 percent exports contribution in the trade and transportation services industry. Peru, Malawi

Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total

Hong Kong

1.5 0.5 2.0 −0.2 0.3 0.2 −0.1 0.1 0.0 2.6 7.3 9.9 0.1 0.2 0.4 5.9 7.2 13.1 12.5 9.9 22.3

Agriculture and processed foods 0.4 3.8 4.2 −0.9 2.2 1.3 −1.0 2.1 1.1 5.9 8.9 14.8 0.2 0.6 0.8 2.8 4.6 7.4 9.2 13.9 23.1

Energy and mining

Source: Author’s calculations based on World Bank (2017b)

Vietnam

Thailand

Singapore

Malaysia

Taiwan

Korea

Demand source

Country

1.7 0.8 2.4 0.0 −0.4 −0.4 −0.1 0.2 0.1 0.1 0.1 0.2 0.0 0.0 0.0 1.3 1.0 2.2 0.5 5.7 6.1

Textile, clothing and footwear 0.4 3.2 3.6 3.0 21.4 24.4 1.2 40.4 41.6 3.4 10.7 14.2 1.2 27.5 28.7 2.9 22.2 25.1 3.4 8.0 11.4

Higher VA manufac­ turing 0.5 1.2 1.7 0.2 0.5 0.7 0.2 1.6 1.8 0.2 1.8 2.0 0.2 0.4 0.5 0.8 1.3 2.1 1.0 3.0 4.0

Other manufac­ turing 9.7 41.2 50.9 8.2 6.8 14.9 6.0 8.6 14.6 13.1 9.3 22.4 8.4 20.0 28.4 21.9 8.8 30.7 8.1 2.1 10.2

Trade and transporta­ tion

Table 5.12 Demand side growth accounting by industry for select Asian economies, 1997–2011

3.9 26.1 30.1 15.2 5.3 20.6 −3.9 13.2 9.3 24.7 5.7 30.5 15.8 13.2 29.0 3.2 3.3 6.5 4.4 3.4 7.9

Commercial services

4.6 0.5 5.1 35.0 3.3 38.3 30.1 1.4 31.5 4.8 1.2 6.1 10.6 1.7 12.3 12.2 0.7 12.9 14.2 0.8 15.0

Other services

22.7 77.3 100.0 60.5 39.5 100.0 32.4 67.6 100.0 54.9 45.1 100.0 36.4 63.6 100.0 51.0 49.0 100.0 53.3 46.7 100.0

Total

126  A new assessment of the postwar era and Mozambique have lower service sector contribution, similar to Vietnam, and for the same reason, that agriculture and energy either separately or combined account for a large fraction of the increase in value added. Bolivia also has a high value-added content to the increase in value added from the domestic sector in agriculture and from exports in energy and very little manufacturing exports. Chile, Peru and Tunisia show the closest possibilities to implementing an export-oriented growth strategy: all have combined contributions to valueadded increase from the manufacturing sector in double digits, and in all cases, exports contribution in higher value-added manufacturing is greater than the domestic demand contribution. The examination of RTAs in the last chapter in fact showed that Peru and Chile have been two of the most active in establishing RTAs in South America, and Tunisia was among the first to establish RTAs in North Africa with the EU, EFTA and Turkey. Argentina presents a stark contrast to all other countries in the demand growth accounting by industry decompositions. Table 5.9 showed Argentina had a highexport contribution number at 84.2 percent, but its annual average growth rate in GPD was low at 1.2 percent. In this case, the negative contributions domestically across many of the industries shown in Table 5.13 indicates a reduction in domestic value added in these industries over the period. Overall domestic value added did not fall as there were offsetting increases in trade and transportation services and other services. In all industries except for textiles, exports actually increased as well. This is an example again of one of the shortcomings of the dataset being in nominal terms. In fact, the Argentine currency depreciated from 2001 to 2011, and given the dataset is in dollars, this results in lower dollar amounts in the final period under examination in 2011 due to currency movements. In PPP terms, Table 4.5 showed Argentina’s real GDP increased by 6.6 percent on an annual compound average rate between 1990 and 2010. Nonetheless, in dollar terms, the contribution measures in Table 5.13 are accurate changes of domestic and export contribution to changes in nominal value added. Table 5.14 shows export contribution estimates for European countries, including four Eastern European ones. The numbers look similar to those seen earlier for Germany and fast-growing Asian nations. The service sector again dominates accounting for over 50 percent of value-added increase across all countries. There is a greater export orientation in this service sector expansion with export increases in the commercial services industries accounting for double-digit percentages of overall increase with Ireland being the highest at 34.2 percent. This is consistent with Ireland’s policy to provide a low tax environment attracting some of the world’s largest MNEs to set up location there. It was only Hong Kong, Taiwan and Singapore in Asia who had similar numbers to the broad range of countries shown in Table 5.14 who have such levels. The large number in these other European countries suggests one of the powerful synergies of the EU style of integration is that services exports are larger and more important, especially in high-value-added sectors. Another similar feature exhibiting the strong implementation of an export-oriented growth strategy is the large contribution of higher-value-added manufacturing industry and,

Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total

Argentina

−65.8 26.3 −39.5 14.4 4.0 18.4 1.8 3.6 5.4 13.4 4.6 18.0 31.1 10.9 42.0 16.9 4.9 21.8 5.8 2.9 8.7 11.4 3.6 15.0

Agriculture and processed foods −13.5 10.4 −3.1 6.2 19.3 25.5 1.5 9.6 11.1 3.4 8.9 12.4 0.1 7.7 7.8 4.7 24.1 28.8 2.2 2.1 4.3 4.7 6.4 11.1

Energy and mining

Source: Author’s calculations based on World Bank (2017b)

Tunisia

Zambia

Mozambique

Malawi

Peru

Chile

Bolivia

Demand source

Country

−21.6 −0.5 −22.0 0.7 0.2 0.9 −0.1 0.0 −0.1 2.7 0.8 3.5 1.3 −0.1 1.2 0.5 0.0 0.5 0.6 0.1 0.7 1.1 2.9 4.0

Textile, clothing and footwear −66.5 12.5 −54.0 0.5 0.6 1.1 2.3 9.3 11.6 7.0 10.4 17.4 −1.1 1.9 0.8 0.4 5.5 6.0 −0.3 2.3 2.0 1.9 5.4 7.3

Higher VA manufac­ turing −1.2 1.5 0.3 1.2 0.2 1.5 0.8 1.3 2.1 5.6 0.9 6.5 −2.1 −0.3 −2.5 2.3 0.5 2.7 0.3 0.5 0.8 1.4 0.6 2.0

Other manufac­ turing 47.1 13.2 60.3 14.4 4.7 19.1 9.6 4.2 13.8 4.7 1.2 6.0 −17.1 −2.9 −19.9 9.6 6.3 15.9 12.4 33.3 45.7 14.4 12.3 26.7

Trade and transporta­ tion

Table 5.13 Demand side growth accounting by industry for select Americas/African economies, 1997–2011

−60.5 13.4 −47.2 3.1 1.3 4.4 18.8 6.5 25.4 17.2 4.4 21.6 26.9 13.7 40.6 3.7 1.7 5.4 1.9 3.0 4.9 8.2 3.1 11.3

Commercial services

198 7.3 205 28.5 0.6 29.2 30.3 0.3 30.6 14.4 0.3 14.7 29.2 0.8 30.0 18.0 0.8 18.8 32.4 0.4 32.8 22.6 0.0 22.5

Other services

15.8 84.2 100.0 69.0 31.0 100.0 65.1 34.9 100.0 68.5 31.5 100.0 68.3 31.7 100.0 56.1 43.9 100.0 55.4 44.6 100.0 65.6 34.4 100.0

Total

Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total Domestic exports total

Austria

1.2 2.9 4.1 0.5 3.1 3.6 0.0 2.9 2.9 0.8 3.8 4.6 5.0 2.4 7.4 3.0 1.9 4.8 3.4 3.9 7.3 3.8 1.8 5.5

Agriculture and processed foods 0.4 3.0 3.4 0.2 3.5 3.7 0.0 8.7 8.6 0.6 1.3 1.9 −4.0 −0.8 −4.8 3.1 4.9 8.0 1.7 5.1 6.8 2.0 4.6 6.6

Energy and mining 0.3 1.1 1.4 −0.1 0.1 0.0 −0.3 0.7 0.4 0.0 0.1 0.1 0.8 −0.2 0.6 0.3 0.7 1.0 0.3 0.3 0.5 −0.2 1.4 1.2

Textile, clothing and footwear

Source: Author’s calculations based on Francois et al. (2013)

Slovak Rep

Hungary

Czech Rep

Malta

Ireland

Denmark

Belgium

Demand source

Country

0.4 17.1 17.6 −0.5 15.5 15.0 0.7 13.9 14.6 −1.9 33.0 31.0 −6.1 35.0 28.9 3.3 23.1 26.5 0.7 24.3 24.9 0.8 21.4 22.2

Higher VA manufac­ turing 1.4 3.4 4.7 0.4 1.4 1.7 0.5 1.6 2.2 0.2 0.8 1.1 0.9 1.9 2.8 1.2 3.0 4.3 1.2 2.1 3.3 1.1 2.1 3.1

Other manufac­ turing 1.1 4.4 5.5 −9.2 0.6 −8.6 −9.9 0.3 -9.6 1.3 10.2 11.5 8.3 −3.4 4.9 5.9 3.9 9.8 −2.8 1.8 −0.9 2.4 3.3 5.7

Trade and transporta­ tion

Table 5.14 Demand side growth accounting by industry for select European economies, 1997–2011

18.1 9.9 28.0 28.5 15.5 44.0 33.7 18.2 51.9 2.3 34.2 36.6 3.9 24.0 27.9 16.5 8.2 24.7 15.7 11.8 27.5 18.9 9.5 28.4

Commercial services

33 1.8 35 37.5 3.0 40.5 24.7 4.3 29.0 13.0 0.2 13.3 31.7 0.6 32.3 20.1 0.8 20.9 28.9 1.7 30.7 25.6 1.7 27.3

Other services

56.4 43.6 100.0 57.3 42.7 100.0 49.4 50.6 100.0 16.4 83.6 100.0 40.5 59.5 100.0 53.5 46.5 100.0 49.1 50.9 100.0 54.3 45.7 100.0

Total

A new assessment of the postwar era 129 in all cases, exports accounting for almost the entire amount of the industry’s contribution. These numbers confirm that Europe is the preeminent model of the largest collection of national economies pursuing an export-oriented growth strategy, and a very successful one at that.

Value-added export distribution across industries, 2011 As previously mentioned, one of the interesting results found in the demand side growth accounting exercise in Table 5.9 was that the contribution of exports to overall increases in value added over the period 1997 to 2011 was similar to the value-added export to total value-added output ratio. This section provides data for this ratio across 118 countries as well as the industry distribution of valueadded exports. This was accomplished by summing up total value added and total export value added in the input–output matrices in the value-added export database (see Francois et al., 2013 for specific documentation on the dataset). The percentages give a measure of the export orientation of a country at a point in time, in this case 2011. Not surprisingly, for many East and Southeast Asian countries large overall exportto-total-value-added ratios and large percentages in machinery and equipment are shown in Table 5.15 for China, Hong Kong, Korea, Taiwan, Malaysia, Singapore, Thailand and Vietnam: the Philippines has a large share in machinery, but its export ratio is smaller. The only other Asian nations in double-digit percentage of exports in machinery are in West Asia, Israel and Turkey. For other higher valueadded manufacturing exports, Japan, Korea and Turkey have the highest ratios for transportation equipment, and Japan, Korea, Taiwan, Indonesia, Singapore, Thailand, Sri Lanka, Israel, Jordan, Qatar and Saudi Arabia have double-digit numbers in chemicals. Lao PDR, Kazakhstan, Kyrgyz Republic, Armenia, Bahrain, Georgia, Turkey, United Arab Emirates and Australia have double digits for metal exports. Combined China, Japan, Korea and Taiwan all have over 75 percent of value-added exports in manufacturing industries with the majority of this in higher-value-added industries. Textile manufacturing is the first rung of industrial development in many cases, and China, Albania, Cambodia, Vietnam, Nepal, Pakistan, Sri Lanka, Jordan and Turkey all have double-digit ratios. Of course, the Asian development strategy is to transition from low-value-added textile to higher-value-added manufacturing sectors over time, as China has and continues to do most recently. The large ratios for Cambodia, Nepal, Pakistan and Sri Lanka suggest they have not been successful in this next step. This is a place where coordinated aid and assistance could make a significant difference with large dividends in poverty reduction. The United Nations Sustainable Development Goals have highlighted industrialization as a target, presumably based on lessons from Asia; of course, industrialization in a more sustainable fashion than has been pursued worldwide thus far. The table also shows the many countries in Asia and Oceania with higher dependence on agriculture and energy exports. Table 5.16 gives industry estimates for the Americas. In the Americas, the United States can be used as an example of how the percentages of valued-added

22.0 49.9 13.3 33.9 30.1 45.1

South Central Asia  Bangladesh 17.6 India 14.1 Iran, Islamic 23.5 Rep. 1.2 11.0 66.0

24.1 1.3 35.6 12.3 7.8 2.0 4.0 19.2

18.6 7.6 12.0 13.6 13.2 1.0 18.3 25.5

4.6 12.0 3.7

8.8 86.5

3.6 0.3 1.9 2.3 66.5 2.0

5.1 0.1

3.2 0.6 0.6 0.9 7.2 1.0

82.4 12.1 0.5

9.2 62.2 8.5 1.5 3.8 0.3 5.6 17.6

18.5 0.4

17.9 7.6 0.9 2.6 2.2 5.0

0.7 9.6 7.0

16.5 6.9 1.3 13.3 4.5 16.1 21.3 5.0

0.6 2.2

8.7 2.6 11.3 10.9 0.2 11.0

Percentage of total value-added exports

Percentage

0.5 5.3 1.7

7.1 0.5 20.3 4.5 5.2 1.5 4.3 2.5

7.7 0.4

7.1 5.0 7.5 7.0 6.2 9.4

0.5 3.7 0.3

2.9 0.6 0.0 1.5 2.4 1.6 6.5 1.3

0.8 0.0

4.0 0.0 20.0 20.3 0.2 2.9

0.4 5.8 0.6

8.5 0.1 0.5 32.4 41.9 31.3 20.0 11.4

2.4 0.2

38.3 4.4 38.9 33.7 0.1 56.2

0.4 12.0 0.1

8.0 1.6 12.7 5.8 3.4 1.2 4.7 9.9

2.4 0.6

9.2 2.2 1.9 1.5 0.1 2.9

1.1 8.7 10.4

2.4 9.9 5.1 8.1 8.2 26.7 10.4 2.1

33.8 5.4

5.4 54.6 11.8 12.6 14.4 4.1

2.7 18.9 8.1

1.8 7.7 2.7 5.6 8.6 17.0 4.1 4.1

17.8 3.1

1.8 22.4 3.5 5.2 2.2 4.5

5.5 0.9 1.7

0.8 1.6 1.2 1.4 1.0 1.2 0.9 1.3  

  2.3 1.1

0.8 0.3 1.7 3.0 0.8 1.0

Trade and Commercial Other Textile, Chemi­ Metals Transpor­ Machinery Other tation manufac­ transporta­ services services clothing cals equip­ment turing tion and footwear

Agriculture Energy and and processed mining foods

VA exports share of total VA

Southeast Asia  Albania 21.2 Brunei 44.8 Darussalam Indonesia 39.2 Cambodia 17.9 Lao PDR 24.6 Malaysia 51.3 Philippines 19.6 Singapore 63.2 Thailand 42.3 Vietnam 42.8

East Asia China Hong Kong Japan Korea, Rep. Mongolia Taiwan

Region/ Country

Table 5.15 Value-added exports by industry in 2011, Asia

15.4 47.4

45.7 7.2

  17.0 88.7 36.3 0.8 12.0 6.7 9.4 79.4 75.0 61.7 78.7 6.4 51.0

2.5 4.9 4.2

60.9 14.7

0.5 2.2

  1.7 0.2 1.8 2.2 1.5 1.5 11.6 0.0 0.1 0.1 0.4 16.5 1.5

23.1 48.3 32.7

0.1 1.9

Source: Author’s calculations based on World Bank (2017b)

  17.4 25.8

Oceania Australia New Zealand

  18.1 2.6 1.7 6.7 14.2 3.8 8.6 0.1 1.4 0.1 0.9 11.2 2.6

16.8 20.4 26.6

5.6 12.1 15.6

  14.1 33.5 39.1 33.6 18.3 24.6 32.1 48.4 40.1 24.6 36.3 16.1 28.7

3.6 16.7

26.6 30.8

West Asia Armenia Azerbaijan Bahrain Cyprus Georgia Israel Jordan Kuwait Oman Qatar Saudi Arabia Turkey United Arab Emirates

Kazakhstan Kyrgyz Republic Nepal Pakistan Sri Lanka

3.2 3.4

  0.6 0.7 4.3 5.5 6.1 22.3 32.0 5.3 11.4 14.0 10.2 7.2 5.0

1.1 2.7 11.2

5.4 3.6

12.7 5.6

  21.4 0.6 26.1 3.1 21.8 3.4 6.6 0.6 5.1 3.1 2.0 10.7 10.7

9.5 3.0 0.3

20.2 36.8

1.6 1.2

  0.7 0.1 0.8 3.5 3.0 1.8 0.5 0.1 0.2 0.6 1.3 10.4 2.4

0.1 0.3 0.7

0.1 1.3

3.6 5.0

  2.5 0.3 2.0 3.9 3.2 19.4 3.6 0.1 0.7 0.7 1.0 12.2 8.6

0.1 2.4 1.9

0.3 1.8

2.0 6.4

  5.2 0.2 1.8 2.2 0.9 9.7 3.3 0.1 0.7 0.4 0.5 3.6 3.6

2.7 3.3 4.2

0.3 0.5

6.8 11.8

  18.1 4.3 6.6 20.6 25.5 14.0 14.9 6.3 2.9 9.2 1.6 14.4 6.7

10.3 5.1 11.2

6.4 14.9

6.5 7.4

  8.5 1.7 15.2 39.7 4.4 15.6 4.4 6.3 2.0 8.2 2.8 6.0 6.7

17.4 3.0 6.2

1.5 4.8

  1.8 2.4

  6.1 0.6 3.3 11.8 7.4 1.9 5.2 1.6 0.4 2.0 0.5 1.3 1.3

16.4 6.6 0.9

1.2 2.9

20.8 9.9

  38.6 22.8 22.2 33.6 23.6 43.9 24.2

  19.9 27.3 10.4 31.6 10.1 22.1 26.2 24.2 20.7 18.2

Central America Costa Rica El Salvador Guatemala Honduras Mexico Nicaragua Panama

South America Argentina Bolivia Brazil Chile Colombia Ecuador Peru Paraguay Uruguay Venezuela, RB

52.3 19.7 31.8 16.6 21.2 38.9 17.8 61.6 49.9 0.4

27.4 26.1 45.7 41.1 7.9 42.3 8.0

10.9 9.9

10.4 52.4 26.4 22.0 34.6 44.2 31.7 22.1 3.4 89.1

1.8 1.5 11.4 3.9 13.1 1.0 1.8

21.1 4.6

1.2 1.7 1.8 0.2 3.7 1.4 4.4 2.6 5.0 0.2

1.7 33.9 12.4 24.7 1.9 26.0 8.4

0.6 1.2

7.1 2.2 5.8 3.9 8.8 2.3 3.6 1.9 7.6 2.3

6.7 7.6 10.4 3 5.4 0.5 35.4

10.5 15.1

5.2 14.2 7.3 37.8 12.8 0.8 33.3 1.0 1.6 3.8

2.4 4.6 4.4 3.8 8.4 7.3 3.6

10.6 6.1

7.5 0.1 6.4 0.5 1.4 1.4 0.2 0.0 1.9 0.1

0.3 0.5 0.3 1.1 19.6 5.0 3.4

12.0 11.2

2.4 0.2 5.6 1.0 2.5 1.5 0.8 0.4 1.0 0.2

39.3 3.1 1.6 7.8 32.9 10.4 12.2

8.6 22.8

1.3 2.1 4.3 6.3 3.4 1.8 1.6 1.4 10.6 0.1

3.4 6.4 2.9 6.4 3.3 1.0 2.7

8.4 4.4

5.4 4.1 3.8 8.8 7.1 5.7 3.8 4.2 11.1 2.4

5.5 9.0 1.8 3.0 3.5 3.0 6.4

5.8 6.7

6.0 2.5 5.7 2.4 3.5 1.3 2.5 3.3 5.7 0.9

9.6 6.0 6.1 3.4 3.4 2.1 14.6

10.0 13.1

  1.2 0.8 1.1 0.5 0.9 0.8 0.4 1.4 2.1 0.5

  1.7 1.3 3.1 1.8 0.6 1.4 3.5

1.3 4.9

Trade and Commercial Other Agriculture Energy Textile, Chemi­ Metals Transpor­ Machinery Other tation manufac­ transporta­ services services and and clothing cals equipment tuing tion processed mining and foods footwear

Percentage Percentage of total value-added exports

VA Exportsto-GDP ratio

North America Canada US

Region/Country

Table 5.16 Value-added exports by industry in 2011, Americas

18.1

12.3 9.0 2.3

  18.0

20.3 10.5 60.6

3.6 8.7 49.6

2.3

Source: Author’s calculations based on World Bank (2017b)

Carribean Dominican Republic Jamaica Puerto Rico Trinidad and Tobago 0.1 1.2 0.1

9.9 0.4 17.0 34.5

6.4 12.8 4.1 5.1

5.9 0.3 11.6 0.7

0.2 0.3 22.5 0.6

12.3 0.6 3.8 0.4

2.3 35.6 7.5 3.8

31.1 27.6 10.4 2.5

8.1

6.6 4.2 0.3

  3.2

134  A new assessment of the postwar era exports distribution across industries given in this section can be compared to the exports contribution measures by industry presented in the previous section. Tables 5.9 and 5.10 showed that exports contribution to valued-added increase in the United States between 1997 and 2011 was 10 percent. The export ratio in Table 5.16 of 9.9 percent is right at the same level. The sum of export percentages in Table 5.16 for the four higher value-added manufacturing industries in the United States indicates that these industries make up 55.2 percent of valueadded exports. While the United States is not as reliant on exports to support growth, over half of its value-added exports are in higher-value-added manufacturing industries. Multiplying this number by the exports to value-added ratio in the first column of the table suggests that 5.5 percent of overall value added in the United States in 2011 was from exports in the higher-value-added industries (0.552 x 0.099 = 0.055). Table 5.10 showed the contribution of higher-valueadded exports made up 3.4 percent of the overall increase in value added. Again, this suggests the 2011 numbers can provide a good approximation to the sectors contribution to overall value-added (GDP) increase over the last decade as it is in a similar range. Table 5.16 shows that value-added exports in Latin American nations are generally higher in agriculture and energy. In terms of manufacturing exports, Central American nations focus more on textiles and machinery with higher percentages here, while South American nations have higher percentages in metals. Caribbean nations are more spread in terms of focus in manufacturing industries in exports. In Central America, Costa Rica, El Salvador, Mexico, Nicaragua and Panama all have over 50 percent of exports from the manufacturing sector. No country in South America has over 50 percent in manufacturing exports, although Chile and Peru are closest at 49.7 and 43.8 percent, respectively. Peru and Chile also have higher percentages in higher-value-added manufactures, whereas several Central American countries have higher percentages in textiles and suggests they have not been able to move to the higher-value-added manufacturing export sector. Table 5.17 gives industry ratios for Europe. For Germany, we can again compare the export ratio and the export percentages across industry here to previous estimates of export contributions to increased output in previous tables. While the export ratio of 33.5 shown in Table 5.17 underestimates the contribution of 47.6 contribution of exports to total value-added increase in Tables 5.9 and 5.11, it does indicate significant reliance on exports to support growth. Summing up the percentages for the four higher value-added manufacturing industries for Germany in 5.17 shows that 66.8 percent of exports in 2011 were from those industries. Multiplying that by the export ratio suggests 22.4 percent of all valued added is from exports in the industry. Table 5.11 showed that in fact between 1997 and 2011, 20.6 percent of value-added increase came from increases in exports in this industry. This again indicates that the industry export ratio serves as a good approximation for the contribution of exports in that industry to increases in value added over time. For Europe’s exports distribution across industries, we see similar patterns to East Asia, but with some important differences. In Table 5.17, there is a vastly

13.0 8.3 3.3 7.0 16.7 19.7 3.1 3.2 4.6

9.6 15.5 7.7

  38.6 43.7 27.2 72.3 32.8 39.2 32.3 34.6 22.5

Northern Europe Denmark Estonia Finland Ireland Latvia Lithuania Norway Sweden United Kingdom

  Southern Europe Croatia 30.9 Greece 13.4 Italy 22.1

6.4 9.3 13.0 5.7 3.0 17.6 4.7

36.2 40.2 20.7 33.5 44.6 33.2 31.5

4.8 5.2 3.9

7.6 5.4 4.3 0.7 7.4 8.3 52.9 5.2 7.7

3.0 7.0 3.4 2.6 1.8 7.4 2.1

4.2 6.4 9.4

2.3 3.8 1.0 0.4 3.5 4.0 0.2 1.3 1.8

2.6 2.8 2.8 2.3 1.7 1.0 0.9

6.1 7.5 12.0

12.0 7.0 10.0 41.2 8.2 14.6 4.2 11.1 12.1

10.6 23.4 17.2 15.8 6.3 15.0 22.7

3.9 9.7 9.1

3.7 7.8 11.0 0.9 5.1 3.8 4.2 7.5 3.9

9.6 6.7 6.7 7.8 10.7 7.3 13.7

4.2 1.7 7.3

1.8 4.5 2.9 0.3 3.4 3.9 1.7 10.4 8.6

6.6 6.4 14.9 17.0 4.2 4.1 1.5

10.4 5.3 24.4

14.5 12.6 22.4 12.2 9.0 8.2 5.1 20.7 12.2

19.7 11.2 15.5 26.2 7.1 12.2 25.0

6.6 2.8 6.2

3.8 13.4 20.5 1.0 14.9 11.1 1.9 11.2 3.5

8.6 4.6 4.5 4.8 2.4 5.3 4.8

26.9 17.5 7.9

15.5 19.8 13.8 6.3 21.5 21.1 17.2 13.6 13.0

17.0 13.3 10.6 8.0 14.6 12.3 7.2

20.7 23.4 10.6

20.8 14.9 9.8 29.4 8.9 4.3 8.7 14.8 30.7

13.8 13.2 9.6 8.1 43.7 15.4 14.8

(Continued)

  2.5 4.9 1.5

  5.0 2.4 1.0 0.4 1.2 1.0 0.7 1.0 1.8

1.9 2.1 1.9 1.8 4.5 2.3 2.6

Trade and Commercial Other Agriculture Energy Textile, Chemi­ Metals Transpor­ Machinery Other tation manufac­ transporta­ services services and and clothing cals equipment turing tion processed mining and foods footwear

Percentage Percentage of total value-added exports

VA Exportsto-GDP ratio

Western Europe Austria Belgium France Germany Luxembourg The Netherlands Switzerland

Region/Country

Table 5.17 Value-added exports by industry in 2011, Europe

  25.0 37.6 43.3 46.2 29.1 29.7 22.0 44.2 34.1

Eastern Europe Bulgaria Belarus Czech Republic Hungary Poland Romania Russian Federation Slovak Republic Ukraine

17.3 5.3 5.2 10.8 10.9 8.5 3.6 5.1 19.5

3.1 9.0 5.7 12.4 10.3 25.9 5.9 4.2 4.2 4.6 62.0 6.3 14.3

0.6 6.5 4.5 4.0

Source: Author’s calculations based on World Bank (2017b)

58.8 24.8 39.5 20.6 8.2 3.9 2.9 2.3 2.9 10.6 0.2 4.6 1.2

2.0 10.2 3.7 4.0 6.3 14.9 9.5 13.3 11.6 7.9 7.2 7.9 6.1

6.7 7.5 17.7 11.6 11.4 5.0 9.8 4.5 10.6 9.6 11.1 11.5 19.6

1.0 6.2 11.1 7.5 2.5 3.9 13.8 11.3 12.9 12.6 1.0 17.1 5.5

1.2 7.2 7.4 11.4 11.8 7.8 28.5 29.3 17.4 22.7 1.5 26.4 6.5

43.1 10.4 19.3 9.1 3.2 3.2 8.0 4.3 10.6 6.7 2.6 6.5 2.4

3.4 10.1 9.3 3.9

16.8 25.5 9.8 8.3 10.8 7.4 5.9 8.6 17.0

4.6 16.5 12.1 15.0

10.2 3.3 5.9 10.4 6.7 8.8 3.8 5.4 5.7

32.9 13.2 8.0 18.4

  1.9 1.2 0.5 1.3 1.5 0.7 1.1 0.6 2.2

1.4 3.4 1.3 2.6

Trade and Commercial Other Agriculture Energy Textile, Chemi­ Metals Transpor­ Machinery Other tation manufac­ transporta­ services services and and clothing cals equipment turing tion processed mining and foods footwear

Percentage Percentage of total value-added exports

VA Exportsto-GDP ratio

Malta Portugal Slovenia Spain

Region/Country

Table 5.17 (Continued)

A new assessment of the postwar era 137 wider number of nations exhibiting export-oriented growth strategies. There is also a greater balance and spread across these nations in terms of higher export sectors. These include the four higher-valued manufacturing export industries and much more in the commercial services industry than observed across East and Southeast Asia, again likely reflecting a benefit of the EU style of deeper integration. Italy and Portugal also have near or higher-than-doubledigit percentages of exports in textiles, but it is widely known that this reflects a significant high-end fashion industry. Russia and Norway are the two largest exporters of energy with over 50 percent of value-added exports coming from that industry. Table 5.18 gives value added by industry for nations in Africa. The first point is the reliance of many nations in the continent on primary product industry exports and/or energy. None of the countries have combined numbers in single digits for the primary product sectors, and few have low single-digit ones. Several countries do have higher percentages in some high value-added manufacturing sectors, such as Mozambique, Tanzania, Zambia, Tunisia, Namibia, South Africa, Burkina Faso and a few others. For many of these countries, metal products exports have a high percentage of total exports and again reflect the natural resources in the country. Tunisia is the only country with double-digits export percentages in machinery.

Comparing eras of increased trade and interdependence Table 5.19 puts export expansion estimates and export contribution estimates side by side for the different datasets used where a comparison can be made for larger advanced countries. Perhaps the most surprising result is the similarity in many nations across the two eras of globalization. It could be that value-added estimates if available for the nineteenth century would be much lower, but estimates comparing value-added export contribution and export expansion measures based on gross value of exports for the most recent period are not substantially different. The only exceptions are the Netherlands and Germany, whose numbers show values similar to Singapore in the current era, indicating that in these cases, gross value export measures contain substantial non-value-added components. The fact that few countries display this trend suggests comparisons across eras is a meaningful exercise to ascertain the role of exports in different periods. It is still the case that most estimates for Europe and North America are larger in the most recent period, although not by large degrees. The exceptions are the United Kingdom, which has similar values, and Taiwan. For Taiwan, the numbers suggest a high reliance on exports to support growth, although under very different circumstances: in the nineteenth century, it was as a colony of Japan. To examine the issue more widely, Table 5.20 compares the valued-added export contribution measures to the expansion measures using Fouquin and Hugot (2016), which contains a larger set of countries in the nineteenthcentury sample. Again, a striking feature is the similarity between the importance of exports in this wider set of countries in supporting growth efforts.

20.9  

11.6 17.3 20.7 26.9 35.2 34.1 13.2 23.6 17.9 40.3 18.9  

Botswana Namibia South Africa

36.6 34.5 22.8

1.2 21.6 8.7

11.1 16.4 9.5

18.0

57.1 43.0 22.7 16.8 16.8 55.7 21.4 31.3 39.1 9.4 38.3

69.8 25.1 19.8

23.3 10.6 11.7

32.8

1.4 4.8 37.8 39.2 14.0 21.1 55.2 16.4 36.1 3.6 16.8

0.4 1.2 1.2

9.6 15.5 18.2

0.3

5.6 5.1 14.0 0.3 16.8 2.0 2.3 4.7 2.2 0.3 2.2

0.4 13.4 6.6

6.8 15.0 6.7

4.6

0.3 5.9 2.0 0.3 5.6 7.1 0.7 1.8 1.8 1.7 1.4

Percentage of total value-added exports

Percentage

6.5 17.0 32.9

7.8 2.9 2.4

2.4

2.8 1.3 0.2 32.3 0.6 0.3 0.5 19.1 1.6 78.5 15.6

0.8 3.9 6.6

0.2 1.4 3.1

0.5

0.4 0.2 0.1 0.4 1.2 0.4 0.5 0.6 1.0 0.2 0.3

0.8 2.5 8.2

2.2 9.5 19.9

1.6

0.5 1.5 0.0 1.2 3.8 0.6 0.7 1.3 1.0 3.4 1.6

7.5 5.0 4.4

1.4 1.3 2.2

10.2

0.3 2.1 2.7 1.8 2.6 0.9 0.4 2.0 0.9 0.5 3.0

4.5 4.4 5.0

23.2 14.1 18.3

19.1

19.3 17.6 8.9 4.3 20.5 4.7 8.2 13.1 6.8 1.6 8.0

6.0 4.1 5.0

10.1 6.8 4.3

7.6

5.9 6.7 5.5 1.8 14.6 5.8 1.9 7.4 3.5 0.7 11.2

2.0 1.8 1.6

4.3 6.4 3.7  

3.0  

6.4 11.7 6.0 1.6 3.5 1.4 8.3 2.1 5.8 0.2 1.6  

Trade Textile, Chemi­ Metals Transpor­ Machinery Other Commer­ Other tation manufac­ and cial services clothing cals equip­ment turing transpor­ services and footwear ta­tion

Agriculture Energy and and processed mining foods

VA Exportsto-GDP ratio

North Africa Egypt, Arab Rep. 15.6 Morocco 23.0 Tunisia 34.1   Southern Africa

Middle Africa Cameroon

East Africa Ethiopia Kenya Madagascar Mozambique Mauritius Malawi Rwanda Tanzania Uganda Zambia Zimbabwe

Region/Country

Table 5.18 Value-added exports by industry in 2011, Africa

0.6 0.4 0.9 1.5 0.1 1.1 0.8 0.5

0.1 0.2 12.2 2.8 0.1 0.5 11.7 2.5

17.3 54.1 2.7 14.6 19.3 0.6 9.0 12.5

0.0 0.2 1.5 0.0 0.1 0.4 0.6 0.0

0.0 0.5 0.5 1.7 0.0 0.2 1.7 0.4

1.5 0.1 2.9 2.3 0.6 0.1 1.2 1.4

8.2 0.8 3.0 9.0 0.7 1.6 10.3 5.4

9.2 0.8 5.0 7.5 2.5 0.4 17.8 3.7

  11.7 23.5 10.3 7.9 60.4 92.8 11.4 20.2

2.5 0.4 2.3 4.4 1.5 0.6 5.9 3.1

48.9 19.0 58.7 48.4 14.8 1.8 29.7 50.4

 

15.9 29.9 37.2 18.1 25.0 25.8 20.6 40.9

Source: Author’s calculations based on World Bank (2017b)

West Africa Benin Burkina Faso Côte d’Ivoire Ghana Guinea Nigeria Senegal Togo

140  A new assessment of the postwar era Table 5.19 Comparison of export expansion and contribution measures across eras of globalization Country  

Maddison real gross value export expansion

Mitchell (2007) nominal gross value export expansion

1870–1913 Japan* Korea Taiwan* Australia* US Canada* Brazil Denmark* France* Germany* Italy* The Netherlands* Spain* Sweden* UK*

3.6 2.8   14.4 4.0 12.2 8.2   11.5 18.3   18.0 11.9   22.3

World Bank nominal value-added export contribution

World Bank/ Penn tables real gross value export expansion

1990–2010 16.1   86.1 8.1 6.6 23.1 15.6 32.1 15.9 20.2 14.0 137.3 13.6 22.0 25.5

15.5 39.5 67.6 17.6 10.0 16.0 12.0 50.6 18.0 47.6 23.9 28.4 20.4 36.9 23.1

36.9 53.0 72.0 25.3 11.6 28.1 11.9 38.9 27.0 114.4 51.6 115.0 29.3 52.0 18.0

* Notes: Japan 1885–1913; Taiwan 1905–1913; Australia 1826–1870, 1879–1913; Canada 1870–1910; Denmark 1921–1929; France 1920–1929; Germany 1880–1913, 1925–1929; Italy 1861–1870; The Netherlands 1900–1913; Spain 1901–1913; Sweden 1861–1870; UK 1830–1870.

The Netherlands, Bulgaria and Belgium shows much higher numbers in the nineteenth century, reflecting their active engagement in the world economy at that time, but it is likely these export expansion numbers again contain substantial non-value-added components. Countries with large differences do suggest important differences between the two eras of globalization. For Austria, Germany, Hungary and Portugal, the numbers suggest their reliance on exports to support growth is much more substantial in the current age. These were some of the main trading nations in the first era of globalization, but the numbers suggest they have put even greater emphasis on the importance of trade in the current era of globalization. This is consistent with the expansion of the EC into the EU and the formation of RTAs at a pace beyond other countries in the current era of globalization. The numbers here and the discussion of their trade policy all confirm this fact. Other notable differences are for Russia, Mexico, Chile and Uruguay. Numbers are much larger in the current era for these nations as well. Discussions on RTA formation showed that Chile has been aggressive in the recent decades, and Mexico in addition to being part of NAFTA has also been quite aggressive. Russia was not actively engaged in the global trading system until the end of the nineteenth century. If comparable data were available for the nineteenth century

A new assessment of the postwar era 141 Table 5.20 Comparison of export expansion and contribution measures across eras of globalization increased sample Region/Country  

Japan Taiwan India Australia New Zealand Austria Belgium France Germany The Netherlands Switzerland Denmark Finland Sweden UK Greece Italy Portugal Spain Bulgaria Hungary Russian Federation Canada US Mexico Brazil Chile Colombia Uruguay

TRADHIST nominal gross value export expansion

World Bank nominal valueadded export contribution

1870–1913

1997–2011

20.1 86.8 17.8 17.7 27.6 19.1 73.0 15.9 19.3 182.5 22.8 32.2 29.1 24.1 23.4 13.6 14.0 1.9 16.4 169.7 19.1 7.1 16.1 6.4 5.4 15.0 10.0 8.1 12.7

15.5 67.6 14.8 17.6 26.5 43.6 42.7 18.0 47.6 28.4 30.4 50.6 24.4 36.9 23.1 12.3 23.9 24.0 20.4 37.4 50.9 21.7 16.0 10.0 23.1 12.0 34.9 7.7 20.6

Source: Fouquin and Hugot (2016) (dates of coverage same as in Table 3.5) and World Bank (2017b), 1997–2011.

for the number of countries that have been brought into the fold of the global trading system as they broke free from the colonial, imperialistic or political system ideological constraints that bound them, especially in Asia at the beginning of this era of globalization and in West Asia and Eastern Europe after 1990, they would similarly show large increases in export contribution measures in supporting their efforts toward economic growth between the two eras of globalization, just as in the case of Russia, Mexico and Chile; or, some would show smaller increases, as in the case of Uruguay. Engaging in the global trading system in both eras is one of the first things these freed nations did. That has been a driving force in both eras of globalization, but especially in the current one.

6 Regional trade agreements and their impact on exports Edward M. Feasel and Daiki Kumazawa

Regional trade agreements (RTAs) have become increasingly a strategy for promoting exports among countries. The number of RTAs formed from the early 2000s through 2015 was substantial, reflecting what appears to be a competition among countries to expand RTAs at a vigorous pace, and most large advanced trading nations have been involved. The World Trade Organization (WTO) indicates as of June 2017 that 279 RTAs were in force, and there have been 445 notifications from WTO members. The clear majority of these RTAs have occurred since 1995. Baldwin (1995) and Bergsten (1996) noted early on the pressures for countries to pursue this regionalization strategy for export promotion, and the pace has only increased over time. While this increasing use of RTAs is indication itself of the belief by exporting countries of their effectiveness, this chapter empirically tests for their impacts on exports in countries around the world.

Previous literature, data and methodology There exists a substantial literature examining the impact of RTAs on trade on an ex ante basis using Computable General Equilibrium (CGE) models. Several have argued that these models tend to underestimate the effects on trade (see for example DeRosa and Gilbert, 2005). The alternative widely used empirical model to estimate ex post impacts of RTAs is the gravity model. Here results have been mixed. The model is in the spirit of Newton’s theory of gravity, which states the force of gravity between two objects is related to their mass and distance apart. In a similar spirit, the gravity model of trade suggests that trade levels will be related to the size of the economies being examined, often with gross domestic product (GDP) and population serving as appropriate proxies, and distance. The model asserts that larger economies will trade more and that those further apart, less. Most tests of the model have found results to be consistent with the models predictions. Researchers wishing to examine other factors affecting trade often start with the gravity model specification and then add variables of interest to see if they have any additional explanatory power. Frankel (1997) found RTAs to have insignificant effects on trade using the gravity model. Frankel et al. (1995) in contrast did find that RTAs in South America increased trade beyond what would be expected due to “natural” factors,

RTAs and their impact on exports 143 such as proximity and size of economies, but that in East Asia the fast-growing nature of the economies accounted for increased trade and not RTAs. Empirical work focusing on the impact of WTO accession has also shown mixed results using the gravity model. Rose (2004a) examined if General Agreement on Tariffs and Trade (GATT)/WTO membership contributed to increases in bilateral trade using 50 years of data for 175 countries and found little evidence of any impact on trade. In contrast, Subramanian and Wei (2007) concluded that GATT/WTO stimulates trade by about 120 percent, but that the degree to which it promotes trade is uneven between developing countries and developed ones. Part of the problem some authors point to is the potential endogeneity issues plaguing the gravity model estimation. The gravity model estimation strategy for testing the effects of RTAs is to utilize a set of dummy variables for RTAs in a general gravity model where trade is related to distance and GDP. The problem arises in that the decision to form an RTA is not necessarily an exogenous decision relative to trade levels between countries. In a series of papers, Baier et al. (2007) and Baier et al. (2008) argue that the endogeneity of the RTA dummies can be addressed by applying appropriate fixed effects in the panel estimation given that RTA formation is generally a slow process and trade flows change more rapidly. With this application, Baier et al. (2007) find a large significant impact of RTAs in the Americas, much larger than those previously estimated: trade actually increases by roughly 100 percent in a 15 year period. Baier et al. (2008) expand the analysis to RTAs throughout the world and find similar results on the same order of magnitude. Behar and Cirerai-Criville (2013) use the same methodology to examine south–south RTAs versus north–south RTAs and find that the impact of RTAs is more substantial in south– south cases. Two recent studies also apply the estimation methodology to Asia trade data. Molders and Volz (2011) examine the impacts of RTAs separated into bilateral and multilateral agreements in East Asia and test for anticipatory effects in addition to actual effects of RTA implementation. They find both effects present and that the impact is larger for bilateral agreements since they are more likely to be completed. Vanhnalat et al. (2015) apply the fixed-effects methodology to Lao PDR and find that RTAs increase exports from Lao by more than 50 percent to countries involved in the agreement. Two recent papers more closely examine Japan’s RTAs in specific context. Urata and Okabe (2010) examine the impacts of various specific RTAs including several for Japan, Korea and Singapore. The authors find significant effects on exports due to the RTAs in Japan–Singapore, Japan–Mexico, Korea–Chile, and Singapore–United States using an ordinary least squares estimation of the gravity model. However, when the authors utilize fixed effects, these previously statistically significant results become insignificant. Finally, Ando (2010) also examines the effect of Japan’s RTAs with Mexico and Singapore. Using a traditional gravity model estimation strategy, the author estimates predicted levels of imports and exports from the gravity model for the countries in the RTAs and compares those to actual values. The author concludes that while the Mexico RTA appears to have increased trade, the Singapore RTA shows no impact on trade.

144  RTAs and their impact on exports As the primary interest is to determine whether RTAs established by exporting nations actually leads to an increase in their exports, an export demand equation is estimated. Based on the gravity model, a representation of this demand equation could be specified as follows: X i , j ,t = α0 + α1 * GDPj ,t + α2 * Pop j ,t + α3 * Dist i , j + α4 * RTAi , j ,t + εi , j ,t (6.1) Here Xi,j,t is log of exports from the exporting country i to the recipient country j at time t, GDPj,t is log GDP of destination country j, Popj,t is log population, Disti,j is log distance between the two countries, and RTAi,j,t is an indicator variable taking on the value 1 if the exporter has a regional trade agreement with country i in period t. It should be noted here that the RTA variable captures both bilateral and multilateral regional RTA agreements. For example, for Singapore its membership in the Association of Southeast Asian Nations (ASEAN) means RTA would take a value of 1 in every period the agreement is in force in all partner countries in the group. As mentioned previously, estimation of Equation 6.1 potentially may result in biased estimates if the RTA variable is endogenous. Baier et al. (2008) showed that cross-section estimation of the gravity model with international data resulted in biased estimates likely due to the endogeneity issue. The authors suggest a fixedeffect approach to remedy problematic estimation has been used in empirical labor economic research for years. Introducing fixed effects in the current context will capture distance effects and other potential individual country effects with particular trading partners and therefore does not allow for a separate estimation of the coefficient on distance. Estimation of Equation 6.1 in the chapter will employ the fixed-effects model to deal with potential endogeneity. In addition to using fixed effects instead of distance in the Equation 6.1, the estimation will also include a variable indicating if both countries belong to the GATT/WTO. The postwar era has two main lines of trade liberalization, multilateral through GATT/WTO and regional through RTAs, whether in the form of bilateral or multilateral regional RTAs. The RTA variable will capture the latter, but the WTO variable is added to separately account for the multilateral impact of GATT/WTO on a particular country’s exports. This results in the following equation that will be estimated for all countries where data are available: X i , j ,t = α0 + α1GDPj ,t + α2Pop j ,t + α3RTAi , j ,t + α4WTOi , j ,t + α5Di , j + ∈i , j ,t

(6.2)

Here Dij represents the fixed effects for each destination country j from origin country i, and WTOi,j,t is an indicator variable equal to 1 when both origin and destination countries are members of GATT/WTO at time t. In addition to individual country estimates of the impact of multilateral and RTA trade liberalization on exports, GATT in 1971 at the urging of the United Nations Conference on Trade and Development (UNCTAD) put in place the Generalized System of Preferences (GSP). The GSP waived the Most Favored

RTAs and their impact on exports 145 Nation (MFN) clause in GATT and allowed advanced nations to give preferential tariff treatment to developing nations for ten years. In 1979, GATT made this a permanent exemption. To estimate the impact of the GSP on exports for developing nations, the following regression will also be estimated: X i , j ,t = α0 + α1GDPi ,t + α2GDPj ,t + α3POPi ,t + α4POPj ,t + α5RTAi , j ,t + α6WTOi , j ,t + α7 Di , j + β1CTR1GSPj ,t + ⋅⋅⋅ + βnCTRnGSPj ,t + ∈i , j ,t

(6.3)

In the above equation, Xi,j,t is log of exports from the origin (denoted with i) to the destination (denoted with j) at time t, GDPi,t is log of real GDP of the origin country, GDPj,t is log of real GDP of the destination country, RTAi,j,t is an indicator variable equal to 1 when there exists a trade agreement between the origin and destination at time t, WTOi,j,t is an indicator variable equal to 1 when both origin and destination countries are members of GATT/WTO at time t, Dij are country dummies for exporter and destination countries, and CTR1 GSPj,t to CTRn GSPj,t are indicator variables equal to 1 when the destination country receives generalized system of preferences benefits from CTRκ t time t. Unlike in the individual country regression, the model is estimated using all country pairs available. As a final means of investigating the impact of RTAs on exports, trade creation and trade diversion effects are incorporated by allowing for crossover effects from RTAs. In this case the regression estimated is the following: X i , j ,t = α0 + α1GDPj ,t + α2POPj ,t + α3WTOi , j + α4Di , j + β1CTR1RTA j ,t + ⋅ ⋅⋅ + βnCTRn RTA j ,t + ∈i , j ,t

(6.4)

Here, Xi,j,t is log of exports from the origin i to the destination j at time t, GDPj,t is log of real GDP of the destination country, WTOi,j,t is an indicator variable equal to 1 when both origin and destination countries are members of GATT/ WTO at time t, and CTR1 GSPj,t to CTRn RTPj,t are indicator variables equal to 1 when there exists a trade agreement between CTRκ and the destination country at time t, where k includes the country whose exports are being examined and other trade competitors as well. These final terms thus allow for the investigation of the effects of another country’s RTA with destination country j in addition to the own RTA effect on the exporter. An example is a regression for Japan’s exports where in addition to the Japan RTA variable a China RTA variable is included, which is an indicator if the destination country also has an RTA with China in the period. This sign of the crossover effect could indicate whether China’s RTA caused Japan’s exports to increase or decrease to country j. The main source of trade data utilized, including exports, GDP, population and GATT/WTO membership data, is The Centre d’Études Prospectives et d’Informations Internationales (CEPII) “Tradhist” database (CEPII, 206). All

146  RTAs and their impact on exports GDP values are converted from nominal GBP to USD using the currency exchange data in Tradhist and then to real terms using the US CPI data from the US Bureau of Labor Statistics website as other empirical studies have done (Rose, 2004; Subramanien and Wei, 2007). Data on regional trade agreements are obtained from Mario Larch’s Regional Trade Agreements Database from Egger and Larch (2008). Data on generalized system of preferences are obtained from the WTO.

Results Table 6.1 gives estimates for individual country regressions for the WTO and RTA variables in Equation 6.2 for countries where data are available in Asia and Oceania. Other parameter estimates are not given in the interest of ease in presenting results. In East Asia, the results suggest that the WTO effect on each country’s exports is positive and significant in every country except Taiwan. The parameter estimate for Japan suggests that being a member of GATT/WTO and having its trading partners also being members of GATT/WTO increased Japan’s trade by 57 percent (e0.45−1). Interestingly the parameter estimates for the own RTA effect is negative for China, Hong Kong and Japan. In the case of China and Japan, estimates for the RTA variable are positive and significant if the regression were estimated using a traditional gravity model specification where distance is used instead of fixed-effects (country fixed effects). However, in the fixed effects regression, only 25 of the 208 country fixed effects were not statistically significant in the regression, suggesting that particular circumstances with each trading partner relative to others in the sample are a very important determinant in the level of exports. After accounting for these individual exporter effects, the estimate suggest that the RTAs established in China, Hong Kong and Japan actually led to lower exports. This indicates that whatever the cause, such as competitors establishing RTAs with the same destination country, the individual country estimates suggest that RTAs were not effective at increasing exports in these countries based on the individual country export regressions. The zero shown for North Korea GATT/WTO variable indicates the country is not a member of the WTO. In Southeast Asia, results are consistently positive and significant for both the GATT/WTO variable and the own RTA variable (GATT/WTO is negative and significant only for Brunei Darussalam). This suggests that trade liberalization in Southeast Asia both on the multilateral level and bilateral/regional level has been very important in increasing exports. For the RTA variable, this indicates the ASEAN agreement has had positive strong effects in the region as the RTA variable includes this agreement. In South Central and West Asia, the results are not as strong for GATT/WTO. For the most part, being a member has resulted in larger exports, but not in all cases, and for some countries, Tajikistan, Cyprus, Qatar and Yemen, it has led to lower exports. Individual RTAs in contrast generally show strong positive effects on exports, with a few exceptions such as for Turkmenistan and Armenia. In Oceania, only New Zealand and Samoa have positive and significant effects from both GATT/WTO and RTAs. Australia

RTAs and their impact on exports 147 Table 6.1 GATT/WTO and RTA effect by countries in Asia and Oceania, 1950–2015 Region/Country

GATT/ WTO

RTA

Region/ Country

GATT/ WTO

RTA

East Asia China Hong Kong Japan Korea, Dem Rep Korea, Rep. Macao SAR, China Taiwan

 

1.61** 0.658** 0.45** 0 0.77** 0.04 −0.18**

  −0.33** −0.48** −0.33** 0.16 0.89** 0.68 −0.89

−0.30* 1.89** 0.40** 0.68** 0.32** −0.17 0.36** 0.72** 1.15** 1.63**

  1.59** 0.75** 0.80** 0.82** 0.46** 0.49** 0.80** 0.39** 1.13** 0.93**

  0 0.99** 0 0.08 −0.17** 0.79** 0 0.51** 0.32** 0.01 0.47 0.55** -0.34** 0.33** 0.24

  1.18** −1.43** 0.01 1.09** 0.42** −0.25 −0.96** 0.27** 0.20** 0.67** −0.67** 0.70** 1.04** 0.32** 0.04

0.51** 0.21**

0.70** 0.10

0.09 0 0.52** 0 0 −0.15 −0.23 −0.02 0.32** 0.24** −1.02** 0 0

  −0.55** 1.00 0.52** 0.62** −0.38 −0.74* 1.12** 0.44** 0.69** 0.38** −0.56 −1.96** −0.17

West Asia Afghanistan Armenia Azerbaijan Bahrain Cyprus Georgia Iraq Israel Jordan Kuwait Lebanon Oman Qatar Saudi Arabia Syrian Arab Republic Turkey United Arab Emirates Yemen, Rep.

Southeast Asia Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam South Central Asia Bangladesh Bhutan India Iran, Islamic Rep. Kazakhstan Kyrgyz Republic Maldives Nepal Pakistan Sri Lanka Tajikistan Turkmenistan Uzbekistan

Oceania Australia Fiji French Polynesia Kiribati Nauru New Caledonia New Zealand Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu

−0.43* 0.233** 0.12 0

0.82**   −0.01 −0.36** −2.23**

0 0 0 0.09* −0.30**

−3.12** −0.70 −1.03** 0.27** −0.10

0.55** −1.28**

1.80** 0.37

−0.28 0 −0.68**

0.23 −0.36 0.43

Note: ** p < 5 percent, * p < 10 percent

also has a positive impact on exports from GATT/WTO, but not from its own RTAs. For other countries in the region, either they are not in the WTO, WTO or RTA has resulted in lower exports, or the estimate is not statistically different from zero. The small island nations do not seem to have benefitted in terms of increased trade from trade policy in either the multilateral or regional dimension.

148  RTAs and their impact on exports Table 6.2 gives estimates for countries in the Americas, and in North America, Canada and the United States show strong positive effects of both GATT/WTO and individual RTAs on exports. Mexico, which is listed in Central America, shows similar results indicating that RTAs for the three countries, which includes NAFTA, has been beneficial in increasing overall exports. For Central and South America only in Mexico, Brazil, Chile and Peru are both GATT/WTO and RTA positive and significant. Mexico, Chile and Peru were also found to be the most active in RTA formation in the region in Chapter 4 and may explain these results. In the rest of the countries, the results for GATT/WTO is varied with eight countries experiencing lower, statistically significant exports from GATT/WTO membership and seven displaying positive significant effects. Individual RTAs show more effect at increasing exports as 14 countries have positive significant impacts of RTAs on exports. The Caribbean countries are in stark contrast to this as only the Dominican Republic and Trinidad and Tobago have a positive statistically significant RTA estimate. The former is the only country with a Table 6.2 GATT/WTO and RTA effect by countries in Americas, 1950–2015 Region/ Country

GATT/ WTO

North America   Bermuda 0 Canada 0.07* Greenland 0 Saint Pierre 0 Miquelon United States 0.38** Centrl America   Belize −0.23* Costa Rica 0.62** El Salvador −0.30** Guatemala 0.08 Honduras −0.36** Mexico 0.66** Nicaragua −0.39** Panama −0.31** South America Argentina −0.25** Bolivia −0.15 Brazil 0.34** Chile 0.20** Colombia 0.05 Ecuador 0.64** Falkland 0 Islands

RTA

Region/Country

GATT/ WTO

RTA

−0.84** 0.23** −2.22** −0.16

Guyana Paraguay Peru Suriname Uruguay Venezuela, RB

0.33** −0.64** 0.36** −0.52** 0.089 0.061

−0.32** 0.62** 0.22** −0.25 0.37** 0.57**

Carribean Antigua and Barbuda Aruba Bahamas, The Barbados Cuba Curacao Dominica Dominican Republic Grenada Haiti Jamaica Netherlands Antilles Saint Vincent and the Grenadines St. Kitts and Nevis St. Lucia Trinidad and Tobago

  −0.29 0 0 0.31** −0.01 0 0.31** 0.40** 0.040 −0.04 0.18* 0 0.31*

  −0.17 −2.34** −1.14** −0.08 −0.74** 0 −0.86** 0.92** −1.20** −0.12 −0.91** −1.65** −1.168**

−0.50** −0.75** −0.05

−0.48** −0.90** 0.42**

0.28** −0.39** 0.64** 0.83** 0.48** 0.82** 0.39** −0.20* −0.43** 0.56** 0.46** 0.30** 0.59** 0.14** −0.09 −0.65**

Note: ** p < 5 percent, * p < 10 percent

RTAs and their impact on exports 149 positive effect in both GATT/WTO and RTA. Of the 13 other countries with RTAs 10 have statistically significant negative impacts of RTAs on exports, and three are not significantly different from zero. RTAs have not been effective and, in fact, have had a negative effect on exports in the region. Five countries have had a positive effect from GATT/WTO and two a negative effect. These mixed results may be a reason, as in Oceania and in West Asia, why there are more countries in the sample not part of the WTO in these regions. Results for European countries are shown in Table 6.3. There is strong robust evidence that both GATT/WTO and RTAs have been very important in increasing exports in Western, Northern, and Southern Europe. Interestingly, one of the few countries for which the RTA variable is not significant is Germany. RTAs have also increased exports in Eastern Europe, but the WTO effect has not had as wide a positive impact on the countries in this region as in the rest of Europe. Four of the estimates are not different than zero, two are negative and only three show positive effects on exports. WTO seems to have negative impacts in Iceland, Albania and Portugal and is not statistically significant in Belgium, but otherwise has been widely effective at increasing exports in the rest of Europe. Table 6.3 GATT/WTO and RTA effect by countries in Europe, 1950–2015 Region/Country Western Europe   Austria Belgium France Germany Luxembourg Netherlands Switzerland

GATT/ WTO

RTA

0.09** 0.04 0.24** 0.13** 0.12** 0.13** 0.12**

0.17** 0.26** 0.24** 0.031 0.32** 0.28** 0.29**

Northern Europe   Denmark −0.01 Estonia 0.95** Faroe Islands 0 Finland 0.29** Iceland −0.42** Ireland 0.39** Latvia 0.31** Lithuania 0.77** Norway 0.12** Sweden 0.02 United Kingdom 0.03

0.40** 0.37** −0.91** 0.2** 0.62** 0.98** 0.62** 0.61** 0.61** 0.20** 0.20**

     

 

     

Note: ** p < 5 percent, * p < 10 percent

Region/Country

GATT/ WTO

Southern Europe   Albania −0.35** Bosnia and 0 Herzegovina Croatia 0.17* Greece 0.13** Italy 0.22** Macedonia, FYR 0.09 Malta 0.20* Portugal −0.18** Slovenia 0.19** Spain 0.16** Eastern Europe Belarus Bulgaria Czech Republic Hungary Moldova Poland Romania Russian Federation Slovak Republic Ukraine Yugoslavia

  0 0.01 0.12 −0.23** 0.40** −0.09* 0.08 0.34** −0.01 0.01 1.42**

RTA

0.36** 0.93** 0.15 0.69** 0.43** 0.19 0.80** 0.74** 0.25** 0.52**   0.08 0.36** −0.09 0.59** 0.19 0.52** 0.27** 0.67 0.26** 0.30 0.86**

150  RTAs and their impact on exports In Africa, the GATT/WTO effect varies across the continent, as shown in Table 6.4. In 12 of the nations, the multilateral agreements reached in GATT/ WTO are associated with increased exports, and in nine with declining exports. This mixed result that was found for Central and South America may help to explain why many of the nations in these regions have been stronger opponents to further trade liberalization in recent WTO rounds of negotiations. One interesting result to highlight is that even South Africa has a statistically significant negative coefficient estimate for GATT/WTO. The individual RTAs in contrast show a wider positive impact on exports. Twenty-two-country estimates are positive and statistically significant and only eight are negative. This again is similar to Table 6.4 GATT/WTO and RTA effect by countries in Africa, 1950–2015 Region/Country

GATT/ WTO

RTA

Region/Country

East Africa Burundi Comoros Djibouti Eritrea Ethiopia Kenya Madagascar Malawi Mauritius Mozambique Rwanda Seychelles Tanzania Uganda Zambia Zimbabwe

  −0.02 0 −0.05 0 0 −0.08 0 −0.02 0.03 −0.82** 1.24** 0 −0.39** −0.26** −0.95** 0.49**

  −0.21 −0.54 0.15 0.65 0.21 0.52** 0.18* 0.94** 1.03** 0.09 1.08** 1.09** 0.55** 0.85** 2.13** −0.28**

North Africa     Algeria 0 0.36** Egypt, Arab Rep. −0.59** 0.50** Libya 0 −0.07 Morocco 0.11** −0.14** Sudan 0 0.08 Tunisia 0.27** 0.09

Middle Africa     Angola −0.51** 0.44 Cameroon 0.13 0.06 Central African Rep 0.38* −1.08** Chad 0.30 0.70** Congo, Rep. 0.31* 0.16 Congo, Dem. Rep. 0.004 1.41** Equatorial Guinea 0 1.37* Gabon 0.55** −0.60** Sao Tome and Principe 0 1.31**      

 

 

Note: ** p < 5 percent, * p < 10 percent

GATT/ WTO

RTA

  Southern Africa Botswana −0.64** 0.66** Lesotho 0.14 0.06 Namibia 0.84** 0.54** Saint Helena 0 −0.99** South Africa −0.12* 0.13* West Africa Benin Burkina Faso Cape Verde Côte d’Ivoire Gambia, The Ghana Guinea Guinea-Bissau Liberia Mali Mauritania Niger Nigeria Senegal Sierra Leone Swaziland Togo

  0.49** 0.05 0.45 0.08 −0.23 0.03 −0.51** −1.22** 0 −0.23* −0.04 −0.14 −0.03 0.08 −0.08 −0.66** −0.07

  0.01 −0.41* −2.00** 0.05 0.14 0.30** 0.07 2.00* 0.05 −0.24 −0.63** 0.24 1.09** 0.13 −0.49 0.95** 0.54**

RTAs and their impact on exports 151 results from Central and South America. The combined GATT/WTO and RTA result can explain why countries have turned to RTAs as their preferred means of expanding exports rather than the WTO multilateral process, which does not show as much evidence of increasing exports in these countries. The number of negative estimates suggest these nations may be correct in their complaint and claim that they have made for some time now that other nations, the more advanced nations in particular, have been the ones benefitting from multilateral trade liberalization. To determine the average impact across countries of the multilateral trade liberalization process through GATT/WTO and from bilateral and multilateral regional liberalization through RTAs, a regression is estimated using all available data and dyad combinations with the GATT/WTO and RTA variable included. Instead of just being for each country individually, this includes exports for all countries. Table 6.5 presents the results. Column one in the table is the traditional gravity model specification using distance. In this model, we see that GATT/WTO actually has a negative effect of exports on average in the world over the period 1950–2015. RTAs have a positive effect. The model in column two is the fixed-effects model with country-pair dummies included, which is the same specification that has been used in the individual country regressions. The GATT/WTO effect is now positive, indicating that the multilateral trade rounds have indeed on average increased exports in the world. The RTA effect is still positive. The final column adds year dummies to see if there is any sensitivity of results to their inclusion. Results are similar to those in column two and support the positive effect of trade liberalization in both multilateral and bilateral/ regional form in increasing exports. Turning to the impacts of GSP, Table 6.6 presents the results for the estimation of Equation 6.3 presented earlier. Column one is with just GATT/WTO,

Table 6.5 Estimates for WTO and RTA effects in the world, 1950–2014 Variable log distance ij log GDP i log GDP j log POP i log POP j GATT/WTO RTA Constant Ctry dummies inc Year dummies inc N R-squared

(1)

   

Note: * p < 0.10, ** p < 0.05

(2)

−1.18** 1.10** 0.85** −0.07** −0.02** −0.24** 0.32** −20.79** 811,477 0.55

 

0.65** 0.57** −0.74** 0.19** 0.18** 0.32** −9.70** X 811,477 0.21

(3)   0.80** 0.71** −0.45** 0.48** 0.22** 0.39** −20.45** X X 811,477 0.37

152  RTAs and their impact on exports Table 6.6 Estimates for GSP effects for all GSP providers w/ctry fixed effects, 1950–2014 Variable

(1)

(2)

log GDP i log GDP j log POP i log POP j Japan GSP US GSP EU GSP Korea GSP Australia GSP Canada GSP ISLGSP Kazakhstan GSP New Zealand GSP Norway GSP Russia GSP Switzerland GSP Turkey GSP GATT/WTO RTA Constant N R-squared

0.68** 0.60** −0.69** 0.23** −0.43** 0.05 −0.52** 0.23** −0.31** 0.02 −0.70** −0.60** −0.21** −1.15** 0.07 −0.69** 1.41** 0.19**   −11.72** 820,901 0.25

0.67** 0.59** −0.73** 0.21** −0.37** 0.10** −0.48** 0.23** −0.26** 0.06 −0.66** −0.56** −0.17** −1.09** 0.10* −0.67** 1.44** 0.18** 0.28** −10.73** 808,330 0.23

Note: * p < 0.10, ** p < 0.05

and column two adds the individual RTA effect and in both cases country fixed effects are included in the regressions. GATT/WTO and RTA both continue to have positive statistically significant estimates with the RTA effect being larger. Many of the GSP variables across GSP providers actually have negative significant estimates indicating that being a developing nation in the GSP program of these countries is associated with lower exports than otherwise experienced. There are seven GSP providers for whom the estimates are negative with Norway having the largest negative numbers. There is the possibility that the GSP variable reflects a selection decision on the part of countries where these advanced nations decide to support and select lesser developed nations with lower and possibly declining trade, which would be an altruistic motive: this could result in a negative GSP estimate. A more detailed investigation would be necessary to determine if this were the case. The only three nations with positive GSP estimates are the United States, Russia and Turkey. It is interesting that the coefficients for the United States and Russia only become significant when the RTA variable is added, which suggests there may be some complementarity between the GSP from the provider and the recipients own RTAs. The size of the effect is a modest 10 percent increase in the GSP recipient’s exports (e0.10−1). Turkey’s

RTAs and their impact on exports 153 GSP has the largest positive effect and shows a larger than 300 percent increase in exports for its GSP recipients. The final dimension of trade policy examined is the crossover effects. One of the motivations of establishing an RTA is to increase trade with partners through trade liberalization. Of course, this means that trade of the destination country with its other partners may decrease as a result. The crossover effects try to measure this secondary or external trade impact of RTAs. Of course, it’s possible that a destination country establishing an RTA with another country could actually result in increased exports for other countries that also have RTAs with the destination country. There have been multiple situations where there has been triangular trade patterns between different nations. A very early example discussed in Chapter 3 was in the nineteenth century and it involved the role of the United Kingdom in balancing international settlements through triangular balance of payments relationships with various trading partners. As it is not possible to include all possible crossover effects, the countries included in the investigation here are China, Hong Kong, India, Japan, Korea, Singapore, Thailand, Turkey, Canada, Mexico, United States, Brazil, South Africa, France, Germany, Italy, United Kingdom and Russia. Table 6.7 gives estimates of Equation 6.4 for the counties in Asia. The own RTA effect is also included in the regression, as well as the GATT/WTO effect. In all cases, except for Singapore the GATT/WTO participation leads to an increase in exports. For own RTA effects, China’s is the only one that continues to display a negative statistically significant estimate. Recall from Table 6.1 that China, Hong Kong and Japan had negative estimates when just their own RTA variable were included in the regression. Here Hong Kong is not significant, and Japan’s RTA effect is now positive. India, Singapore and Thailand’s own RTA effect is also positive. This suggests these crossover effects are important to include to uncover the full effectiveness of the own RTA effect. For all select Asian countries, the RTA effects of Russia is large and positive except for Hong Kong. This indicates that trade with partner countries for these Asian economies is larger in the case where partners also have RTAs with Russia. Given Russia’s RTA patterns, this likely reflects trade with the former Soviet Union countries and satellites in West Asia and Eastern Europe, which are important entrants into the global trading network in the post-Cold War period. India’s RTAs show similar positive externalities for exports for China, Thailand and Turkey. The cases of statistically significant negative coefficients on other nation’s RTAs indicate these nations are likely drawing exports away from the exporter, whose regressions are being examined, through their RTAs. The RTAs for South Africa show four of the eight countries from Asia have negative coefficients suggesting South Africa is drawing away exports to these countries through its RTAs. Chapter 4 showed that South Africa is engaged in multilateral regional RTAs in Africa, the Southern African Development Community (SADC), and created an RTA with the EU in 2000. This suggests South Africa may be expanding exports at the expense of these nations in Asia partially. RTAs for the EU have a negative sign only for Japan out of the Asian countries suggesting the EU through its

1.62** 1.78** −0.23** −0.13* 0.88** −0.01 0.20** −0.09 0.68** 0.46** 0.39** 0.09 0.01 −1.18** 0.65** 2.48** −0.05 0.81** −31.96** 3,587 0.64

log GDP j log POP j RTA China RTA Hong Kong RTA India RTA Japan RTA Korea RTA Singapore RTA Thailand RTA Turkey RTA Canada RTA Mexixo RTA US RTA Brazil RTA EU RTA Russia RTA South Africa GATT/WTO Constant N R-squared

Note: * p < 0.10 ** p < 0.05

China

Variable

0.78** −0.67** −0.25** −0.28 −0.46** 0.17 −0.35** 0.29** 0.30 0.18** −0.25 0.17 −0.05 0.12 0.05 0.38 −0.48** 0.24** 3.65** 3,486 0.22

Hong Kong 1.07** 2.62** 0.11 −0.24 0.33** 0.04 0.24** −0.01 0.37* −0.17** 0.28* 0.43** 0.10 0.16 0.84** 2.03** 0.02 0.44** −30.99** 3,537 0.56

India 0.95** −1.55* −0.26** −0.09 −0.23 0.35** −0.50** −0.04 −0.04 0.17** 0.07 −0.26 −0.06 1.93** −0.24* 3.42** −0.26** 0.29** 8.80** 3,572 0.25

Japan 1.20** .43** −0.21* −0.06 0.05 0.28* −0.11 0.01 0.21 0.17* 0.28* 0.20* −0.04 1.06** 0.25** 3.02** −0.09 0.25** −12.83** 3,515 0.60

Korea 1.10** 0.62** 0.08 0.24 −0.18 −0.25 −0.28** 0.27* 0.04 0.04 0.14 −0.10 0.025 0.67 0.59** 1.64** −0.39** −0.03 −9.35** 3,087 0.28

Singapore

1.44** 0.18 0.05 0.06 0.40** −0.20 −0.16 0.01 0.26 0.42** 0.10 0.28** 0.62** 0.14 0.43** 1.10** −0.33** 0.32** −17.4** 3,459 0.54

Thailand

Table 6.7 Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Asia, 1950–2014

1.13** 3.26** −0.10 0.33 1.09** −0.12 −0.12 −0.33** −0.06 0.34** 0.28* 0.37** 0.10 0.14 0.80** 1.97** 0.37** 0.37** −38.56** 3,424 0.43

Turkey

RTAs and their impact on exports 155 RTAs is diverting exports away from Japan. Turkey does so for India and India for Hong Kong. Two other regional countries who have multiple negative coefficients in other countries export regressions are China and Korea. China appears to have drawn exports away from Hong Kong, Japan and Korea, while Korea has drawn them away from Hong Kong, Japan, and Singapore. These crossover effects appear to be quite important. In the case of Japan who was a bit of a latecomer to the RTA escalation race, it is clear that other RTAs were adversely impacting its exports. The fact that its own RTA variable is positive and significant indicates its decision to enter the RTA competition has counter-acted the negative effect form others’ RTAs, to some degree. Crossover effects for select countries in the Americas and Africa are given in Table 6.8. There are again positive significant estimates for RTAs of Russia and India for all countries examined, similar to the effects in Asia. This again may reflect a factor related to former Soviet satellite countries in the case of Russia and perhaps a development country effect for India. Interestingly here, Brazil is also more consistently positive and significant for Canada, United States and South Africa, perhaps a similar complementary effect as observed for India. For the Russia and Brazil RTA, the estimate is negative in Mexico’s exports regression, suggesting that RTAs from these countries have diverted some of Mexico’s exports away from its trade partners. China’s RTAs has a similar effect in Mexico, Table 6.8 Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Americas and Africa, 1950–2014 Variable

Canada

Mexico

US

Brazil

log GDP j log POP j RTA China RTA Hong Kong RTA India RTA Japan RTA Korea RTA Singapore RTA Thailand RTA Turkey RTA Canada RTA Mexixo RTA US RTA Brazil RTA EU RTA Russia RTA South Africa GATT/WTO Constant N R-squared

1.13** 0.48** −0.09 0.01 0.39** 0.19 −0.19** 0.21 −0.86** 0.02 0.01 −0.10 −0.13 1.05** 0.34 1.45** −0.17** 0.26** 11.98** 3,575 0.62

1.38** 0.06 −0.30* 0.39 0.41* 0.49** 0.19 −0.01 0.13 0.70** 0.01 0.29** 0.20 −2.50** 0.01 −2.53** −0.36** 0.01 −16.49** 2,358 0.42

0.81** 0.41** −0.11 0.09 0.47** 0.29** −0.20** 0.05 -0.43** -0.15** 0.09 −0.11 0.11 0.76** −0.09* 0.78** −0.25** 0.15** −1.46** 3,586 0.50

1.33** 0.74** 0.95** 1.58** −0.03 0.15 0.54* 0.02 0.55** −0.31 0.03 −0.09 −0.12 0.10 0.04 0.04 −0.34 −0.34 −0.02 −0.13 0.26* −0.17 −0.06 −0.02 −0.23* −0.39** 0.95** 2.04** 0.23** 0.48** 2.35** 5.34** −0.25** 0.03 0.50** 0.30** −22.62** −15.79** 3,482 3,228 0.52 0.28

Note: * p < 0.10 ** p < 0.05

South Africa

156  RTAs and their impact on exports but not in any other country in the table. South Africa again has negative RTAs estimates with all countries, suggesting the RTA with the EU and SADC may have had wide implications for other advanced trading nations exports. Asian countries negatively impacting exports among these countries are Korea and Thailand for Mexico and Korea, and Thailand and Turkey for the United States. Of the five regressions, only the United States and Canada’s own RTA estimates shows no impact on promoting its own exports. All GATT/WTO estimates are positive and significant, except for Mexico, which is not statistically significant. Table 6.9 presents crossover effect regressions for European countries. Again, Russia’s RTA variable is positive and significant in all countries except for itself. Brazil and Mexico’s RTAs show similar positive spillover effects in Germany and Italy, and Mexico and India’s RTAs also have positive effects on Russia’s exports. South Africa again has significant negative estimates in Italy, United Kingdom and Russia. The estimate is not statistically significant in France and Germany. A more detailed examination would be required to see the cause behind this consistent finding across most nations and across regions. Overall, there is fewer negative crossover effects from others countries RTAs in the case of Europe, suggesting there may be less overlap in terms of partners and industries than within and between Asia and the Americas. The few cases are export diversion on the Table 6.9 Estimates for RTA own and crossover effects on exports w/ctry fixed effects for select countries in Europe, 1950–2014 Variable

France

Germany

Italy

UK

log GDP j log POP j RTA China RTA Hong Kong RTA India RTA Japan RTA Korea RTA Singapore RTA Thailand RTA Turkey RTA Canada RTA Mexico RTA US RTA Brazil RTA EU RTA Russia RTA South Africa GATT/WTO Constant N R-squared

0.83** −0.72** 0.02 0.04

0.85** −0.38** −0.04 −0.00

0.87** −0.42** 0.07 −0.06

0.63** −0.83** −0.17** 0.06

0.77** 1.52** 0.17 0.16

−0.02 −0.14 −0.13** 0.07 −0.05 0.25** −0.03 0.09 0.05 0.25 0.01 1.35** −0.04

0.09 0.19** −0.02 0.10 −0.24* 0.17** −0.13 0.13** 0.08 0.41* −0.02 1.79** −0.02

0.07 0.04 −0.02 −0.04 0.00 0.21** −0.08 0.22** 0.04 0.82** 0.12** 1.97** −0.25**

0.17 0.04 0.04 −0.10 −0.16 0.30** 0.06 0.01 0.16** 0.31 −0.23** 1.23** −0.12**

0.81** −0.03 −0.04 −0.68** 1.31** −0.03 −0.22 0.59** 0.21* −0.72 0.39** 0.69 −0.36*

0.11** 4.98** 3,596 0.28

0.06 1.83** 3,591 0.74

0.08 −0.85 3,590 0.64

−0.01 10.05** 3,593 0.13

0.26** −14.90** 3,061 0.33

Note: * p < 0.10 ** p < 0.05

Russia

RTAs and their impact on exports 157 part of Korea’s RTAs for France, Thailand for Germany, China for the United Kingdom, and Singapore for Russia. The EU RTA variable is not significant in France and Germany, positive in Italy and negative in the United Kingdom. The latter result suggests joining the EU actually may have led to lower exports in the United Kingdom than otherwise would occur. Russia’s own RTA effect is not significant. GATT/WTO has positive statistically significant effects only in France and Russia.

Summary of findings The individual country export regressions, either with or without crossover effects, showed mixed results, often consistent for groups of countries along regional dimensions. GATT/WTO has had positive significant effects in Southeast and East Asia, Western, Northern and Southern Europe, and North America. These happen to also be the most engaged in RTA formation and the fastest-growing regions in the world. They also happen to be where most manufacturing exports and high value-added exports come from. The GATT/WTO effects is more mixed in South Central and West Asia and Central and South America: it is mostly zero or negative in the Caribbean, Eastern Europe and much of Africa, except for Middle African nations. Results here are consistent with frustrations expressed among certain developing countries from different regions of the world, dissatisfied with the WTO multilateral trade system and its results. RTAs effects on promoting exports has been more positive across regions and often larger in magnitude. It is strongest in Southeast, South Central and West Asia; Central and South America; Europe; and in Africa as well. These results would explain why nations have opted to put more attention and effort in the RTA formation process than depending on multilateral successes in the WTO. Crossover regressions show that in terms of trade policy, countries must be aware of the competition from competitors and the prospect of these competitors’ RTAs with partner countries diverting exports away. Japan in Asia as a case in point where RTAs from China, Korea and the EU diverted exports away from Japan. Japan’s crossover effect regression confirmed this. However, the regression also showed that its own RTAs have somewhat counterbalanced the effect. This would explain its heated pace of RTA formation after 2005; its willingness to enter TPP negotiations as it was always reluctant to enter multilateral RTA negotiations, but TPP was perhaps the only way to counterbalance the US–Korea RTA, which went into force in 2012. In addition, its recent conclusion of an RTA with the EU in 2017, with who Korea was able to develop an RTA in 2011. Overall, worldwide regressions with over 800,000 observations show both GATT/WTO and RTAs have had positive impacts on exports on average across countries with the RTA effect having a slightly larger impact of a 35 percent (e0.3−1) increase in exports compared to the GATT/WTO effect of 22 percent (e0.2−1). However, the individual country regression emphasizes that the impacts are not evenly distributed, especially in the case of the benefits due to GATT/WTO.

7 The importance of export-led growth Time series and panel data evidence Edward M. Feasel and Daiki Kumazawa

Economies in East Asia, and the Four Tigers in particular, which include Hong Kong, South Korea, Singapore and Taiwan, have provided the most robust experiences of economic catch up with the West compared to any other region in the World. There are various features of commonality in the experience of these economies including the role of savings and investment, importing of technology in many cases, and active government policies. Perhaps the greatest commonality across experiences, however, is a reliance on an export-oriented growth strategy. While their experience brought focus and attention to the proposition of exportled growth as a development strategy, early on, there is great debate in the literature on the role of export-led growth. This chapter investigates the importance of the role of exports by examining the joint postwar economic experience across a variety of panel time series datasets, including a panel for the Four Asian Tigers, and a case study for South Korea. Specifically, the chapter investigates the role of export shocks using annual panel data from the Penn World Tables Version 9 database, quarterly data from the World Bank Global Economic Monitor (GEM) database, Organisation for Economic Co-operation and Development (OECD) Main Economic Indicators, and national government statistics from the governments of the Four Tigers. The Blanchard–Quah long-run restrictions on the long-run neutrality of demand shocks on real gross domestic product (GDP) are utilized as identifying restrictions to help identify demand, supply and export shocks in a panel vectorautoregression (VAR). These restrictions combined with additional long-run restrictions or short-run restrictions based on the time series properties of the data are sufficient to just identify the three-variable structural panel VAR, including nominal GDP, real GDP, and the real export measure allowing for the comparison of impulse responses and variance decompositions to determine the relative importance of the shocks in explaining real GDP fluctuations. The role of investment is also investigated in the quarterly panels where data are available. The chapter also presents a detailed econometric examination for the South Korean experience which sheds further light on its unique development experience.

The importance of export-led growth 159

Background literature and findings, data and motivations Many have pointed to the role that an export-oriented growth strategy played in the historical development of the Four Tigers; however, there remains a wide debate over its relative importance, and Chapter 2 provided a thorough review of the general theoretical and empirical literature on exports and growth. In terms of the Tigers experience, Findlay (1984) and Krueger (1985) were two of the strongest and earliest proponents that the experience of the Four Tigers represented the great potential for development based on export-led growth. More recently, Blecker and Razmi (2010) examined export-led growth and its lessons. The authors point out the importance of export markets in many countries’ growth strategy and how the East Asian experience was a case where circumstances were just right: these include the Asian countries following a “flying geese” pattern of moving up the value chain, while not over-saturating markets in any one level of the chain; the synergistic support of south–south trade as nations grew; and, finally, the role of industrialized nations as a market for the countries pursuing export-led growth. Blecker and Razmi (2010) suggest, however, there is a mounting evidence that while the Asian growth experience pointed to the importance of export-led growth, there may be a “fallacy of composition” as other developing countries following the same strategy are subject to a significant demand constraint in that all are competing over the same export markets in similar products and thus have not been as successful. Others have also cast doubt on the notion that exports were the driver of growth in many of the so-called export-led growth cases. Yang (2008) suggests that real exchange rate appreciations accompanying cases of export-led growth is more consistent with the scenario that growth drove increases in exports instead of the other way around. Even earlier, Rodrik (1995) argued that it was actually investment stimulated by government industrial policy that led to growth in exports, and it was not exports that drove growth, and Krugman (1994) suggested the success of the Asian economies was nothing miraculous, but simply strong governments mobilizing resources and generating growth based on traditional factors that lead to growth such as savings, investment and labor migration, to a name a few. The World Bank (1993) study on the East Asian Miracle also discounted the role of exports and industrial policy relative to traditional growth factors. This chapter investigates the issue by applying recent panel time series techniques to identify export, demand and supply shocks in a panel VAR. The panel datasets utilized in this chapter are described in Table 7.1 along with the sources. There are three annual panels and three quarterly panels covering different periods and different sets of countries. All panels are balanced. As we move from longer to shorter time periods in the annual data from the Penn World Table, more countries are included in each panel. An attempt to distinguish between the tradeoff of including a greater number of countries versus a longer time span on the empirical results is done by examining and comparing results across panels.

Table 7.1 Panel datasets: coverage and sources Panel

Period

Number of countries

Number of observations

Data source

A B C

1960–2014 1970–2014 1990–2014

113 182 208

6215 8190 5200

D

1997:1– 2016:4

41

3280

E

1999:1– 2016:4

28

2016

F

1975:1– 2016:4

4

672

Penn World Table Version 9. Annual data 1960–2014 GDP, GDP at constant national 2011 prices, and exports at constant national 2011 prices. The dataset covers 1950–2014 and includes 200+ countries and territories. Exchange rates from database used to convert data into dollars. Organisation for Economic Co-operation and Development (OECD) Main Economic Indicators. Quarterly data 1997–2016. GDP millions of US dollars at current PPPs and current prices; real GDP and real exports volume estimates at fixed PPPs in millions of US dollars. World Bank Global Economic Monitor (GEM) Database. Quarterly data 1990–2016. GDP, GDP at constant 2010 prices, and exports at constant national 2010 prices in dollars. Taiwan: The Directorate General of Budget, Accounting and Statistics (DGBAS), Republic of China (Taiwan); South Korea: Korea Statistical Information Service, Statistics Korea. Singapore: Department of Statistics, Government of Singapore. Hong Kong: Census and Statistics Department, The Government of the Hong Kong Special Administrative Region. Exchange rate for Korea, Singapore, Hong Kong: IMF International Financial Statistics database. Taiwan exchange rate: Central Bank of the Republic of China (Taiwan). GDP, GDP in chained 2010 national prices, exports in chained 2010 national prices. Exchange rates used to convert data into dollars.

The importance of export-led growth 161 The theoretical motivation for the empirical work conducted in the paper is based on the model presented in the seminal work of Blanchard and Quah (1989), in which the authors examined the effects of aggregate demand and supply shocks in the US economy during the postwar era. The model is modified to allow for export shocks. The model can be specified as follows: Y (t ) = M (t ) − P (t ) + αθ (t ) + X (t ), (7.1) Y (t ) =N (t ) + θ (t ), (7.2) P (t ) =W (t ) − θ (t ), (7.3) W (t ) =W |{Et −1N (t ) = } , (7.4) where Y, P, θ and X represent the log levels of real GDP, the GDP deflator, pro¯ is full employment and W and M are the ductivity and exports, respectively. N log levels of the nominal wage and money supply. Equation 7.1 represents aggregate demand and states that demand is related to real money balances and exports. This suggests that exports affect the economy as a demand shifter. Equation 7.2 represents the production function, where N is employment, and θ represents a supply side productivity shock. Equation 7.1 follows Blanchard and Quah (1989) in allowing for productivity to potentially have a demand component such as through investment demand and not just a pure supply shock. Equation 7.3 represents price-setting behavior, which depends on nominal wages and productivity. Nominal wages, as described by Equation 7.4, are set one period in advance to achieve full employment. To close the model, we specify how M, θ and X evolve: M (t ) = M (t − 1) + e d (t ),  θ (t ) = θ (t − 1) + e s (t ),  X (t ) = X (t − 1) + e X (t ), 

(7.5) (7.6) (7.7)

where ed, es and eX are the serially uncorrelated and pairwise orthogonal demand, supply and exports disturbances in the economy. If we let log nominal GDP be Q(t) = Y(t) + P(t), solving for growth in nominal and real GDP, we obtain the following: ∆Q (t ) = e d (t ) + αe s (t ) + e X (t ), (7.8) ∆Y (t ) = e d (t ) −e d (t − 1) + α (e s (t ) −e s (t − 1)) + e x (t ) −e x (t − 1) + e s (t ). (7.9) The specification in Equations 7.8 and 7.9 represent the traditional Keynesian interpretation of disturbances in the economy, where demand shocks have purely transitory effects on real GDP, and supply disturbances have real longrun effects. While the model presented above is mainly for illustrative purposes, it does provide the intuition for the estimation strategy in the chapter. The estimation procedure will allow for three types of shocks, two representing demand shocks;

162  The importance of export-led growth a nominal demand shock and an export shock, both having transitory effect on real GDP. A third shock represents the permanent component of real GDP fluctuations arising from productivity shocks. While some theoretical growth models such as those presented in the literature review in Chapter 2 allow for long-run real effects from export shocks, the long-run neutrality of all demand shocks based on traditional macro models is employed here.1 More practically, the following three-variable VAR is specified: Y (i , t ) = g (L )(Q (i , t − 1),Y (i , t − 1), X (i , t − 1)) + u1 (i , t ), (7.10) Q (i , t ) = f (L )(Q (i , t − 1),Y (i , t − 1), X (i , t − 1)) + u 2 (i , t ), (7.11)

X (i , t ) = h (L )(Q (i , t − 1),Y (i , t − 1), X (i , t − 1)) + u3 (i , t ). (7.12)

Here, all variables potentially influence the others and the u’s represent shocks to the system. The equations for real GDP (Y), nominal GDP (Q) and the real exports to real GDP ratio (X) represent a three-variable system that captures the dynamic relationship between the variables, where it is assumed there is feedback over time and shocks to demand, supply and exports have varying degree of persistence and importance. Here the export ratio (real exports/real GDP) is used to capture the relative importance of exports in each of the countries in the panels and its variation over time.

Identifying restrictions and methodology The aim is to identify and estimate the three-variable system using panel data for our various panels so that a measure of the impact of demand, supply and exports on real GDP over time can be determined. To accomplish this, appropriate restrictions are imposed on the error structure of the panel VAR to allow for structural decomposition of the residuals. Impulse responses and variance decompositions from the structural panel VAR are then investigated. To interpret the shocks from the panel VAR as representing independent structural shocks to exports, supply, and demand, three restrictions must be placed on the system to identify the underlying shocks. The same theoretical assumption employed in Blanchard and Quah (1989) to identify demand and supply shocks is utilized in the current chapter to help identify the system: namely, demand shocks, both nominal demand shocks and export shocks, only have transitory effects on real GDP, giving two restrictions to identify structural shocks in the panel VAR. In this case, the identifying restriction used to identify the nominal demand shocks is that the demand shock does not have any long-run effects on real GDP, which is the same restriction Blanchard and Quah (1989) used where the VAR contained real GDP and the unemployment rate. The long-run neutrality of both demand shocks on real GDP is consistent with standard theoretical Macro models from the various schools of thought where demand shocks only have transitory real effects. We turn to the time series properties of the data to support the final identifying restriction used to just identify the structural panel VAR. Table 7.2 reports the results of panel unit-root tests developed by Levin et al. (2002), Im et al. (2003), Choi (2001) and Pesaran (2007): these unit root tests

Table 7.2 Panel unit root tests results Variable

LLC

IPS

Fisher-ADF

Pesaran  

A: Annual 1960–2014 N = 113   ln(Real GDP) ** −2.90 ∆ln(Real GDP) ** −39.48 ln(Nominal GDP)   −1.01 ∆ln(Nominal GDP) ** −43.38 ln(Real Exports) ** −3.09 ** −54.08 ∆ln(Real Exports)

 

 

    **   **   **

B: Annual 1970–2014 N = 182   ln(Real GDP)   0.31 ** −34.05 ∆ln(Real GDP) ln(Nominal GDP) ** −4.30 ∆ln(Nominal GDP) ** −42.70 ln(Real Exports) ** −3.27 ** −49.18 ∆ln(Real Exports)

 

  1.45 −42.24 −5.45 −44.99 −2.13 −56.54

      3.42 ** −20.49 ** 3.42 ** −21.35   3.32 ** −25.17

 

C: Annual 1990–2014 N = 208   ln(Real GDP) ** −7.15 ** −25.43 ∆ln(Real GDP) ln(Nominal GDP) ** −9.86 ** −29.98 ∆ln(Nominal GDP) ln(Real Exports) ** −5.04 ** −30.58 ∆ln(Real Exports)

        ** −4.57   2.60 ** −28.47 ** −11.88 ** −9.04   2.93 ** −31.16 ** −7.93 ** −4.66   1.21 ** −36.57 ** −17.59

 

D: Quarterly 1995:1–2016:4 N = 20   ln(Real GDP) ** −3.35 ** −20.06 ∆ln(Real GDP) ln(Nominal GDP)   −0.23 ** −24.33 ∆ln(Nominal GDP) ln(Real Exports) ** −3.20 ** −32.70 ∆ln(Real Exports)

 

  −0.21 ** −21.23 1.39 ** −22.90 −1.27 ** −29.77

      −0.34 ** −12.08   1.96 ** −12.76   −0.68 ** −16.84

 

E: Quarterly 1999:1–2016:4 N = 28   ln(Real GDP) * −2.21 ∆ln(Real GDP) ** −22.57 ln(Nominal GDP)   3.11 ** −20.05 ∆ln(Nominal GDP) ln(Real Exports) ** −4.84 ** −30.34 ∆ln(Real Exports)

 

      0.42 ** −11.90   6.44 ** −14.15   −1.37 ** −16.74

 

F: Quarterly 1975:1–2016:4 N = 4   ln(Real GDP)   0.02 ** −4.00 ∆ln(Real GDP) ln(Nominal GDP)   −1.38 ** −5.09 ∆ln(Nominal GDP) ln(Real Exports)   0.88 ∆ln(Real Exports) ** −4.00 Reported Test Statistic LLC adjusted t

 

      0.05 ** −7.28   1.30 ** −6.88   0.67 ** −8.59 Choi InverseNormal Z

 

2.83 ** −41.13 2.51 ** −41.17 −1.19 ** −54.25

** ** ** * **

** ** ** **

  −0.13 −22.18 5.21 −19.70 −2.83 −29.38

  −0.76 ** −7.58 0.98 ** −7.88 0.09 ** −13.20 IPS Wt–bar

 

1.75 −18.70 3.66 −18.12 0.50 −21.86

 

5.41 ** −14.59 1.32 ** −17.07 3.32 ** −14.75   4.73 ** −11.45 3.90 ** −17.29 1.62 ** −15.47

** ** ** **

  4.73 −3.43 −2.57 −6.89 2.20 −2.87

  3.65 ** −9.26 −1.33 ** −11.09 0.00 ** −14.37   4.22 ** −9.28 −1.26 ** −10.62 3.15 ** −14.68

  0.21 ** −6.70 0.24 ** −6.68 −0.70 ** −8.53 Pesaran Standardized

Note: * significant at 5 percent; ** significant at 1 percent. Lag lengths for the LLC and IPS tests were determined using the AIC; For the Fisher-ADF and Pesaran tests, Schwert’s (1989) 0.25 criterion was used lags max =  4 ⋅ (T / 100)  .





164  The importance of export-led growth are known as the LLC, IPS, and Fisher-ADF, and Pesaran tests, respectively. The null hypothesis of all the tests is that all the panels have unit roots. The results in the table are generally consistent across different tests suggesting log real GDP and log nominal GDP are nonstationary in log levels and are only stationary after first-differencing. Results for the LLC test suggest that the two variables may be stationary in log levels for the annual data and that real GDP may be stationary for the quarterly data. However, for panels A and D, which have the longest time span of data at their respective frequencies the other three unit root tests do not support the LLC results. Based on this observation and all of the panel unit root tests, we reject the null hypothesis of a unit root for log real GDP and log nominal GDP. The unit root results are quite different for the export ratio. In this case there is more evidence that the export ratio is stationary in levels. In all panels using annual data and for the quarterly data in panels D and E, at least one and in some cases two of the four tests reject the null hypothesis that the export ratio across countries exhibit a unit root. At the ten percent significance level one additional test also rejects the null hypothesis in panels D and E. Given this evidence we conclude that the export ratio is stationary in levels. While the unit root results are different for the three variables in the VAR, the conclusion that the export ratio is I(0) and real GDP and nominal GDP are I(1) gives evidence for the final long-run restriction used to identify export shocks based on time series properties of the data. As shocks to a stationary variable cannot have long-run effects on a nonstationary variable, the fact that the export ratio is stationary in levels is used to identify export shocks as the shock in the three-variable system including real GDP, nominal GDP, and the export ratio that does not have a long-run effect on both real GDP and nominal GDP.2 We turn next to Granger causality tests, which may give information on potential additional identifying restrictions based on the short-run direction of causation. Dumitrescu and Hurlin (2012) discuss the benefits of panel Granger tests including finding meaningful results even with shorter time horizons and improved efficiency of results. Their paper provides a procedure which addresses the problem arising from heterogeneity of individual cross-sections. The test is based on the simple Granger (1969) causality test in a heterogeneous panel model. The spirit of the test is similar to the IPS panel unit root test, in that the individual Wald statistics defined to test Granger non-causality hypothesis for each country are averaged. If the null of homogeneous non-causality is rejected, then there is evidence that a causality relationship can be found in one or more of the bivariate relations in the panel. Table 7.3 gives results from panel granger causality tests for the three variables examining all possible bivariate combinations.3 Results are largely consistent, showing bidirectional causation in all cases: causation in each direction between the two variables but no evidence of one direction causation. If there were clear one direction causation between any combinations of the three variables, it would allow for the use of short-run restrictions to identify the structural VAR. However, in this case evidence across all panels shows there is no evidence of one directional causation.

Table 7.3 Panel Granger causality test results A: Annual 1960–2014 N=113   ∆ln(Real GDP) → ∆ln(Nominal GDP) WNHnc 1029.69 ,T 1846.19 Z NHnc ,T ** Hnc  Z N ** 1095.01   ∆ln(Nominal GDP) → ∆ln(Real GDP) WNHnc 1008.84 ,T Hnc Z N ,T ** 1808.18 Z NHnc ** 1072.42 B: Annual 1970–2014 N=182   ∆ln(Real GDP) → ∆ln(Nominal GDP) WNHnc 2.47E+06 ,T 6.29E+06 Z NHnc ,T ** 3.48E+06 Z NHnc **   ∆ln(Nominal GDP) → ∆ln(Real GDP) WNHnc 1.63E+04 ,T ** 4.14E+04 Z NHnc ,T 2.29E+04 Z NHnc **

∆ln(Real exports) → ∆ln(Nominal GDP)   1158.43

∆ln(Real GDP) → ∆ln(Real exports)   1558.97

**

**

2080.89

** 1234.49 ∆ln(Nominal GDP) → ∆ln(Real exports)   538.53 950.78

**

2314.54

**

562.88

**

1373.35

∆ln(Real exports) → ∆ln(Nominal GDP)   6.89E+04

∆ln(Real GDP) → ∆ln(Real exports)   1.11E+05

**

**

1.76E+05

2.84E+05

** 9.72E+04 ∆ln(Nominal GDP) → ∆ln(Real exports)   5.07E+04

** 1.57E+05 ∆ln(Real exports) → ∆ln(Real GDP)   1.88E+04

**

1.29E+05

**

4.78E+04

**

7.15E+04

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2.64E+04

**

589.43

∆ln(Real GDP) → ∆ln(Real exports)   230.77 **

862.51

** 270.39 ∆ln(Nominal GDP) → ∆ln(Real exports)   122.74

** 397.32 ∆ln(Real exports) → ∆ln(Real GDP)   1.29

**

446.12

**

2.92

**

203.78

 

1.54

D: Quarterly 1995:1–2016:4 N=20 ∆ln(Real GDP) → ∆ln(Real exports) → ∆ln(Nominal GDP) ∆ln(Nominal GDP) WNHnc 1.04   1794.29 ,T

Z NHnc ,T Z NHnc  

** 1668.46 ∆ln(Real exports) → ∆ln(Real GDP)   1286.59

**

C: Annual 1990–2014 N=208   ∆ln(Real GDP) → ∆ln(Real exports) → ∆ln(Nominal GDP) ∆ln(Nominal GDP) WNHnc 184.83   159.92 ,T 685.43 Z NHnc ,T ** Hnc  315.01 Z N **   ∆ln(Nominal GDP) → ∆ln(Real GDP) WNHnc 1.61 ,T Hnc 6.17 Z N ,T ** 4.25 Z NHnc **

2811.10

∆ln(Real GDP) → ∆ln(Real exports)   4.27

0.11

**

1055.56

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10.34

0.04

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670.53

**

9.84 (Continued)

166  The importance of export-led growth Table 7.3 (Continued) ∆ln(Nominal GDP) → ∆ln(Real GDP) WNHnc 4.48 ,T

∆ln(Nominal GDP) → ∆ln(Real exports)   2235.40

11.02 ** 1319.17 Z NHnc ,T ** Hnc  10.48 ** 838.18 Z N ** E: Quarterly 1999:1–2016:4 N=28 ∆ln(Real GDP) → ∆ln(Real exports) → ∆ln(Nominal GDP) ∆ln(Nominal GDP) WNHnc   1.76E+05 8768.94 ,T ** 6823.49 ** 1.37E+05 Z NHnc ,T Hnc  ** 8.37E+04 Z N ** 4168.91 ∆ln(Nominal GDP) → ∆ln(Nominal GDP) → ∆ln(Real GDP) ∆ln(Real exports) WNHnc 3.24   1.08E+05 ,T Hnc 8.38 ** 8.44E+04 Z N ,T ** 7.84 ** 5.16E+04 Z NHnc ** F: Quarterly 1975:1–2016:4 N=4 ∆ln(Real GDP) → ∆ln(Real exports) → ∆ln(Nominal GDP) ∆ln(Nominal GDP) WNHnc 5.89   4.31 ,T Hnc 6.92 * 2.31 Z N ,T ** 6.75 * 2.22 Z NHnc ** ∆ln(Nominal GDP) → ∆ln(Nominal GDP) → ∆ln(Real GDP) ∆ln(Real exports) WNHnc   7.05 4.84 ,T ** 5.43 ** 8.55 Z NHnc ,T Hnc  5.29 ** 8.35 Z N **

∆ln(Real exports) → ∆ln(Real GDP)   2.55 **

4.91

**

4.63

∆ln(Real GDP) → ∆ln(Real exports)   1.46E+04 **

1.14E+04

** 6.96E+03 ∆ln(Real exports) → ∆ln(Real GDP)   6.05E+07 **

4.72E+07

**

2.89E+07

∆ln(Real GDP) → ∆ln(Real exports)   13.73 **

6.88

** 6.63 ∆ln(Real exports) → ∆ln(Real GDP)   5.49 **

6.35

**

6.19

Note: * significant at 5 percent; ** significant at 1 percent.

Finally, Table 7.4 presents results for cointegration tests based on Pedroni (1999) between the two nonstationary variables, real GDP and nominal GDP. If cointegration exists, a vector error correction model would be appropriate for estimating the three-variable system. As there is little evidence in the table for cointegration in any of the panels and there is no additional restriction implied by the time series properties of the data based on the Granger causality test results, we employ the following three restrictions to identify the structural shocks of interest: nominal demand shocks have no long-run real effects on real GDP, and export shocks have no long-run effects on real GDP and nominal GDP. The estimation strategy here follows Pedroni (2013). While Pedroni (2013) developed an innovative approach not only for the estimation of a panel structural VAR through a group mean/median process, the author also showed how the

The importance of export-led growth 167 Table 7.4 Pedroni’s panel cointegration tests results A: Annual 1960–2014 N = 113       v-stat   Panel-stats: −4.29 Group-stats:

rho-stat  4.02  3.41  

t-stat  4.07  4.23  

adf-stat  2.54  3.33  

C: Annual 1990–2014 N = 208    v-stat  0.44 Panel-stats: Group-stats:

rho-stat  3.73  4.90  

t-stat  2.49  3.55  

adf-stat  1.66  1.83  

rho-stat  0.16  2.76

D: Quarterly 1995:1–2016:4 N = 20     v-stat Panel-stats: −2.31 Group-stats:

t-stat −4.16 −4.28  

adf-stat  0.57 −0.20  

rho-stat −0.20  0.99

t-stat −0.68  0.10  

adf-stat −1.01 −0.85  

t-stat −0.68  0.39  

adf-stat −1.96 −2.01  

t-stat −1.38 −1.94

adf-stat  0.35 –2.97

B: Annual 1970–2014 N = 182  v-stat   Panel-stats: −5.08 Group-stats:

E: Quarterly 1999:1–2016:4 N = 28      v-stat rho-stat Panel-stats: −2.34 −0.04  1.70 Group-stats: F: Quarterly 1975:1–2016:4 N = 4     v-stat Panel-stats: −1.82   Group-stats:

rho-stat  0.15 −2.19

Note: All reported test statistics are normalized to the N(0,1) distribution, with the null of no cointegration. * significant at 5 percent; ** significant at 1 percent.

estimates could be separated into common and idiosyncratic components. Here, we simply apply the group mean/median estimation strategy for the composite shocks without decomposition. We denote the reduced form moving average representation of the three-variable VAR by ∆zit = Fi (L ) µit and the structural form by ∆zit = Ai (L ) εit . Δzit is a 3X1 vector consisting of the three stationary variables Δ(log real GDP), Δ(log nominal GDP), and the export ratio. It is assumed there is a vector of white noise shocks for each country, εit m=1, . . ., N. The relationship between the reduced form shocks and the structural shocks is given by µit = Ai (0) εit ∀i. (7.13) First, the reduced form VARs Ri (L ) ∆zt = µit for each panel member i is estimated.4 The three long-run restrictions which impose a zero in the lower left

168  The importance of export-led growth triangle of Ai (1) allow us to identify this matrix, where the appropriate covariance matrices are represented by '’

Q µi (1) = Ai (1) Ai (1) . (7.14) Furthermore, using the fact that Fi (1) Ai (0) = Ai (1) and Equation (7.13), the structural shocks εit are obtained. We then use the sample distribution of these responses to calculate the median response and also perform a panel bootstrapping procedure with 1000 draws to compute 95 percent confidence intervals for these median response estimates. Median variance decompositions are similarly estimated. We now turn to the impulse responses and variance decompositions resulting from the structural VAR estimation.

Empirical findings Figure 7.1 shows the impulse responses of real GDP to structural demand, export and supply shocks from the panel VARs using annual data. Results for all three panels show that demand, export and supply shocks all have statistically significant effects on real GDP at all horizons. The impact on real GDP from a supply shock increases from the initial shock to five to seven years out, with the effect then leveling off at a sustained higher level. An example for the interpretation of the point estimate of the impulse response is in the initial period a supply shock the figure shows results in a 2 percent increase in real GDP.5 Generally demand shocks have smaller impact, although statistically significant, with export shocks having the second largest, followed by demand shocks. Nonetheless, the evidence shows export shocks have strong significant effects and highlight their importance for understanding real output fluctuations over time. Consistent with the identifying restriction imposed on the system to estimate the structural shocks, the impacts from both demand shocks on real GDP diminishes over time. Results for more recent data in panel C, which covers 208 countries for the period 1990–2014, show a somewhat dampened impact relative to the other two panels. It is possible this difference is due either to the additional countries in the more recent sample, all being developing and transitioning countries, or due to the shorter time span, not allowing for as accurate an estimation of the impact. In the more recent panel, the relative size of the impacts between demand, exports and supply differ from those in panels A and B. While supply shocks still have the largest relative impact, the relative size of the impact of export shocks lessens compared to those from other demand shocks. Moving down rows in Figure 7.1, we see this change progresses as the size of the impact on real GDP from the export shock is smaller as we shorten the time span in each panel and increase the number of countries. Table 7.5 gives the median variance decompositions at various horizons for real GDP across the three panels using annual data. In all panels, supply shocks account for a majority of the variation of real GDP fluctuations at all horizons, increasing in percentage over time. While the relative importance of the two

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C. 1990-2014, N=208

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170  The importance of export-led growth Table 7.5 Variance decompositions for log real GDP, annual data Panel

A. 1960–2014, N = 113 B. 1970–2014, N = 182 C. 1990–2014, N = 208

Horizon

1 3 7 10 1 3 7 10 1 3 7 10

Variation due to: Supply

Demand

Exports

52.8 57.7 70.9 72.0 50.6 62.1 64.8 72.5 56.9 68.6 78.1 84.4

7.1 9.3 10.6 10.3 15.5 13.1 12.8 12.0 12.6 12.9 10.5 7.8

25.4 20.1 13.6 10.6 14.6 11.5 9.6 8.3 14.8 9.5 5.9 4.2

demand shocks varies across the panels, consistent with the smaller impact for export shocks found in the impulse responses in more recent panels, export shocks account for a smaller fraction of the variation in real GDP as well. As the table presents median estimates for each panel, the variance decompositions across the three shocks do not necessarily sum to 100. Nonetheless, while both demand shocks have statistically significant effects on real GDP, they account for a greater percentage of real GDP variation in panels that cover longer time spans, with the export shock having relatively greater explanatory power, even accounting for 25 percent of variation in the immediate period of a shock in panel A. This indicates adding the additional countries in later panels dampens the estimated impact and importance of export shocks. Figure 7.2 shows impulse responses from the structural VAR estimation using quarterly data. Results for panels D (OECD data) and E (World Bank data) are similar to those from panel A. Responses from real GDP to all demand and supply shocks are statistically significant at all horizons, supply shocks have the largest impact and increases over time, and the relative size of the impact from exports shocks is greater than from nominal demand shocks. The variance decompositions in Table 7.6 for the quarterly data show supply shocks account for the majority of variation at all horizons and increases to over 80 percent in the long run. The table also shows that export shocks account for a greater share of variation relative to nominal demand shocks and more in the OECD data versus the World Bank GEM data. In this case, adding more countries over a similar period found greater impact of exports shocks. However, given most of the countries in the quarterly sample would not be classified as “low-income” countries, results here combined with those from the annual panels suggest that incorporating more developing countries does dampen the estimate of the impact of export shocks.

Panel

D. 1997:1-2016:4, N-41 (OECD)

E. 1999:1-2016:4, N=28 (GEM)

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F. 1975:1-2016:4, N=4 (Tigers)

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172  The importance of export-led growth Table 7.6 Variance decompositions for log real GDP, quarterly data Panel

D. 1997:1–2016:4, N = 41 OECD

E. 1999:1–2016:4, N = 28 GEM

F. 1975:1–2016:4, N = 4 Tigers

Horizon

1 4 8 16 20 1 4 8 16 20 1 4 8 16 20

Variation due to: Supply

Nominal demand

Export demand

32.0 36.8 48.9 58.1 64.8 53.1 61.3 67.9 81.1 85.2 14.7 20.5 22.8 21.0 20.5

10.6 13.2 10.6 10.4 8.9 10.9 8.4 7.8 6.7 5.4 50.6 43.0 39.9 43.2 44.5

22.4 25.8 20.2 18.6 14.5 18.5 24.9 14.5 7.7 5.5 15.7 20.3 20.4 19.8 19.3

The impulse response results for the Four Tigers’ in panel F in Figure 7.2 show much larger estimates for both type of demand shocks compared to the other panels. In fact, the size of the impact from the nominal demand shock is larger than the supply shock at all horizons. Impacts from both demand shocks also show greater persistence despite the identifying restriction imposed on the system of long-run neutrality of demand shocks. Variance decomposition estimates in Table 7.6 show that nominal demand shocks account for a larger percentage of variation in real GDP than supply or exports shocks, and combined, both demand shocks account for over 50 percent of real GDP variation, at all horizons. Export shocks account for roughly the same fraction of variation as supply shocks in panel F. The distinct difference in the results for the Four Tigers panel supports what others have concluded in the literature: the experience of these nations is simply different than most. Results here suggest that the difference is in the importance of demand shocks in particular, but not necessarily export shocks. Of course, it may be that the identifying restrictions used in this chapter do not accurately separate demand shocks into nominal domestic demand shocks and export shocks, and part of the nominal demand shock impact could actually contain export shocks. To investigate the issue more fully, it is possible to add the investment rate to the quarterly samples for the OECD dataset and the Four Tigers. These data are available from the same sources. Here the investment rate, measured as real investment divided by real GDP, is utilized as the investment measure. Adding this variable to the three-variable VAR now requires three additional identifying restrictions to identify the four-variable structural VAR. The first restriction is to

The importance of export-led growth 173 extend the long-run neutrality of demand shocks to the investment rate as investment is a component of aggregate demand. This would mean that a shock to investment demand would have no long-run effect on real GDP. To investigate possible other identifying restrictions time series properties of the investment variable are examined. Table 7.7 presents panel unit root and Granger Causality tests for the investment rate for both datasets. There is clear indication that the investment rate across countries is stationary in levels in both samples. This supports the long-run neutrality assumption for the investment shock. Further, just as the stationarity of the export ratio was used to justify the identifying restriction that export shocks had no long run impact on nominal GDP, the stationarity of the investment rate implies there is no long run effect of an investment shock on nominal GDP as well, providing the fifth identifying restriction. Panel B of Table 7.7 also suggests that the export ratio granger causes the investment

Table 7.7 Panel unit root and Granger Causality tests for investment rate A. Panel unit root tests results investment rate Variable

LLC

IPS

Quarterly 1997:1–2016:4 N = 41 (OECD)   ** −2.37 * −2.19 Quarterly 1975:1–2016:4 N = 4 (Tigers)   ** −2.93 ** −3.87 Reported Test Statistic

LLC adjusted t

IPS Wt-bar

Perron

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**

167.23

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−2.03

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15.49

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−2.81

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Pesaran Standardized

Note: * significant at 5 percent; ** significant at 1 percent.

B. Panel Granger Causality tests results Quarterly 1997:1–2016:4 N = 41 (OECD) Export ratio ≠> Investment rate

 

WNHnc ,T

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174  The importance of export-led growth rate. This suggests a short-run identifying restriction to just identify the structural VAR, namely that the investment shock has no contemporaneous effect on exports as exports Granger Cause investment. This latter result suggests also that exports in addition to any direct impact of real GDP may also have an effect through impacting investment demand. Figure 7.3 provides impulse response estimates for log real GDP to the four shocks in the four variable structural VAR for three different panels: the first and second columns are for the same samples for the OECD and the Four Tigers as examined previously, just adding investment, and the third column is for the Four Tigers restricting the sample to prior to 2000, the period the four experienced robust growth. For the OECD sample, results are similar to previous ones and the impact of an investment demand shock appears similar to the other two demand shocks, but even stronger in magnitude. Variance decomposition estimates in Table 7.8 confirm this visual observation as investment demand accounts for a larger share of real GDP variation than the other two demand shocks except for the very long run where the exports number is slightly higher. Overall, variance decomposition for supply shocks decreases slightly, but in the long run they still account for over half of the variation. This is similar to original Blanchard and Quah (1989) results for the United States where they only had only one demand shock. Results for the Four Tigers in column two are similar to previous results as well with nominal demand shocks over the full sample having the largest impact and accounting for the greatest portion of real GDP variation at all horizons. Investment demand shocks have a statistically significant impact in the short run, but not in the long run, and export shocks continue to be important, but less so that nominal demand shocks. When the sample is restricted to before 2000, the results for the Four Tigers in column three change quite dramatically. Combined demand shocks continue to have the largest impact and account for the greatest portion of real GDP variation, but it is investment demand shocks that now have the largest effect on real GDP in the short run and account for the largest fraction of variation at all horizons. Overall, the results show that supply shocks are the underlying driver for real GDP fluctuations across countries in the postwar era, but that demand shocks are also important accounting anywhere from 20 to 30 percent of real GDP variation in the short run, with declining impact over time. Results for the Four Tigers stand in contrast, where there appears to have been a more important role of demand in changes in real GDP over time. Investment, in particular, seems to have played an important role in the early periods of the Four Tigers growth experience. To examine the issue more fully, a case study for South Korea is examined in the next section of that chapter.

The South Korea case study Korea’s economic development is an important potential model for other developing countries aiming toward the same goal of reaching the status of advanced

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176  The importance of export-led growth Table 7.8 Variance decompositions for log real GDP, quarterly data Panel

1997:1–2016:4, N = 41, OECD

1997:1–2016:4, N = 4, Tigers

1975:1–1999:4, N = 4,Tigers

Horizon

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Variation due to: Supply

Nominal demand

Export demand

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27.9 29.4 33.0 46.7 52.2 18.4 18.2 21.2 27.1 29.7 13.2 5.4 5.6 8.7 11.1

9.0 4.8 5.8 4.8 4.7 36.7 41.6 48.0 52.2 52.1 16.6 18.2 19.0 21.2 21.6

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20.1 17.9 16.6 12.2 10.1 20.6 12.0 5.9 2.7 2.6 47.8 50.8 44.7 33.2 29.3

developed nation. Korea, however, is a stand out among the Four Tigers given its size: in 1950, Korea had nearly three times the population of Taiwan, ten times that of Hong Kong, and 20 times that of Singapore. Achieving such remarkable economic progress is much more challenging the larger the population of the nation. While there has been significant attention on the development story of Korea, and many have pointed to the role that an export-oriented growth strategy played in the historical development of the country, there remains a wide debate over the relative importance of capital formation, industrial policy, export-driven growth and other aspects of the remarkable accomplishment. The role of industrial policy in this success story of export-led growth has also been an area of extensive discussion in the literature. Westphal (1990) highlights the role of industrial policy in the Korean success story of export-led growth in terms of controlling capital, setting export targets, providing incentives and protecting and fostering infant industries. Quarterly data for real exports, nominal GDP and real GDP are obtained from the IMF International Financial Statistics database. In this section, real exports are used as the export measure instead of the export–GDP ratio used previously since there is only one country being examined in this case. The data are available from 1960:1 through 2012:4. Exports are available in dollars, while nominal and real GDP are in local currency. Exports are converted to local currency using the exchange rate from the IMF database, and real exports are computed using the GDP deflator from the same database. Quarterly employment and investment data are obtained from the Korean Statistical Information Service (KOSIS). Employment data are available from 1966:1 through 2012:4. The investment rate is available from 1970:1–2012:4, and investment is calculated using nominal GDP from the IMF database: real investment is computed using the GDP

The importance of export-led growth 177 deflator from the IMF. Table 7.9 provides general descriptive statistics for the main variables of interest and the period for which the data are available. Seasonal adjustment is performed on the data using the US Census X13a seasonal adjustment program. As in the previous panel estimation, the aim here is to identify and estimate the three-variable system so that a measure of the impact of demand, supply and exports on real GDP over time can be determined. To accomplish this, appropriate restrictions are imposed on the error structure of the VAR to allow for structural decomposition of the residuals and impulse responses and variance decompositions from the structural VAR are then investigated, as in the previous panel models. In this case, three identifying restrictions are necessary. First, the Blanchard and Quah (1989) long-run neutrality assumption that demand shocks do not have long-run effects on real GDP gives two restrictions where nominal demand and export shocks are assumed not to impact real GDP in the long run. Table 7.10 presents unit root tests for log nominal GDP, log real GDP and log real exports for the period 1960:1–2012:4.6 Results are given for both the Augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) tests. Panel A shows that real exports and nominal GDP are stationary in log levels, I(0). In contrast, while the result for the ADF test shows log real GDP is stationary in levels, the PP test

Table 7.9 Descriptive statistics for South Korea data Variable

Sample

# Obs Mean Std. Dev. Min

Max

Log Nominal GDP Log Real Exports Log Real GDP Log Real GDP per worker Log Real Investment

1960:1–2012:4 1960:1–2012:4 1960:1–2012:4 1966:1–2012:4 1970:1–2012:4

212 212 212 188 172

33.4 32.6 33.3 23.1 32.3

30.2 30.1 31.7 22.3 29.0

2.7 1.9 1.1 0.6 2.9

24.7 24.5 29.7 21.1 22.2

Source: IMF (2016) and Korean Statistical Information Service (2016)

Table 7.10 Unit-root tests for real exports, real GDP, and nominal GDP for Korea Variable

Augmented Dickey–Fuller

A. Quarterly Data, IMF, 1960:1–2012:4 log real exports −4.99 (0) log real GDP −3.23 (3) log nominal GDP −6.11 (0) Δlog real GDP −17.62 (0) B. Annual Data, Penn World Tables, 1953–2011 log real exports −3.32 (1) log real GDP −1.11 (1) log nominal GDP −6.31 (0) Δlog real GDP −5.60 (0)

Phillips–Perron −5.67 (0) −2.83 (11) −3.21 (1) −18.82 (0) −1.37 (1) −0.87 (1) −4.41 (0) −5.72 (0)

Note: Bold indicates significant at the 5 percent significance level; number of lags in parenthesis (max 12 quarterly, 4 annual).

178  The importance of export-led growth shows that it is nonstationary. Panel B of the table examines unit-root tests using annual data from the Penn World Tables 9. The results here show that log real GDP is nonstationary in log levels for both tests. Log nominal GPD is stationary in levels, and log exports has mixed results. For both the quarterly and annual data the first difference of log real GDP is stationary suggesting it is integrated of order one, I(1). Overall, the results suggest that real exports and nominal GDP are both I(0) and real GDP is I(1). In the present case, the fact that real exports and nominal GDP are I(0) suggests that both structural shocks do not have long-run effects on real GDP based on the order of integration of the variables. This implies that changes in nominal GDP and real exports, which do not display persistence shifts, are not consistent with the time series properties of real GDP, which displays large persistent shifts, suggesting that shocks to nominal GDP and real exports do not have long-run effects on real GDP. Table 7.11 provides results from the three-variable VAR Granger causality tests for nominal GDP, real GDP and real exports to see if there are any additional short-run restrictions that could be used.7 The results show that in every case, for every pair ordering, the null hypothesis of non-causality is rejected as the Wald Statistic is significant at the 5 percent significance level. This suggests that there is evidence of bidirectional causation for every pair ordering among the three variables and does not suggest any short-term restriction among the three variables. The time series evidence for Korea here differs from previous panel data in that nominal GDP appears to be stationary. Previous evidence of nominal GDP’s non-stationarity lent justification for the long-run restriction that nominal GDP shocks did not have long-run effects on exports. While the same time series evidence is not seen in the Korean Data, the restriction will be utilized as the third necessary identifying restriction which would impose the restriction on the system that shocks to nominal GDP have no real effects in the long run: either on real GDP or real exports. On one level, this is just a further dimension of neutrality where it is being extended to nominal variable (demand in this case) neutrality in the long run. Figure 7.4 gives the impulse responses for the three-variable SVAR with 90 percent confidence bands which are calculated based on 1000 bootstrap sample draws. Responses are shown for up to 20 quarters following the shock. The

Table 7.11 Granger causality tests for real exports, real GDP, and nominal GDP (13 lags) for Korea Null hypothesis Real exports   Real GDP 58.21 Real exports Nominal GDP 53.81 Nominal GDP Real GDP 27.62

Real GDP   Real exports 29.14 Nominal GDP Real exports 27.72 Real GDP Nominal GDP 45.53

Bold indicates significance at the 5 percent level

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Note: Dashed lines are 95 percent confidence intervals base on 1000 sample bootstrap

Figure 7.4 Impulse responses to Korean nominal GDP, real exports, and real GDP SVAR, 1960:1–2012:4

Reald GDP

180  The importance of export-led growth first clear result is that the impulse of response of real GDP to export shocks is not statistically significant at any horizon. In contrast, only the nominal demand shock and supply shock has a statistically significant impact on real GDP. In addition, the supply shock has immediate and persistent effects on nominal GDP and real exports over the entire horizon. This is a clear picture of supply driving demand, although nominal demand does have statistically significant impact on real GDP in most period. Table 7.12 provides variance decomposition estimates with evidence that largely confirms the relative importance of shocks. Around 50 percent of the fluctuations in real GDP at all horizons can be attributed to supply (real GDP) shocks. Surprisingly, nearly 40 percent of variation in real GDP can be jointly attributed to nominal GDP and exports shocks even though the impulse response of real GDP to exports shocks were not statistically significant at any horizon. This reflects the difficulty often in obtaining precise and statistically significant estimates in time series VAR estimation. In addition, supply shocks account for a significant amount of variation for both nominal GDP and exports in the short run and long run, increasing in magnitude over time: a little over 40 percent and 50 percent of variation in exports and nominal GDP is attributable to supply shocks at a horizon 20 quarters out, respectively. This is a case where supply creates its demand both domestically and internationally in Korea. The results suggest that while exports did play an important part in Korea’s growth history, exports were not the driver of economic growth: rather, exogenous increases in supply and productivity resulted in an expansion of exports, a necessary increase in market size for Korean-made products over time. The supply shocks likely helped create the comparative advantage for Korean goods to be competitive in world markets and for exports to increase and provide the necessary market to sustain higher levels of production. This evidence is supportive of the strand in the export-led growth literature that argues export growth was a result rather than a cause of Korean economic growth and development.

Table 7.12 Variance decomposition for nominal GDP, real exports, real GDP SVAR Korea Variable

Real GDP Real exports Nominal GDP

Horizon

1 12 20 1 12 20 1 12 20

Variation due to: Supply

Nominal demand

Export demand

53.3 48.6 51.2 28.1 39.1 43.4 36.9 40.6 52.6

27.5 21.5 22.3 58.0 49.1 45.6 22.2 17.2 12.7

10.8 21.0 18.6 6.0 5.8 5.3 28.4 31.6 28.1

The importance of export-led growth 181 To investigate another demand shifter that many have pointed to as an important factor in Korean development, we include real investment in the three-variable VAR replacing real exports. Also, real GDP per worker is included in the VAR instead of real GDP to more accurately capture supply shocks as they reflect productivity shocks. Investment data are only available on a quarterly basis from 1970, thus including real GDP per worker, which is available from 1966, does not result in any loss of sample. All efforts to estimate a four-variable VAR were not successful due to the loss of precision from lower degrees of freedom and a smaller sample size. Table 7.13 provides unit-root tests for the two new variables. Evidence is clear for both unit-root tests that log real GDP per worker is nonstationary and stationary only after first-differencing, I(1), and log real investment is stationary in levels, I(0). Table 7.14 provides results from Granger causality tests where variables are included in stationary form in the VAR as required for the Granger test. Evidence for real investment and real GDP per worker show bidirectional causality. In contrast, there is clear evidence that nominal GDP Granger causes both real investment and real GDP per worker, although the evidence for the latter is much more robust in terms of p-values. The fact that nominal GDP causes real GDP per worker would suggest that shocks to real GDP per worker have no contemporaneous effect on nominal GDP. This would be the case if supply shocks actually put downward pressure on prices, which seems reasonable based on the macro theory of supply shocks from all schools of thought. The Blanchard–Quah nominal demand long-run neutrality assumption of demand (nominal GDP) and exports on real GDP is combined with the short

Table 7.13 Unit-root tests for real investment and real GDP per worker for Korea Variable

Augmented Dickey–Fuller

Quarterly Data, IMF, 1970:1–2012:4 log real GDP per worker −2.60 (11) log real investment −5.27 (0) Δlog real GDP per worker −17.71 (0)

Phillips–Perron −2.85 (12) −5.63 (0) −19.56 (0)

Table 7.14 Granger causality tests for real investment, real GDP per worker, and nominal GDP (3 lags) for Korea Null hypothesis Real Inv Real GDP per worker 31.65 Real Inv Nominal GDP 4.74 Nominal GDP Real GDP per worker 27.40 Bold indicates significance at the 5 percent level.

Real GDP per worker Real Inv 10.49 Nominal GDP Real Inv 10.44 Real GDP per worker Nominal GDP 2.12

182  The importance of export-led growth run restrictions implied from the Granger Causality estimates that nominal GDP causes real GDP. Figure 7.5 gives the impulse responses for the three-variable SVAR. In this case, supply shocks continue to display statistically significant effects on GDP per worker at all horizons. However, investment shocks also display statistically significant effects on real GDP per worker, also at all horizons, although the size of the impact is strongest in the immediate period of the shock. This suggests that demand is also a driver of growth and economic fluctuations, but it is through investment shocks. Interestingly, the results also show a persistent fall in investment in response to a supply shock, perhaps reflecting the diminished need for investment in the presence of positive productivity shocks. Investment shocks have statistically significant effects on nominal GDP, as well at all horizons. Evidence suggests that investment has played an important role in Korean development, a fact that many others have stressed. Table 7.15 gives the estimates for the variance decompositions for the three-variable VAR. Supply shocks continue to be the most important factor explaining movements in real GDP per worker. The fraction of variation in labor productivity attributable to supply shocks increases from nearly 50 percent in the initial period to 80 percent 20 months out. Here, the statistically significant effects from investment shocks account for 30 percent of real GDP per worker variation in the short run. While the fraction of variation attributable to investment shocks decreases over time, there is clear evidence of the importance of investment shocks. Investment itself is largely driven by independent investment shocks, although there is nearly 20 percent variation due to shocks in real GDP per worker. Given the negative association between the two in the impulse response estimates, this could reflect the lower levels of investment over time as productivity increases continued. Interestingly, nearly all variation in nominal GDP, over 90 percent at all horizons, is due to investment shocks. This suggests that investment is the main factor behind demand shocks in the Korean economy. Given this fact, it is not surprising that nominal GDP shocks are not statistically significant for both investment and real GDP per worker impulse responses in Figure 7.5, and the variation that can be attributed to nominal GDP shocks in both variables is marginal. The picture that emerges is the important role of investment in the Korean development story. While its relative importance is much less than productivity shocks, it accounts for 30 percent of variation in labor productivity in the short run, declining to slightly less than 20 percent in the long run. This is in contrast to export shocks in the previous section, which suggested that while providing an important market for increased Korean production, exports were not the main driver of growth in any statistically significant way. Given the evidence that real investment is the main driver behind demand shocks in the previous section, we bring real exports into the three-variable VAR replacing nominal GDP. Previous unit-root tests have confirmed that real investment and exports are both I(0), and real GDP per worker is I(1). Table 7.16 provides results for the Granger Causality tests from the three-variable VAR including real investment, real exports and real GDP per worker. The evidence

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Note: Dashed lines are 95 percent confidence intervals based on 1000 sample bootstrap

Figure 7.5 Impulse responses for Korean nominal GDP, real investment and real GDP per worker SVAR, 1970:1–2012:4

Real GDP per Worker

184  The importance of export-led growth Table 7.15 Variance decomposition for real investment, real exports, real GDP SVAR Korea Variable

Real GDP per worker Investment Nominal GDP

Horizon

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Variation due to: Supply

Investment

Nominal GDP

49.1 73.2 79.6 19.6 17.4 16.2 0.0 0.6 2.5

30.4 21.1 17.1 62.8 76.1 78.9 94.9 98.1 96.7

17.4 4.4 2.6 14.3 4.9 3.6 5.1 1.0 0.6

Table 7.16 Granger causality tests for real investment, real GDP per worker, and real exports (1 lag) for Korea Null hypothesis: Real Inv Real GDP per worker 16.67 Real Inv Real exports 16.17 Real exports Real GDP per worker 4.25

Real GDP per worker Real Inv 5.62 Real exports Real Inv 5.15 Real GDP per worker Real exports 17.31

Bold indicates significance at the 5 percent level.

presents a clear causal ordering running from real investment to both real exports and real GDP per worker and from real GDP per worker to real exports. The latter result is consistent with the impulse response of real exports to real GDP in the first VAR examined, where supply shocks led to an expansion in exports and not vice versa. This suggests there is a causal ordering from real investment to real GDP per worker to real exports and that a simple Choleski Decomposition with its three-short run restrictions will just identify the SVAR. Figure 7.6 presents the impulse responses for the three-variable SVAR. The results show that real investment and supply (real GDP per capita) shocks continue to display strong and persistent statistically significant effects on real GDP per capita. There is no statistically significant evidence that real exports have an exogenous impact on real GDP per worker, consistent with previous results. The results again confirm previous findings that supply drives real exports: the response of real exports to a supply shock is immediate, persistent and statistically significant. In the present case, supply shocks do not impact real investment, which is in contrast with the previous section that found investment reduced following a positive supply shock.

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Note: Dashed lines are 95 percent confidence intervals base on 1000 sample bootstrap

Figure 7.6 Impulse responses of Korean real investment, real exports and real GDP per worker SVAR, 1970:1–2012:4

Real GDP per Worker

186  The importance of export-led growth Table 7.17 Variance decomposition for real investment, real exports, and real GDP per worker SVAR Korea Variable

Real GDP per worker Exports Investment

Horizon

1 12 20 1 12 20 1 12 20

Variation due to: Supply

Exports

Investment

92.4 82.6 73.4 2.4 15.3 23.5 0.0 0.9 1.5

0.0 1.5 4.1 92.9 80.4 70.0 0.0 10.3 19.5

7.6 14.1 18.6 3.8 2.9 4.9 100.0 88.1 77.0

The results show that investment also increase over time in response to an export shock. This suggests that export shocks with a lag lead to higher investment and indirectly supports growth instead of being a direct driver of economic growth in Korea. This does not discount the role of exports in the Korean development story as without the export expansion, it is likely domestic demand alone could not sustain the remarkable increased production, productivity and employment that Korea experienced in the postwar era. However, evidence here suggests exports were not the main driver in the growth and development story. Table 7.17 presents the variance decompositions for the three-variable SVAR. The results largely confirm that the Korean development accomplishment is largely a supply side phenomenon with supply shocks accounting for the majority share of variation in real GDP per worker. However, real investment does account for nearly 20 percent of real GDP per worker variation at longer-run horizons, and combined with estimates from the previous VAR estimates, it appears investment could account from anywhere from 15 to 30 of variation at all horizons. The estimates in the table also show the importance of supply shocks for expanding exports over time.

Summary of findings Overall, the results suggest that exports play an important role in understanding real GDP fluctuations across countries. There is a sustained significant effect to real GDP from an export shock and at various horizons, export shocks can account for as much as 15–20 percent of output variation. The similarity of results across panels, both with annual and quarterly data and from different sources, suggests that while there may be some differences across panels, the significant role of exports in driving real GDP changes over time is a robust finding for a wide cross-section of countries. There is evidence that as one includes more developing countries in the sample, the estimated impact of exports diminishes, and the impact and importance of domestic nominal demand shocks increases.

The importance of export-led growth 187 Except for the case of the Four Tigers, supply shocks account for the majority of real output variation over time. For the Four Tigers, it seems demand has played a much more significant role. Many have pointed to the different circumstances that allowed the Four Tigers to develop so rapidly. Results here suggest that while exports played a significant role, other demand shocks played a more significant role. Limiting the sample to before 2000, the faster period of expansion in the Tiger’s experience, investment is seen to be the dominant demand shock driving increases in real GDP, suggesting investment demand played a critical role in the East Asian miracle. The empirical investigation of the macroeconomic performance of the Korean economy shows, however, that its experience was different than the other three Tigers, given the panel Tiger results. The Korean case study in the postwar era sheds light into the dynamics and forces driving and sustaining the country’s economic expansion. There are three main findings based on the results: • The Korean development experience is largely a supply driven story with supply shocks, being the major force behind expansion in production and productivity over time. • Exports were not the driver of growth in the Korean economy. Instead, domestic supply and investment shocks drove export growth and not the other way around. However, export growth was important for providing an expansion of market size to accommodate the increased productivity, output and employment and also led over time to further increases in investment. • Investment is the primary demand shock in the Korean economy, and it played a significant role in Korea’s development story, which is consistent with the Four Tigers panel results, although not to the extent of supply shocks in Korea, which is a significant difference. Figure 7.7 provides a simple diagram summarizing the main results for Korea. The primary source of development suggested by the Korean case study empirical results is the section of the diagram contained in the box: supply shocks drive labor productivity and export expansion. Export expansion also leads to higher

Supply Shocks

Labor Producvity Growth

Exports

Investment

Figure 7.7 Implications of results for Korean development process

Investment

188  The importance of export-led growth investment, which feeds back to further expand labor productivity. This is the main development channel. There is also evidence of the investment channel, where there is an initial exogenous shock to investment which feeds into the main framework shown in the box. This latter channel accounts anywhere from 15 to 30 percent of the expansion in labor productivity. The results cast doubt on the idea of a pure export “led” growth experience in the Korean case. The first two bullet points above on the importance of supply shocks in the development experience and the fact that export expansion was driven by supply and investment shocks lead to this conclusion. This suggests that other larger countries trying to follow in the footsteps of the Korean experience should focus on creating favorable supply shocks, technological and productivity enhancing improvements, and investment increases rather than just export promotion. It seems likely these favorable supply shocks gave Korea the comparative advantage in new industries and then led to expansion in exports. It is not that exports didn’t play an important role. As emphasized in previous chapters, any expansion in real GDP must be supported by an increase in demand, and the results here show that export demand was important in facilitating growth after supply shocks occurred and led to further increases in investment, but exports did not drive growth. Further investigation into the specific nature of the supply shocks behind the Korean development story would be an important future step. For example, the results do not rule out the importance of Korea’s industrial policy as a force behind the supply shocks: policies leading to restructuring the economy and government-directed expansion of capital formation. This could also be pursued along the lines of investigating the factors determining comparative advantage in the industries, where Korea expanded rapidly, and what type of specific “supply” shocks were most important in this process. Previous chapters have highlighted the importance of manufacturing exports in the experience of many export-oriented growth economies. There is clearly much more to be learned and gained from the Korean experience so that other developing nations can achieve similar results someday in the future.

Notes 1 In some sense, one can think of the results here on the effects of demand and exports shocks as being a lower-bound estimate since long-run neutrality is imposed on the system. 2 The fact that the export ratio is stationary in levels and that real GDP is nonstationary in levels also supports the long-run neutrality restriction/assumption of the export shock as a type of demand shock. 3 The number of lags were chosen based on the Akaike Criterion. 4 Lag length is chosen in separate VARs using the GTOS option in procedure varlagselect, RATS 9.0. 5 The actual size of the supply shock is a combined unit shock in both the idiosyncratic and common components of the composite supply shock in the panel (Pedroni, 2013).

The importance of export-led growth 189 6 Estimation for unit-root and VAR Granger causality tests are performed in STATA. All VAR estimation is done using RATS 9.1. 7 Lag length for all estimation in the chapter is based on the maximum lag length selected from the AIC, BIC, and HQ tests for lag length. Lag length for each VAR is not presented and is available from the authors upon request.

8 Challenges confronting globalization

The previous chapters have compared two eras of globalization and the role of exports in each, examining trade policy as a tool to increase access to the world’s resources and as a vehicle to increase external demand to support domestic growth. Chapters 3 and 5 attempted to document and provide a measured account of the contribution of exports in supporting the growth process in countries in both eras of globalization. The last two chapters examined whether trade policy in fact increased exports in countries and whether increases in exports led to greater economic activity and growth across countries in the current era of globalization. This concluding chapter turns to two of the challenges that globalization presents for the current world. The first is the astonishing role and expansion of the multinational enterprise (MNE) in the global trading system. The second is the issue of rising inequality, which many believe is in large part due to the forces of globalization. The problem of inequality in many dimensions has a fractal nature to it where it occurs at almost all levels within and across nations. The chapter concludes drawing on lessons learned from the research presented in this book.

The global conquest of the multinational corporation The first MNEs were the Dutch and English trading companies of the sixteenth and seventeenth centuries. Kenwood and Lougheed (1971) discusses the importance of foreign capital in the expansion of trade during the first era of globalization. The authors point to the important motivation among the United Kingdom, Germany, United States and rest of Europe of using foreign direct investment (FDI) to set up factories in high-tariff countries to avoid the tariffs (Ibid., pp. 40–49). Thus, MNEs played an important role in the first era of globalization as well. The same authors also point to the fact that industrialization in the United States and Germany resulted in greater industrial concentration compared to the United Kingdom, largely due to monopolies eliminating competition (Ibid., p. 88). Much of the investment that occurred in the prewar era was in primary commodity production in colonies and involved chartered corporations (Grimwade, 1989, p. 154). In the United States, oil was discovered in Pennsylvania in 1859, and Standard Oil and the first MNE in the oil industry

Challenges confronting globalization 191 was established by Rockefeller in 1870, just after Ford built the first motor car in 1869: Ford Motor Company was incorporated in 1903. In the interwar era, important MNEs for the United States included Ford and General Motors and for Europe, Phillips and IG Farben. While MNEs role was increasing in this early era, transportation and communication limitations did not allow them to achieve fuller integration as occurred in the postwar era with jet airplanes and telecommunications, which allowed global production to be centrally coordinated (Ibid., p. 155). During the interwar years exchange controls, the rise of nationalism and less mobility across borders led to foreign affiliates of MNEs obtaining greater autonomy. The introduction of trade barriers discouraged trade and a move toward national production where MNE affiliates also strived to be able to produce wholly within the host country (Jones, 2005). After the war in the 1950s and 1960s, many US affiliates continued to have great autonomy and were almost like separate companies (Ibid.). The increase in protectionist sentiments of the 1970s and 1980s led to slower growth in global trade. The movement toward trade liberalization and deregulation initiated in the 1980s with the Reagan and Thatcher governments found its international policy application in the Washington Consensus, a set of policy reforms advocated by the World Bank and the International Monetary Fund (IMF) during the 1990s. Together with the fast expansion of regional trade agreements (RTAs) in the following decades, the opportunity arose for the emergence of the international production model that has become known as global value chain (GVC): the term first begins appearing in the mid-1990s. This new model of global production had FDI playing a critical role for MNEs to set up production sites or contracts around the globe wherever it is most cheap and efficient: where standards could be maintained at the cheapest cost of production. As an indication of the growing importance of the GVC and the MNEs role estimates show that worldwide FDI inflow rose from $200 billion in 1990 to just under $400 billion in 1995; and then to $1,400 billion in the early 2000s and to over $2,000 billion in 2007. This role of FDI in export expansion globally is not just a phenomenon of the current era of globalization. In 1914, the United Kingdom as the largest global economy accounted for 43 percent of global FDI, France 20 percent, Germany 13 percent, Belgium, the Netherlands and Switzerland collectively 12 percent, and United States 7 percent (Kenwood and Lougheed, 1971, p. 41). Europe was where the world’s wealth was located in the nineteenth century. Just as in the current era of globalization, it must be kept in mind, that FDI’s target is often other advanced nations, not just developing nations. In 1914, 27 percent of FDI went to other European countries, North America 24 percent, Latin America 19 percent, Asia 16 percent, Africa 9 percent and Oceania 5 percent. The United States has played a major role in the expansion of FDI flows, and while increasing exports could have been a natural way to increase trade and meet the demand that trade liberalization was creating, antitrust sentiment in the United States made foreign subsidiaries a more attractive vehicle for MNEs (Grimwade, 1989, p. 156) This also met the need for recycling of dollars

192  Challenges confronting globalization providing liquidity in the expanding global trading network (Ibid.) In the early postwar period, the United States had expanded from Europe to Latin America, the Middle East, and Asia by 1970 as European wages came closer to US levels (Ibid.) By the mid-1960s, there was also a great acceleration in the number of foreign affiliates of European MNEs first into other parts of Europe and then into the United States (Ibid., p. 157). Japan would follow, first setting up affiliates in Asia given difficulties of entering the United States and Europe, but later were able to enter that the United States as well (Ibid., p. 158). This was followed by Korea (Ibid.). Table 8.1 gives the increase in the number of foreign affiliates by countries between the early 1990s and 2010. For most countries, the period of coverage is just short of two decades, and the number of foreign affiliates worldwide more than tripled increasing by over 640,000 affiliates over the period. About one-third of this increase was in the developed world and two-thirds in developing countries. This latter of course reflects the growth in the GVC where MNEs search out the cheapest cost-production location. Of the total increase in foreign affiliates in developing countries (those whose number increase over the period), over 80 percent of the increase was in China. This shows the focus of the world’s MNEs on China in this most recent period of globalization in terms of a production sight to produce exports, a source of resources that MNEs need in their production process and as a location to increase sales of their products. Eastern Europe has been an important location as well, especially for European MNEs. Although data for South Africa are not available, the other BRICS nations have seen increases, as well as in Mexico, Hong Kong and Singapore. Most advanced nations showed sizeable increases, confirming that a large focus of FDI is between advanced nations. Table 8.2 gives the number of foreign affiliates in other developing nations and for different regions for the year 2010. The large number for East Asia again reflects over 90 percent of the affiliates being in China. Southeast Asia has the largest number in terms of regions with sizeable developing nation presence. South America also has a sizeable number with Brazil and Chile accounting for the most. In Chapter 4, examination of RTA policy in the Americas showed Chile stood out as an outward-oriented economy very active in RTA formation. A similar statement could be said about Tunisia in North Africa. There were a greater number of foreign affiliates in Tunisia than South Africa in 2010. Eastern and Southern Europe has been areas of focus of European MNEs, as the numbers confirm. Trade from the home country can either be expanded or reduced as MNE expands production facilities abroad. Kojima (1978) argues that Japanese FDI focuses on natural resource extraction and taking advantage of low-labor costs based on comparative advantage and as a result increases Japan’s trade: US FDI has largely been trying to avoid trade barriers by setting up production location abroad and thus has reduced US exports. FDI by MNEs has made it possible for the vertical disintegration of the production of goods so that different parts of the production process can be located in the cheapest production locations

Developed Countries Australia Austria Belgium and Luxembourg Canada Denmark Finland France Germany Greece Iceland Ireland Italy Japan Netherlands New Zealand Norway Portugal Romania Spain Sweden Switzerland Turkey UK US

2,450 2,210 1,121

4,475 1,289 1,050 97 11,396 798 28 1,040 1,474 3,433 2,259 1,717 3,000 7,602

6,232 6,150 4,000 2,739 3,376 16,491

1994 1993 1978

1993 1992 1994 1993 1993 1991 1991 1994 1993 1993 1993 1993 1993 1993

1992 1993 1985 1994 1992 1992

93,311

6,508 3,774 3,124 20,548 19,229 395 65 5,387 14,426 2,948 17,188 7,195 5,845 5,144 11,936 14,457 12,861 6,905 2,936 45,466 27,251

4,853 6,864 9,393

373,612

8,225 6,711 2,905 197 42,090 10,760

2,033 2,485 2,074 20,451 7,833 −403 37 4,347 12,952 −485 14,929 5,478 2,845 −2,458

2,403 4,654 8,272

280,301

640,664

Taiwan Northern Europe Estonia Southern Europe Albania Eastern Europe Belarus Bulgaria Hungary Poland Russia Ukraine Southeast Asia Indonesia Philippines Singapore South Central Asia India Pakistan WEST ASIA Saudi Arabia

China Hong Kong Korea

Developing Economies East Asia

5,733 1,856 118 393 918 15,205 126 7,793 2,514 3,472 1,952 709 926 758 225

1994 1994 1994 1994 1994 1994 1994 1994 1995 1987 1986 1991 1993 1990

45,000 2,828 3,671

1990

1993 1991 1991

101,139

144

2,033 138

2,477 922 11,064

61 13,297 28,994 7,016 2,139 872

65

1,079

2,049

434,248 10,621 1,649

512,531

(Continued)

−81

−995 −1,030 10,355   1,107 −620

−332 12,379 13,789 6,890 −5,654 −1,642

−53

−777

−3,684

389,248 7,793 −2,022

411,392

 

892,114

World

251,450

Initial year Initial value 2010 value Difference

Region/Country Initial year Initial value 2010 value Difference Region/Country

Table 8.1 Change in the number of foreign affiliates in the country by region, 1990–2010

Source: UNCTAD (2011), (1995)

Developing economies continued Central America El Salvador 1989 Guatemala 1985 Mexico 1993 South America

1,461 287 8,420

237 229 6,364

−1,224 −58 −2,056

1995 1988 1990 1988

1994

Brazil Colombia Paraguay Peru Uruguay

1990

2,220 208 905 117

698

298

689 76 631 372

4,547

121

−1,531 −132 −274 255

3,849

−177

Initial year Initial value 2010 value Difference

Bolivia

Region/Country Initial year Initial value 2010 value Difference Region/Country

Table 8.1 (Continued)

Challenges confronting globalization 195 Table 8.2 Number of foreign affiliates across regions and in other developing countries not listed in Table 8.1, 2010 Region/Country

2010 value

Region/Country

2010 value

East Asia Macao Southeast Asia Malaysia Thailand Vietnam South Central Asia Kazakhstan West Asia Bahrain Lebanon United Arab Emirates Oceania Central America Costa Rica Honduras Panama South America Argentina Chile Ecuador Venezuela

450,587 2,020 25,477 2,761 3,161 4,961 2,490 156 5,161 121 117 1,329 509 7,771 278 123 528 10,349 1,975 4,547 309 668

Southern Europe Bosnia and Herzegovina Croatia Macedonia Serbia Eastern Europe East Africa Kenya Mauritius Middle Africa North Africa Algeria Egypt Morocco Tunisia Southern Africa Angola South Africa West Africa Nigeria    

2,484 380 754 298 987 3,993 630 162 246 227 3,952 127 381 337 3,069 1,180 127 675 684 220    

Source: UNCTAD (2011), (1995)

based on comparative advantage: Ford pioneered this approach in Europe in 1960 (Grimwade, 1989, pp. 233–234). This also creates a new international division of labor (Ibid. p. 237). Grimwade (1989, pp. 247–260) provides a good discussion on the various means used by MNEs to expand into foreign countries and which conditions make one approach, such as joint ventures or licensing agreements, better than another, for example, outright ownership. Patterson and Afilalo (2008, pp. 85–98) argue that the global trade order developed under General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) has created a global web of economic agents stretching well beyond any one nation, making faster transportation and communication necessary and ultimately leading to cross-border ownership and the increasing role of the MNE. This also impacts national policies such as environmental and labor standards and requires increasing moves toward harmonization. In the postwar era, the role of the MNE has become increasingly important in all economic matters, especially international linkages (Kenwood and Lougheed, 1971, p. 254). Michalak (1994a, p. 42) argues that the spread of MNEs as they take advantage of low-wage labor has reached a level where many of them look like “fully fledged industrial economies . . . (of ) their western prototypes.” Table 8.3 provides

196  Challenges confronting globalization Table 8.3 Top 20 countries by sum of MNEs revenue in Global 500, 2015 Country

GDP

The number of companies in Global 500

Rev. share in Global 500

Sum of revenues of MNEs in Global 500

Sum of rev. as percentage of GDP

United States China Japan Germany France United Kingdom The Netherlands South Korea Switzerland Italy Russia Brazil Spain Canada Australia India Mexico Indonesia Saudi Arabia Turkey

18,036,650 11,181,560 4,124,210 3,365,290 2,420,160 2,858,480 750,700 1,377,870 664,010 1,815,760 1,326,020 1,772,590 1,199,720 1,550,540 1,225,290 2,073,000 1,143,800 858,950 646,000 717,930

128 92 54 28 31 29 13 17 12 9 5 7 8 11 8 7 3 2 1 1

25.6% 18.4% 10.8% 5.6% 6.2% 5.8% 2.6% 3.4% 2.4% 1.8% 1.0% 1.4% 1.6% 2.2% 1.6% 1.4% 0.6% 0.4% 0.2% 0.2%

8,691,997 5,847,346 2,868,529 2,082,025 2,024,865 1,671,607 1,090,693 929,913 748,612 730,232 466,605 464,890 423,457 397,768 355,839 324,102 214,515 95,334 50,155 31,376

48.2% 52.3% 69.6% 61.9% 83.7% 58.5% 145.3% 67.5% 112.7% 40.2% 35.2% 26.2% 35.3% 25.7% 29.0% 15.6% 18.8% 11.1% 7.8% 4.4%

Source: Fortune (2015)

estimates of the sum of revenues for over 20 nations of their MNEs in the Global 500, the largest 500 MNEs in the world. The countries are listed in order of the sum of MNEs revenue with the United States being at the top of the list at $8.7 trillion dollars, or the equivalent of 48 percent of the total US gross domestic product (GDP) in 2015. China is second with its MNEs totaling $5.8 trillion, equivalent to 52 percent of China’s GDP. The sum of China’s MNEs revenue is actually larger than Japan’s GDP, the third largest economy in the world. These are actual sale revenues, not company stock valuations. The numbers show the truly massive size of the advanced countries MNEs and their importance in global economic activity and trade. Switzerland and the Netherlands have low tax rates for MNEs and are so called tax havens, which has become a topic of increasing tension between nations and between nations and MNEs. As a result of the low tax rates, some MNEs locate their headquarters in Switzerland and Netherlands to avoid taxation and, as a result, the table shows the sum of revenues of their “home” MNEs is over 100 percent of their country’s GDP. One must keep in mind that even though the companies have their headquarters in these countries, their sales do not enter GDP if the products or services are produced outside of the country. For example, Airbus’ headquarter is located in the Netherlands. However, Airbus’ actual main offices and center of

Challenges confronting globalization 197 business are in France. Assuming that Airbus’ revenue is made up of 50 percent of the products that are produced in France and another 50 percent produced in the Netherlands, a total revenue for the company that would show up in each country’s GDP would only be that portion produced in each country: in this example 50 percent of total revenue. However, total company revenue in Table 8.3 would be allocated to the MNEs of the Netherlands, which it has designated as “home” and has its corporate headquarters. In addition to the United States and China, Japan, Germany, France, the United Kingdom, and South Korea all have the sum of MNEs revenue equivalent to over 50 percent of their country’s GDP. In Japan, the “Keiretsu” or enterprise groupings have played a critical role in Japan’s economic development and evolution in the second half of the twentieth century under what has been called the “Iron Triangle,” or coordination between governmental elected officials, civil servants in the powerful ministries of the government, and big businesses dominated by the Keiretsu. Korea has a similar word for these enterprise groupings, Chaebol. The structure lends itself to much greater coordination between government and business. While Europe may not have the enterprise groupings such as in Japan or Korea, the numbers show the MNEs play no less of a role in terms of economic activity relative to the size of their domestic economies. Table 8.4 compares the sum of revenues of countries MNEs to countries’ GDP and revenue of the largest individual MNEs in the Global 500. Again, the United States and China’s collective revenue of MNEs would be the third and fourth largest economies in the world, respectively. In terms of individual companies, Walmart of the United States is the first to show up in position 35. Walmart’s revenues in 2015 were just slightly larger than Poland’s GDP. The first Chinese company to appear is the Sinopec Group, an energy company in China. Of course, with the Chinese MNEs, there is the question of how large a fraction of their revenue is from foreign sales. The percentages relative to the other nations is significantly lower. The Chinese Government has given the mandate to “go out” or “go global” (Shambaugh, 2012). The MNEs have responded, but with varying degrees of success. While China tells its own MNEs to go out, more foreign companies are beginning to leave China as tax rates and wages increase and domestic company competition intensifies (Li, 2017). In comparison to Europe, United States, and Asia, there is less collaboration between governments and businesses in Africa and Latin America in trade policy, where corruption and ineffective governance is often a major issue as well. In Latin America, some have used the reference to the image of “crabs in a barrel” to describe the situation where businesses and government entities even pull each other down if they become too successful. In this expansion of global economic activity, MNEs have become a transnational entity detached from government regulations, while at the same time being the main force behind globalization due to their need for unrestrictive access to markets (Michalak, 1994a, p. 54). Shin (2012, p. 211) argues that economic crises, first in Japan with the burst of the real estate bubble and then Korea with the Asian financial crisis, led to governments promoting globalization policies as the

Country/Country MNCs/Company

US China MNEs (US) MNEs (China) Japan Germany MNEs (Japan) UK France MNEs (Germany) India MNEs (France) Italy Brazil MNEs (UK) Canada South Korea Russia Australia Spain Mexico MNEs (The Netherlands) MNEs (Korea) Indonesia The Netherlands MNEs (Switzerland)

Rank

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

18,036,650 11,181,560 8,691,997 5,847,346 4,124,210 3,365,290 2,868,529 2,858,480 2,420,160 2,082,025 2,073,000 2,024,865 1,815,760 1,772,590 1,671,607 1,550,540 1,377,870 1,326,020 1,225,290 1,199,720 1,143,800 1,090,693 929,913 858,950 750,700 748,612

GDP/Revenues 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

Rank Royal Dutch Shell (Netherlands) China National Petroleum (China) MNEs (Spain) MNES (Canada) Thailand Iran Norway Exxon Mobil (US) Austria United Arab Emirates BP (UK) MNEs (Australia) MNEs (Taiwan) State Grid (China) Egypt MNEs (India) South Africa Hong Kong Israel Malaysia Denmark Singapore Philippines Colombia Ireland Pakistan

Country/Country MNCs/Company 431,344 428,620 423,457 397,768 395,300 390,040 388,320 382,597 374,260 370,300 358,678 355,839 348,796 339,426 330,160 324,102 314,730 309,240 299,410 296,280 295,090 292,730 292,450 292,090 283,720 271,050

GDP/Revenues

Table 8.4 Rankings of countries, country MNEs total revenue in Global 500, and individual MNEs, 2015 (millions of US dollars)

MNEs (Italy) Turkey Switzerland Saudi Arabia Argentina Taiwan Nigeria Sweden Walmart (US) Poland MNEs (Russia) MNEs (Brazil) Belgium Sinopec Group (China)

Source: Fortune (2015)

27 28 29 30 31 32 33 34 35 36 37 38 39 40

730,232 717,930 664,010 646,000 630,450 523,010 493,830 493,040 485,651 474,780 466,605 464,890 454,290 446,811

67 68 69 70 71 72 73 74 75 76 77 78 79 80

Volkswagen (Germany) Venezuela Toyota Motor (Japan) Chile Finland Glencore (Switzerland) MNEs (Mexico) Total (France) Bangladesh Chevron (US) Portugal Samsung Electronics (Korea) Greece Berkshire Hathaway (US)

268,566 260,090 247,702 240,230 232,080 221,073 214,515 212,018 206,530 203,784 199,030 195,845 195,320 194,673

200  Challenges confronting globalization governments were ill equipped to deal with the downturns. Nation-states have experienced loss of control due to the forces of globalization and especially the growth of MNEs and the resulting de-nationalization of the economy (Haller, 2012, p. 40). In this environment, the position of MNEs and large financial institutions were strengthened with governments losing aspects of regulatory control and the ability to guide economic activity. It is in this light that some have argued that one important function of regional trading blocs that have emerged globally is to try to regain regulatory ability on a larger regional or even continental scale (Michalak, 1994a, p. 55). Michalak concludes that the conflict between multilateralism and regionalism is at the heart of the transformation of industrial society (Ibid., p. 65). MNEs have aligned with governments to also protect themselves (Ibid., p. 67). Chapter 4 showed how many of the issues and politics surrounding global trade deal with concerns of MNEs and reflects the strong collaboration and connection of large MNEs with their home governments (Buckman, 2005, p. 94). Yeung et al. (1999, p. 34) in examining the Association of Southeast Asian Nations (ASEAN) and the EU concludes that a large part of trade is intraindustry trade done by MNEs, and this means trade diversion is less likely and, thus, potentially less contentious. Given MNEs dependence on FDI for success, these transnational entities also welcome RTAs to facilitate intraregional investment (Ibid.). So, while some governments may see multilateral RTAs as a vehicle to regain regulatory authority, governments and MNEs have become collaborators as RTAs have become a means for home country MNEs to expand their operations and importance in global trade. Relative to past periods global supply chains and the increasing importance of intermediate goods in international trade have made openness in trade even more important to corporations as they are now the purchasers and not households, and there is the desire to purchase from the cheapest locations (Irwin, 2012, pp. 170–171). In addition, politically industry’s clout has grown much stronger than households in the home nations of MNEs, and thus, trade has continued to open up further, often based on dual collaboration between industry and government. While anger and resentment toward globalization has increased in the last decade and resulted in two anti-globalization elections in the United States and United Kingdom in 2016, with policy implications being carried out in 2017 and beyond, the anger has not been directed largely at the MNEs, one of the true beneficiaries and major forces behind the increase in globalization and trade. Instead, it is directed mostly at other nations with increasing protectionist and nationalist sentiment increasing across the globe. The source of frustration in the two countries where the globalization backlash has shown up in elections are different. One source more common, although impacting citizens in different ways in different countries, and the other that the United States, has particularly been more impacted by. Patterson and Afilalo (2008, p. 191) argue the principal existential threat in the world today is the global network of terrorism and state sponsored religious fundamentalism (such as Iran) that work through proxy organizations. To the

Challenges confronting globalization 201 degree poverty is the cause of terrorism, the reality that globalization has not been successful in bringing these nations into the fold is a significant shortcoming. In fact, for many actors in the terrorist network, globalization and the MNEs are seen as the enemy and viewed as the postmodern form of colonialism consisting of a value system that is antithetical to their religious fundamentalist beliefs. McCarthy (2006, p. 9) describes colonization as the process whereby a local economy becomes dependent on the outsider and loses local decision-making ability. It is line with this definition that many view the spread of MNE production facilities throughout the developing world as a new form of colonization in terms of production decisions including the use of resources of the nation in the production of goods and services (see Michalak, 1994a, p. 55). The rise of this existential threat of terrorism was also at the heart of the both the UK and US votes. In the United Kingdom, the referendum on staying in the EU had particular far-reaching implications as it meant the nation would need to embrace the free flow of citizens across borders, an EU mandatory policy. An anti-immigrant sentiment was also a major issue in the presidential election, although there the issue was framed more targeted at banning citizens from certain countries. In some sense, the UK referendum on this topic was more complicated as the 2015 refugee crisis into other EU countries had heightened fears, and the United Kingdom had already experienced increased immigration from other parts of EU since joining the EU. The EU’s policy stance is in stark contrast to the US and UK view. The core EU advanced nations opened their doors to refugees from across the Mediterranean, mostly from the area around Syria. To some the level of openness that Belgium, France and Germany were supporting seemed perplexing. However, in the examination of trade policy and RTA formation in the Middle East (West Asia) and Africa the EU was the most active and aggressive among advanced nations with no other country coming close. Colonial ties are one reason behind this, but there is a larger ambition to embrace and bring into the EU collection of nations this region of the world, all operating under the EU model of integration and governance. It is an ambitious goal and will certainly involve overcoming cultural differences that are significant, often related to religious beliefs. At the same time, no other advanced nation is doing this in the region, or any region. This integration though has not been based on supporting growing industrialization judging by the share of manufacturing exports in the partner nations, except for perhaps those in Northern Africa and to some extent in the Middle East. Nonetheless, the support for refugee immigration is testament to the seriousness and commitment of the Europeans to this goal. Germany admitted over a million refugees. Ultimately, immigration and the flow of people is an important aspect in any era of globalization, and it played a significant role in the rising backlash against globalization in the United Kingdom and United States during the most recent period in globalization. The second area of backlash was more directed at the flow of goods and the trade creation and trade diversion impacts, which created certain winners and losers within countries. This is the area where the MNEs had played such a critical role over the years in the globalization process, and the US and UK MNEs

202  Challenges confronting globalization were some of the most successful, as tables presented earlier demonstrated. While both countries experienced dislocation of workers as a result of globalization the impact was much more severe and significant in the United States. In fact, it was not a major issue in the UK referendum. The fear and threat were just the opposite: that the UK would lose thousands of jobs by leaving the EU. In contrast in the United States, the anti-globalization rhetoric was strongest about the lost jobs to other nations due to bad trade deals. It was a clear strong position of protectionism directed toward the rest of the world. Candidate Trump more than anyone had realized and capitalized on this sentiment in the country. The only MNEs directly attacked by the Democrats were the large US MNE banks. This was not for their loss of jobs being transferred overseas though, but it was instead for their role in causing the Great Recession and because of the protection and assistance they received from the US government. Seven years after the Great Recession, the economy and jobs in the United States had not recovered enough, and the distributional effects of globalization and the Great Recession were difficult to disentangle. The reality was the Great Recession had confounded a problem that globalization, with the MNEs spearheading progress with increasing intensity after the Cold War, had help to create rising inequality. And, the efforts of a preeminent leader of globalization in the postwar era, with all its actions to lead and cajole others to liberalize trade, had led to a nation where the distributional impacts had been substantial and severe enough, and neither the government nor the MNEs were doing enough to address that the time was ripe for the unexpected to occur, what the entire US nation experienced when the election was called in favor of Donald Trump after 2:30 am the morning after. The rhetoric of presidential candidate Trump centered on what he called the forgotten person and specifically on getting companies to move back to America and bring those jobs back. He also promised to get better trade deals and end NAFTA, if needed, and end Trans Pacific Partnership (TPP) no matter what. He said what the impacted people were thinking. The irony of it all is a businessman, billionaire at that, who ran an MNE himself, becomes the champion of the forgotten person left out by the forces of globalization. The US and UK backlash shows one cannot ignore those on the losing side of globalization within nations and that despite the global expansion and influence of MNEs, the nation-state is not dead.

Globalization, rising inequality and the battle for equality With the election of President Trump, US MNEs have been urged to be more concerned about the home base. The president in fact singled certain companies out in his first months of office, and it appeared that his presidency could turn into a watchdog program on US MNE job location. Foreign MNEs were not spared the president’s attention as they also were singled out in certain cases and encouraged to build production plants in the United States. President Trump would not forget his base that he developed and the main issue of inequality, job

Challenges confronting globalization 203 losses and poor job opportunities in their view brought about by the forces of globalization. Around the world, the spread of globalization is often intertwined with the increasing importance of individualism. This has brought challenges as well in countries around the world. China, Russia and Eastern Europe have all seen turbulent transitions with the rise of individualism and autonomy, where in Eastern Europe, there has been a rise in deviant behavior, crime and disrespect for public property and authority (Genov, 2012, p. 12). The early stages of entering the global market was a tumultuous time for many of the new emerging economies in the post-Cold War era. These countries experienced great uncertainties even in terms of political and governmental structures and authority. People’s revolutions brought in new governments throughout Eastern Europe, but they were squelched in other places like China. There was a sense though that in these openings, these nations had gotten a true view of the global market order and saw it as a means to gain prosperity for their countries. As these countries ventured along the path of globalization, inequality did increase within their borders. Attitudes toward this reality can differ widely within and across countries. In Eastern Europe, for example, equality was associated with an inefficient economic system of the past Communist days, and it was believed that rising inequality is to be expected in successful economies (Muller, 2012, p. 178). China has also seen a large increase in inequality, but surveys show that citizens are not necessarily dissatisfied: their main concern is that the system is fair, with equal opportunity and based on equal market competition (Ibid., p. 184). There is evidence that countries in East and Southeast Asia, in contrast to Africa, Central Asia and Eastern Europe, as part of their growth process have invested heavily in the regions infrastructure, which has had a dampening effect on income inequality (Muller, 2012, p. 187). This infrastructure also supports further regional integration and FDI from foreign companies. Patterson and Afilalo (2008, pp. 197–199) discuss how the success of the Mexican Maquiladoras, while it brought economic success to the trading class and those employed in the export industries, leave the areas extremely vulnerable to MNEs relocating production to wherever has greater comparative advantage since the Mexican state did not use the opportunity to create a welfare infrastructure to deal with the dislocation that will occur. In fact, even in some of the successful developing countries in this current era of globalization, a significant portion of the population has not benefited and live in poverty. In 2010, China’s poverty rate was still 11.8 percent, 32.7 percent in India, 16.9 percent in Vietnam, 6.1 percent in Brazil and 13.8 percent in South Africa. For many countries, the reality is that they have observed substantial increases in income inequality within their countries. In 2014, the bestselling book Capital in the Twenty-First Century by Piketty and Goldhammer (2014) caught the economic profession by storm and was one of the few occasions were an economic text was read so widely by the public. The book documents the increase in inequality in countries in different regions and across different income groups. Table 8.5 gives data available from Piketty’s website for years closest to 1990 and

204  Challenges confronting globalization 2010 and the change in the percent of income in these countries going to the top 1 percent of the population (Piketty, 2017). While the increase in some countries is noteworthy, the comparatively small increase in some European countries like Germany, France and Spain stands out. At the same time, these nations have lower fractions of income going to the top 1 percent of the population. The United States has among the largest increase, and its ending level is one of the highest with slightly less than 20 percent of all income belonging to the top 1 percent in 2010. In his book, Piketty provides longer periods of comparison going as far back as 1910, the period just near the end of the first era of globalization. The longer charts show that for the European nations and Japan, inequality is in fact substantially less in 2010 compared to 1910 and has not risen extensively between 1950 and 2010. For the other countries where data are available including the Unite States, Canada, Australia and other developing nations (China, Indonesia, India, Argentina, Colombia and South Africa), income inequality measures based on fraction of income going to the top deciles of the population is similar in 2010 and 1910. For the United States, Canada, and Australia, inequality steadily declines with the advent of World War I, then during the interwar years and more dramatically with World War II. A smaller gradual decline continues until the late 1980s. In the developing countries, the more dramatic decline is between the 1950s through the 1980s. In both sets of countries, the striking feature is the rise of inequality between 1990 and 2010, which is also shown in Table 8.5. For the advanced countries, it was the two successive wars and the period in between them that led to the decrease in inequality.

Table 8.5 Top 1 percent income share Country

1990

2010

Difference

China Japan Indonesia India Australia New Zealand Canada US Argentina Colombia Denmark Germany France Italy Spain Sweden UK South Africa

5.0 8.1 8.1 7.4 6.3 8.2 9.4 14.3 12.4 20.5 5.2 10.5 8.2 7.8 8.4 4.4 9.8 9.9

11.0 9.5 13.0 12.0 9.2 8.2 12.3 19.8 16.8 20.5 6.4 11.2 8.8 9.4 8.5 6.9 14.7 16.6

6.0 1.4 4.9 4.6 2.9 0.0 2.9 5.5 4.4 0.0 1.2 0.7 0.6 1.6 0.1 2.5 4.9 6.7

Source: Piketty (2017).

Challenges confronting globalization 205 The pattern for the other European nations is similar to the United States, where the wars caused inequality to decline dramatically. There was the continued decline to 1990, and then, if anything a slight uptick. The main difference of course between the two sets of nations, the European and the others, is the existence of a more advanced welfare state. The United States passed a massive tax cut at the end of 2017, and it will likely increase inequality further and make any increase to income support structures more difficult for government to introduce: it will more likely require reductions in the income support structures in place. This has been done in a spirit of what can be compared to the rhetoric of growthmanship that was part of the 1950s and 1960s, although then, the aim was to facilitate growth through trade liberalization and the new GATT framework. The massive increase in MNEs revenues and size discussed earlier no doubt has a lot to do with the rising inequality in nations, as this trading elite in the form of owners and executives fills the rank of the top 1 percent in Piketty’s (2017) estimates.1 Most of Europe has managed to maintain greater equality through its tax system and income redistribution policies.2 While globalization has certainly coincided with the richest citizens and MNEs being the clear winners in advanced countries, the clear loser has been the laborintensive manufacturing industries in these same countries (Buckman, 2005, p. 99). The case of the US manufacturing industry provides an apt example. Figure 8.1 shows manufacturing employment for the period 1960 to 2017.The figure shows the rapid increase in manufacturing employment in the 1960s with nearly 4 million jobs added. While recessions negatively impacted manufacturing 20 2001 Recession

19 18

China joins WTO

miilions

17 16 15 14

2007-2009 Recession

NAFTA

13 12 11 10 1960

1970

1980

1990

Figure 8.1 US manufacturing employment, 1960–2016 Source: Bureau of Labor Statistics (2017)

2000

2010

206  Challenges confronting globalization employment, it reflected normal business cycle patterns with employment swings in the range of about 2 million jobs up through 2000. This was even during the early years of NAFTA. With the recession in the early 2000s, which was just before the entry of China into the WTO and the explosion of RTAs globally, US manufacturing employment began its dramatic decline with about a 3-million loss of manufacturing jobs following the early 2000s recession. Figure 8.2 shows US manufacturing sales from 1992 to 2016, and there was a drop in sales in the early 2000s recession of over $25 billion, but by 2005, sales had rebounded, while employment had not increased at all. Employment in the industry did stabilize though somewhat in 2003, but it continued to fall by over another 600,000 jobs through 2007. The 2007 Great Recession saw a further reduction of another 3-million jobs to its low point in 2010. Sales declined as well, but reached previous levels by 2011. Employment on the other hand even as recent as 2017 had only increased by 1 million jobs. This loss of manufacturing jobs during the first decade of the of the new millennium in the United States was nearly 6 million jobs, roughly the population size of the state of Missouri or Wisconsin, two states President Trump won in the election. The rebound in manufacturing sales during both recessions without the rebound in employment is indication manufacturing firms either increased productivity through new technology and/or capital increases, or moved production abroad to other countries: likely both occurred. The dislocation of workers was on a massive scale. The EU did not experience a decline in the early 2000s in manufacturing employment as the United States did. However, it did experience a decline with the Great

525

billions of dollars

475

425

375

325

275

225 1992

1996

2000

2004

Figure 8.2 US manufacturing sales, 1992–2016 Source: US Census (2017)

2008

2012

2016

Challenges confronting globalization 207 Recession, and levels have not recovered to pre-recession levels as well. Using comparable OECD data, US manufacturing employment from 2000 to 2017 has declined by 21.4 percent, whereas EU manufacturing employment, which is just over twice as large as the US, decreased by 12.4 percent between 2008 and 2017. The evidence is clear of the negative impact of the Great Recession and potential role of outsourcing of jobs on the manufacturing labor force in the US economy. There is wider disagreement on whether globalization and increased trade have led to greater or lower inequality across nations. Muller (2012) argues from a sociological standpoint the right measure of success in an era of globalization should be a world view, and from this perspective, inequality across nations has decreased significantly. It is true that in successful countries, such as those in East and Southeast Asia, economic development and poverty reduction have been substantial (Feasel, 2015, pp. 193–197). However, the United Nations Conference on Trade and Development (UNCTAD) also argues that trade liberalization for the developed world has mostly led to greater dependence on primary commodity export dependency rather than causing a shift to manufacturing (UNCTAD, 2004, p. 19). Buckman (2005, p. 272) argues that the least developed countries have actually split into third and fourth worlds and inequality has increased. Chapter 3 discussed the flying-geese model of development that can aptly describe Asia’s development process as countries move up the value-added chain of manufacturing export production over time. This development strategy addresses the inequality issue across nations through a development process. It was also pointed out that a challenge to applying this on a global scale is potential flooding of markets with labor-intensive production goods. The proliferation of RTAs, especially with developed nations combining with developing ones, can potentially create a similar process for development. This is what has occurred with the EU and Eastern Europe and to a certain degree with the United States and Canada and Mexico. Of course, this also means that those countries left out will continue to fall further behind with inequality increasing between them and the faster developing nations. This is especially true for African and Middle Eastern nations. In Asia, there is the sense the RTA process has facilitated this growth process and the key has been to also develop intraindustry trade, not just interindustry trade. While interindustry trade based on comparative advantage, first pioneered by Ricardo, does have its benefits, dependence on it can also lead to backwardness and development inequality. With the exception of resource-rich nations, there is no example of increasing standards of living to the level of the advanced world other than through the industrialization process of expanding manufacturing. In all cases, exports have played an important role, varying depending on the size of the nation, but an important role nonetheless. At the same time, Shin (2012) shows that while Japan and Korea were originally held up as models of being able to achieve high growth and increased standards of living without increasing income inequality, this is no longer true: with the bursting of Japan’s real estate bubble and decades of economic malaise and Korea’s financial crisis in 1997, there has been a substantial increase in inequality

208  Challenges confronting globalization in both countries. Both governments have seen increased costs of social programs similar to other OECD countries (Ibid., p. 211). At the same time, in response, governments have increased their promotion of globalization through a fast proliferation of RTAs as was seen in Chapter 4 to benefit their countries MNEs. This has exposed their working-class citizens to fierce international competition and has further led to rising inequality and an insecure future (Ibid, p. 212). In Korea, the crisis especially results in the decline of the development state and has occurred in a substantial rise in non-regular employees, or part-time workers, who earn much less than regular workers (Ibid., p. 218). So far, these Asian nations have not moved to the generous welfare state model of the EU, and while successful, their development efforts have exposed themselves to what appears to be a negative consequence of globalization experienced in those nations without a sufficiently robust safety net, rising income inequality. Another dimension of inequality, or what is more aptly called the drive for equality arising from globalization, especially in advanced Western nations, is examining inequality across dimensions beyond income. Increasingly, globalization especially in developed nations sees the growing demand for the social and political inclusion of ethnic groups, what Bos (2012, p. 268) refers to as the rise of ethnic particularization. The broader framework is that there is increasing demand for recognition of identities based on gender, race, language, ethnic background and sexual orientation (Ibid.). Of course, these are all finer dimensions of discrimination and inequality in the developed world. The rise of identity politics is a result of the increased migration to the Western industrialized world and has brought about this inevitable challenge (Ibid., p. 269). In the Western world, Bos (2012, p. 271) argues that individualization has replaced the collective tradition and morals that can no longer bring cohesion in society. The author argues that the particular has become the universal in that all particulars should be accepted, and what was previously considered universal has now become a particular: this is a key aspect of globalization, and ultimately, individuals and society should recognize that integration of all within a nation is the key to sustaining globalization, not a threat to it (Ibid.). Of course, it is precisely this acceptance of minority groups that puts fundamentalist religious groups often in opposition to globalization and presents a significant challenge to its spread to other countries, in the Arab world in particular, as was partially discussed in Chapter 4. In the advanced world, this anti-immigrant sentiment is an important element of the globalization backlash, especially in the United Kingdom and the United States, and also growing nationalist sentiments in Europe. In Germany, recent elections left the Chancellor with the previous coalition not having a majority. To form a coalition government with the Social Democrats, the Chancellor had to agree to immigration caps for the country. John Stuart Mill stated women’s empowerment was the best measure of progress in a nation. Khondker (2012) examines the progress of gender empowerment in Asia, the fastest-growing region in this new era of globalization, and while there has been some progress, gender discrimination and bias persist, and

Challenges confronting globalization 209 a significant reason is cultural beliefs. The Global Gender Gap Report (2015) ranked Japan 101st and Korea 115th out of the 145 countries surveyed. The challenge in the non-Western world is often confronting Western values whose presence within their borders increases with expanding globalization. The response is often to hold on or embrace alternative conceptions such as the ASEAN response toward embracing and holding onto “Asian values” in the 1990s, or the Chinese refocus on Confucianism, and Protestant fundamentalist movements in Latin America (Turner, 2012, p. 264). The Asian values campaign lost momentum after the 1997 Asian Financial Crisis. Inequality in all its dimensions will become an increasing challenge, partially produced by and threatening globalization. Governments will need to decide how to address these issues that will only increase with the rise of automation in all aspects of the production and delivery of goods and services, the pace of which will only increase more dramatically in coming years. Shin (2012, p. 222) concludes that what is in crisis in this current era of globalization is not the gross level of economic performance, and these advanced economies are more than large enough to be considered developed with considerable wealth. The real crisis is the distributive and integrative aspect of the global economy’s impacts in these nations (ibid.).

Lessons from two eras of globalization An important lesson of the two eras of globalization is the importance of trade, and exports in particular, for the economic development and political solidification of the nation-state. In the nineteenth century, it was new emerging nations in Europe and Latin America and the strengthening of existing European and North American nations. In the twentieth century, the postwar era first in 1945 had many Asian nations engage the global community as well as nations that had just lost in war. African nations’ independence which gained momentum in the 1960s brought another wave of nations into the mix. The end of the Cold War led to more in West Asia, Eastern Europe and Africa as well. The early postwar era of trade liberalization was largely multilateral through GATT. While all regions of the world participated, with increasing numbers over time, it was only in Asia where one witnessed the economic miracle of fast catch-up in terms of standards of living. Of course, Europe was rebuilt rapidly, and Japan quickly emerged as a global economic power. However, in the developing world, it was the Asian Tigers who first showed the ability to enter higher stages of development. The multilateral trade liberalization in Latin America, and to a lesser extent Africa later on, was carried out, while the nations pursued an import substitution policy and were inward looking, except for their agriculture and natural resource sectors. The multilateral trade liberalization did benefit these countries in a comparative advantage aspect given their main exports. However, the Asian Tigers pursued an export-oriented growth strategy aimed at manufacturing exports and benefitted from trade liberalization in this strategy by allowing foreign direct investment to take advantage of low-wage labor in their countries.

210  Challenges confronting globalization Eastern European countries similarly pursued an export-oriented strategy after the end of the Cold War. On one level, GATT and the WTO were very successful and benefitted the United States, Europe and Asia the most, allowing for the rebuilding of Europe and Japan and the victory over Fascism and Communism, thus protecting the structure of the modern nation-state (Patterson and Afilalo, 2008., pp. 69–70). However, at the same time, the global trading order planted the seeds of crossborder structures and linkages, especially with the expanding size and role of MNEs in every advanced nation, that would eventually challenge the sovereignty of the nation-state (Ibid., p. 81). As such, the emergence of the global trading order presents several challenges to the nation-state, and there was bound be a backlash (Ibid., pp. 6–7). Patterson and Afilalo (2008, pp. 106–108) argues that the Doha round of trade negotiations was rejected as it would bring down the last restrictions on trade and would result in production moving to wherever there was comparative advantage. However, the welfare system infrastructure is non-existent in the developing world, and shifting of world trade would largely only benefit the trading class that already exists (Ibid., p. 108). The rise in inequality among advanced nations shows this is true in their countries. The increasing inability to provide sufficient welfare through state polices and share the benefits of globalization with all citizens is one of the greatest challenges to the nation’s sovereignty (Ibid.). There are examples of other nations now operating in the global trading network as equals, including several in Asia and the BRICs. However, in these nations there are sizeable parts of the population that have not benefitted from the economic success of their integration into the global trading system. Two failures of GATT are its ability to regulate the trading class and to integrate the “pre-modern segments” of even the successful nations into the world economic system, beyond the obvious inability to incorporate pre-modern states (Ibid., pp. 119–120). This has led to the global proliferation of RTAs and the question of which model of integration, the US, EU, or Chinese, will prevail. Through regional trading blocs, we see instances where nation-states are determining the structure of the international trading system (Gibb and Michalak, 1994, p. 257). The state has remained the main institutional framework to manage global trends, including the evolution of the global trading system, but increasingly, it is utilizing supranational integrative systems such as RTAs to regain regulatory authority (Genov, 2012, p. 1). In this expansion of increasing regionalization, one of the greatest threats to further advances in globalization is the rise of protectionism. Irwin (2012, pp. 175–176) concludes drawing on lessons based on a study of trade policy in the aftermath of the Great Depression, that a “significant reversal of this accomplishment (recent advances in trade liberalization) would constitute another trade policy disaster.” Further, the author warns “against trade interventions that give the illusion of improving short-run economic prospects, but that risk adverse consequences in the long run” (Ibid.). Most recently, there seems to have emerged two separate visions of the future of globalization. On the one side, there is the cooperative increasing

Challenges confronting globalization 211 interconnectedness, which the EU is championing and expanding in their promotion of increased economic ties around the world; and the more protectionist, beggar thy neighbor policies dominated by nationalist interests that the United States and to a lesser degree the United Kingdom are pursuing. Patterson and Afilalo (2008, p. 5) point to the EU as postmodern institution where nations have chosen to relinquish sovereignty to pursue a cooperative strategy. While the EU emerged initially as a threat to globalization, it has allowed the member nation-states to regain control of sovereign powers and regulatory authority at a larger regional scale and manage what a was previously uncontrolled global processes, often based on European values (Buhari-Gulmez, 2012, pp. 65–66). As such, the EU produces and exports its own norms and provides an alternative model of regulated capitalism to the US model of unregulated capitalism and a successful model of post-national governance (Ibid., p67). It also represents the alternative of cosmopolitan Europe as opposed to self-interested United States (Ibid., p. 70). It supports the freer movement of people, goods and capital and desires to be the meeting place for Western, Islamic, and post-Communist modernities (Ibid.). If the world were to pursue the EU route of integration, the ultimate aim would be a World Union with global governance. At the same time, a weakness of the EU is its inability to make decisions quickly, which makes crisis management difficult (Genov, 2012, p. 8). The ethnic conflict and breakup of the former Yugoslavia and the EU’s inability to prevent the ethnic genocide that occurred there is an early unfortunate example. The fact that no large developed country outside of the EU is arguing to create an institution similar to the EU lends doubt to it serving as a model for the world as countries are more interested in preserving their sovereignty (Lane, 2012, p. 42). The only exception we find based on examination of trade policy around the world is Africa, where large multilateral RTAs are ambitiously aiming (in actions, not just rhetoric) toward complete economic union, following the path of the EU. There is the Asian model of larger regional integration based on relationships and protection of national sovereignty that may emerge as another alternative, especially if the RCEP negotiations are able to be concluded and prove to be successful. China is essential to this and has increased its focus on Africa and the world. This model is one more consistent with the United Kingdom, the rest of Asia and other parts of the world: with an emphasis on integration, but retention of national sovereign powers. Both China and India have become major economic and political players now willing to engage in normative politics, but based on their own values (Kavalski, 2012, p. 280). India viewed advances in globalization in the 1990s negatively and was a major critic of further multilateral liberalization and became a major opponent, but in the end provided no alternative model (Ibid., pp. 288–292). Nevertheless, this is the first time nonWestern actors play a major role in the evolution of the global trading system and with China promoting a state-led model for the developing world. Given its recent history and its non-prescriptive approach to development assistance, which stands in stark contrast to Western interventionist approaches, China views itself as the best leader for the less fortunate nations around the world. In many

212  Challenges confronting globalization regards, Japan and Korea share similar approaches but have been less willing to lead, especially in Japan’s case. In the future, the Asian model based on a middle path of embracing international trade linkages and globalization, while respecting a nation’s sovereignty, will continue to expand as the flock expands, especially in Asia. However, there is a question of whether it can spread beyond Asia. The US retreat from leadership in trade liberalization raises great uncertainty. It has threatened to pull out of NAFTA, and recent comments from Canadian government officials to Reuters (2018, January 10) suggest Canada is increasingly convinced the Trump Administration will pull out of NAFTA. The United States also announced in 2017 that it would reduce UN contributions by $285 million the following year. This is not the first instance of questioning US true intention of providing leadership in trade liberalization and globalization. Gibb and Michalak (1994, p. 258) argue that “regionalism in the 1990s may be the result of the inability of the United States and unwillingness of Japan to assume responsibility for the world economy.” The United States was never interested in substantial regionalization, and in fact, NAFTA was set up as a model of minimal regional organization (Haller, 2012, p. 49). The danger of not taking leadership and focusing inward has shown in history that the leading nation can ultimately find the global economy deteriorating, requiring significantly more effort and resources to save a situation that could have been prevented. The opinion polls of the US president are among the lowest in history, and it maybe a case of just waiting the situation out, something US MNEs are certainly hoping for in terms of trade policy: in the meantime, they were awarded the largest tax cut since the presidency of Ronald Reagan. In any case, the election of President Trump reveals deep resentment toward globalization, especially regarding inequality issues that need to be addressed and will not disappear. The book took great effort to present estimates on the importance of export growth in the economic growth process in nations in both eras of globalization. Economic growth theory, and therefore growth accounting, was developed based on the growth experience of the main globalizing economies in both eras of globalization, the United States and the United Kingdom. The reality, however, is that trade plays an important role both in magnitude and government policy in terms of supporting and facilitating economic growth in countries around the world. For the vast majority of developing countries around the world, the most important part of economic growth is primary product trade, whether agriculture or nonagricultural resources. And for those countries that have industrialized or are further along in the process, the results presented show that exports and the role of external demand has played a significant role in their industrialization experiences. In this era of globalization where the leading globalizing economy has retreated from leadership, it is time for a new focus in economic growth research, both theoretical and empirical, to take this reality into more serious consideration. The overarching lesson is that globalization can be a powerful force to raise economic growth in countries around the world through the expansion of trade, which can support industrialization. Between 1990 and 2009, over 500 million

Challenges confronting globalization 213 people were lifted out of poverty in China, and the global market trading system with the participation of the advanced nations of the world played an important role in making this happen. This was one of the greatest achievements consistent with the Millennium Development Goals of the United Nations, which ended in 2015. This result can be expanded, but requires openness and coordination, something the United Nations’ new Sustainable Development Goals (SDGs) seem to have learned as they specify the concrete target for developing nations to industrialize to achieve the overall SDG targets. Of course, this is considered in a holistic manner in the SDGs as numerous goals are specifically in place to protect the environment and address and avoid other potential ill effects of industrialization. While the development lesson has been learned, the coordination and assistance necessary from advanced nations to support developing nations and create something akin to the flying-geese model is also necessary. This has been done with success in regions like East and Southeast Asia and Eastern Europe. Along the way, it has become clear that the issue of rising inequality must also be addressed if globalization is to thrive or even survive. On one level, the EU has been more successful in this regard and its larger welfare state provides one model for addressing the issue. Kenwood and Lougheed (1971) draw important lessons from their examination of the first and beginning of the second eras in globalization. The authors point to the need for the key currency countries to provide liquidity in eras of globalization, which in the current era means some large trade deficit countries must be willing to continue to run trade deficits. The critical interwar era was a time when national interests dominated policy and a more nationalistic approach to economic affairs were pursued, which made multilateral solutions not possible. A primary motivation in this attitude during interwar years was to maintain sovereignty and reduce the influence of external influences. In this current era of backlash against globalization, similar sentiments have emerged that can be seen especially in the United Kingdom and the United States, the two leading nations of the two eras of globalization. These sentiments are by no means limited to these nations, and increasing nationalism is on the rise in Asia and Europe as well. If these are not addressed and reversed, there should be concern about the future prospects of expanding globalization. At the same time, one should not overestimate the effect of the domestic backlash. As Pahre (2008a p. 34) argues, global war, not domestic backlash brought an end to the first era of globalization. And therein lies the greatest threat to globalization in any era.

Notes 1 The Berkshire Hathaway Corporation was ranked 80 in Table 8.4, and it can be certain that Warren Buffet is among the 1 percent that account for nearly 20 percent of all income in the United States in 2010. 2 Although there are consequences to such a system, such as France losing one of its talented citizens, actor Gerard Depardieu, to Russia due to high tax rates.

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Index

Note: Italicized page numbers indicate a figure on the corresponding page. Page numbers in bold indicate a table on the corresponding page. absorption capacity 28 advanced nations 109 Agadir Agreement 90 agriculture industry 29 Andean Community 79 Anglo–French trade agreement 26 Apartheid system 89 Arab League 73 Argentina 112, 126 Asian economic success 159 Asian Financial Crisis (1997) 58 Asian model of development 124 Asia Pacific Economic Cooperation (APEC) 68 – 69, 69 Asia Pacific Trade Agreement (APTA) 63 Association of Caribbean States 77 Association of Southeast Asian Nations (ASEAN) 63, 67, 146, 200, 209 Augmented Dickey–Fuller (ADF) test 177 Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) 63 Balance of Payment Manual 5 (BPM5) 112 Berlin Conference 52 bilateral trade 4, 27, 143 Blanchard–Quah long-run restrictions 158 Bolivar, Simon 25 Brazil 112 Bretton Woods system 3, 7, 29, 51 BRICS countries 3, 122, 124, 192, 210 Capital in the Twenty-First Century (Piketty, Goldhammer) 203 – 204

Caribbean Community and Common Market (CARICOM) 76 – 77 Central African Customs and Economic Union (CACEU) 88 Central African Economic and Monetary Community (CEMAC) 86, 88 – 89 Central American Common Market (CACM) 74 – 75, 79 Central American economies 103 Central American Integration System (CAIS) 76 Central European Free Trade Agreement (CEFTA) 84 Centre d’Études Prospectives et d’Informations Internationales (CEPII) 145 CFA franc zone 86 Chile 140 China 60, 67, 112, 124, 203 Choleski Decomposition 184 Cold War 3, 50, 53, 61, 105, 209 colonialism 22, 36, 106 colonization 1, 2, 23, 81, 87, 201 Common Economic Zone 71 common market 24, 81 Common Market for Eastern and Southern Africa (COMESA) 87, 88 Commonwealth of Independent States (CIS) 71, 85 Communism 53, 103, 109 Computable General Equilibrium (CGE) models 142 Council for Mutual Economic Assistance (CMEA) 83 – 84 Customs Union of West African States 52 custom union 24

Index  223 data limitations 2 demand and economic growth 9 – 13 demand shocks 158 – 162 demand side growth accounting: across industries 120 – 129, 121, 123, 125, 127 – 128; value-added exports 116 – 120, 118 – 119 Deng Xiaoping 60 Doha Round 59 domestic demand contribution 117 domestic value added 126 Dutch East India Company 34, 36 East African Community (EAC) 87 East Asian Miracle 159 East Asian Tigers 56, 60, 101 – 102, 209 Eastern European governmental structures 203 econometric methodologies 18 – 19 Economic and Customs Union of Central Africa 52 Economic Community of Central African States (ECCAS) 88 – 89 Economic Community of West African States (ECOWAS) 85, 87 Economic Cooperation Organization (ECO) 70 – 71 economic growth: demand and 9 – 13; globalization in interwar years 22 – 30, 23, 24, 25, 26; introduction to 1 – 6, 7, 92 – 93; theoretical underpinnings 13 – 18; trade’s impact on 18 – 21 economic union 24, 74, 85, 88, 211 enclave economies 29, 106 entrepôt economies 11, 105 ethnic backgrounds 208 European Atomic Energy Community 83 European Coal and Steel Community 83 European Common Market 61 European Community (EC) 51, 81 – 83 European Economic Community (EEC) 8 European Free Trade Area (EFTA) 8, 51 European Union (EU): export expansion 104; fear of terrorism 201; introduction to 3, 5 – 6; RTAs and 77, 81 – 82, 81 – 83 European value-added exports 134, 137 export contribution measures 33 – 40, 35, 37 – 38 export economies 22 – 23, 23

export-led growth: background on 159 – 162, 160; empirical findings 168; introduction to 158; restrictions and methodology 162 – 168, 163, 165 – 166, 167; South Korea 174 – 186, 175, 176, 177, 178, 179, 180, 181, 183, 184, 185; summary of findings 186, 186 – 188, 187 export ratio granger causes 173, 173 – 174 exports: across industries 105 – 116, 106, 107 – 108, 110 – 111, 113 – 115; demand side growth accounting 116 – 120, 118 – 119, 120 – 129, 121, 123, 125, 127 – 128; introduction to 1 – 6, 7, 92 – 93; manufacturing exports 40, 40 – 42, 42; post-war expansion measures 93 – 105, 94 – 100; regional trade agreements impact on 142 – 146; see also see higher value-added exports export shocks 13, 158, 161 – 164, 166, 168 – 174, 177, 180, 182, 186 exports-to-GDP ratio 21, 101, 120, 176 external demand 2, 5, 7, 10 – 18, 21, 190, 212 Federation of Equatorial Africa 88 First Sino–Japanese War 34 flying-geese model of development 4, 109, 159, 207, 213 Ford Motor Company 191 foreign direct investment (FDI) 20, 28, 120, 191 – 192 Franco–Prussian war 26 free trade agreements (FTA) 20 free trade area (FTA) 24, 71, 72 Free Trade Area of the Asia–Pacific (FTAAP) 68 G7 countries 120 – 122, 121 General Agreement on Tariffs and Trade (GATT): bilateral trade increases 143; country’s decision to join 19; globalization and 195, 210; introduction to 3, 4, 7 – 9; multilateral trade liberalization 80, 81, 92, 144 – 145; post-war era 51 – 54, 55, 61; RTA variable 146 – 157, 147 General Agreement on Trade in Services (GATS) 59 Generalized System of Preferences (GSP) 53, 144 – 145, 152, 152 General Methods of Moments 19 General Motors 191

224 Index Georgetown Agreement 77 Germany 32, 39, 120, 134 German Zollverien 26 – 27 Global Economic Monitor (GEM) database 158 Global Gender Gap Report 209 globalization: backlash from 104; following World War II 90; General Agreement on Tariffs and Trade 195, 210; impact on value chain 106; introduction to 1 – 6, 190; lessons from 209 – 213; multinational enterprises and 23, 190 – 202, 193 – 194, 195, 196, 198 – 199; rising inequality 202 – 209, 204, 205, 206; three time periods 92; trade policy in 7 – 9, 8; travel industry growth 116; value added estimates 137, 140; World Trade Organization 195, 210 globalization in interwar years: export contribution measures 33 – 40, 35, 37 – 38; export expansion measures 30 – 33, 31; exports contribution to Great Depression 43 – 48, 45 – 47; introduction to 22; manufacturing exports 40, 40 – 42, 42; nation building and interconnectedness 48 – 49; trade policy and economic activity 22 – 30, 23, 24, 25, 26 global terrorism 200 – 201 global trading system 190 global value chain (GVC) 5, 66, 191 gold standard 29 Granger causality tests 19, 164 – 166, 165 – 166, 173, 174, 178, 178, 182 Granger non-causality hypothesis 164 gravity model of trade 142, 144 Great Depression: exports contribution to 43 – 48, 45 – 47; introduction to 3, 22, 30, 34; regional trading blocs 51; trade policy after 210 Great Recession (2007–2008) 124, 202, 206 – 207 gross domestic product (GDP): demand shocks on 158 – 162; demand side growth accounting 120 – 129, 121, 123, 125, 127 – 128; export expansion measures 30, 33, 39 – 40; export shocks 172 – 173; exports-toGDP ratio 101, 120, 176; Granger causality tests 19, 164 – 166, 165 – 166, 173, 174, 178, 178; gravity model of trade 142; Great

Depression impact on 43 – 44, 48; increases in 92; introduction to 2, 5, 9 – 10, 18; MNEs and 196, 196 – 197; Pedroni’s panel cointegration tests results 166 – 167, 167; post-war era 50; service exports-to-GDP ratio 116; South Korea 174 – 186, 175, 176, 177, 178, 179, 180, 181, 183, 184, 185; unit root tests 162 – 164, 163; value added increase 134; variance decompositions 172; world exports 51 Gulf Cooperation Council (GCC) 74 Harmonized System (HS) 105 higher value-added exports: across industries 129 – 137, 130 – 133, 135 – 136; demand side growth accounting 116 – 120, 118 – 119; increased trade vs. independence 137 – 141, 138 – 139, 140, 141; introduction to 2 – 3, 11; overview of 36, 92, 101 Hong Kong export growth 101 imperialism 22 import substitution 102 India 112 individualism 203 Indonesia 112 industrialization 29, 41, 50, 109, 112, 212 industrial revolution 2 inequality and globalization 202 – 209, 204, 205, 206 interindustry trade 207 International Financial Statistics database 176 International Historical Statistics 34 International Monetary Fund (IMF) 7, 51, 191 International Trade Organization (ITO) 51 international trading system 53 intraindustry trade 15 – 16 Ireland 126 Japan: customer care, service industry 122; export growth 101; foreign direct investment 192; as global economic power 209; manufacturing exports 41 – 42; Official Development Assistance policies 109

Index  225 Keynesian economic models 13 – 14 Keynesian interpretation of disturbances 161 knowledge-intensive manufacturing exports 109 Korea 112; see also South Korea Korean Statistical Information Service (KOSIS) 176 Larch, Mario 146 Latin America 81, 83, 103, 134, 209 Latin American Free Trade Association (LAFTA) 52, 78 – 79 Latin American Integration Association (LAIA) 78 Leontief input–output matrices 116 liberalization of services sector 122 liberalization of trade see trade liberalization Lome Convention 77 low-skill-labor-intensive goods 109 Lucas, Robert 13, 14 Maastricht Treaty 83 macroeconomic models 16 Maddison dataset 33 – 34, 36, 39 Main Economic Indicators (OECD) 158 manufacturing employment 205, 205 – 207 manufacturing exports 40, 40 – 42, 42 MERCOSUR (Mercado Común del Sur) 79, 89 Mexican Maquiladoras 203 Mexico 140 Mill, John Stuart 208 Millennium Development Goals 213 Most Favored Nation (MFN) clause 8, 26 – 27, 51, 144 – 145 multilateral regional agreement 61, 143 multilateral trade liberalization 80, 103 multinational enterprise (MNE): economic growth 17; expansion of 190; foreign direct investment from 120; globalization and 23, 190 – 202, 193 – 194, 195, 196, 198 – 199; impact on domestic share of exports 112; introduction to 3, 5, 11, 17, 190; post-war era 57, 59 – 60; trade liberalization 103 nation building 48 – 49 Neoclassical economic models 13, 19

neutrality assumption 177 New Growth theory 20 newly industrialized countries (NICs) 2, 56 – 57, 60, 61, 70, 103, 109 nominal wages 161 non-tariff barriers 56 North American Free Trade Agreement (NAFTA) 61, 77, 103, 112, 140, 202, 206, 212 North Atlantic Treaty Organization (NATO) 74 Obama, Barack 66 October Revolution (1917) 40 Official Development Assistance policies 109 Organisation for Economic Co-operation and Development (OECD) 158, 172, 174, 208 Organization for Democracy and Economic Development 71 – 72 Organization of Islamic Cooperation (OIC) 73, 73 Other Business Services 116 Pahre’s Trade Agreement Database 24 Pan-Arab Free Trade Area (PAFTA) 74 Pedroni’s panel cointegration tests results 166 – 167, 167 Penn World Tables 93, 159, 178 Phillips–Perron (PP) test 177 Plaza Agreement 57 political union 24 post-Communist countries 1 post-war era: export expansion measures 93 – 105, 94 – 100; increasing integration 90 – 91; introduction to 50; multilateral trade liberalization 103; multinational enterprise 59 – 60; regional trade agreements 52, 58 – 59; trade policy 50 – 61, 51, 53, 54, 55, 55 price-setting behavior 161 productivity growth 17 protectionism 27, 42, 57 purchasing power parity (PPP) 93 Qatar 74 Q-theory of investment 14 – 15, 17 Reagan, Ronald 212 Regional Comprehensive Economic Partnership (RCEP) 67, 67, 72

226 Index regionalism 58 – 59, 68 – 69, 78 – 81, 89 – 91, 200, 212 regional trade agreements (RTAs): economic growth and 15; formation of 140; globalization and 26 – 27, 191 – 192; impact on exports 142 – 146; introduction to 3 – 5, 7 – 8, 8, 142; post-war era 52, 58 – 59; proliferation of 61 – 90, 62 – 63, 65, 67, 68, 69, 70 – 71, 73, 74, 75, 76, 78, 80, 82, 84, 86, 87, 88, 92, 126; results of study on 146 – 157, 147, 148, 149, 150, 151 – 152, 154, 155, 156; summary of findings 157 regional trading blocs 51 Romer, Paul 10, 15 Russia 112, 140 – 141 Saudi Arabia 112 Say’s Law 14 service exports-to-GDP ratio 116 sexual orientation 208 Shanghai Agreement 68 Shanghai Cooperation Organization 67 Shia Islam 74 Singapore growth rate 56, 101, 105 Solow growth accounting exercise 12 – 13, 20 South Africa 52, 105, 124, 153 South African Customs Union (SACU) 89 South African Development Coordination Conference (SADCC) 90 South American economies 103, 142 – 143 South Asian Preferential Trade Arrangement (SAPTA) 72 Southern African Development Community (SADC) 90, 153 South Korea 174 – 186, 175, 176, 177, 178, 179, 180, 181, 183, 184, 185 South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA) 63 Soviet Union 1, 40, 50, 53, 104, 105 Standard International Trade Classification (SITC) 105 Sunni Islam 74 Sustainable Development Goals (SDGs) 213 Taiwan 137 technology-intensive manufacturing exports 109

terrorism threat 200 – 201 textile manufacturing 129 Thailand 112 trade: barriers to 3, 9, 15 – 16, 27, 51, 58, 90; bilateral trade 4, 27, 143; gravity model of trade 144; independence vs. 137 – 141, 138 – 139, 140, 141; regional trading blocs 51 Trade Expansion Act (1962) 52 trade liberalization 27, 61, 103 – 104, 205 trade policy: after Great Depression 210; in globalization era 7 – 9, 8; globalization in interwar years 22 – 30, 23, 24, 25, 26; impact on economic growth 18 – 21; introduction to 1 – 6, 7; in post-war era 50 – 61, 51, 53, 54, 55, 55 Trade Related Aspects of Intellectual Property Rights (TRIPS) 59 Trade Related Investment Measures (TRIMS) 59 trade treaties 25 – 26 trade-volume-to-GDP ratio 21 TRADHIST database 36 Trans Pacific Partnership (TPP) 3, 61, 64 – 66, 77, 202 Trans-Pacific Strategic Economic Partnership 64 travel industry growth 116 Tripartite Free Trade Area (TFTA) 87 Trump, Donald 66, 202, 212 Union of South American Nations (USAN) 79, 80 United Kingdom: external export demand 28, 32, 39; Great Depression impact on 43 – 44, 48; manufacturing exports 41; RTAs and 83 United Nations Conference on Trade and Development (UNCTAD) 53, 105, 112, 144, 207 United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) 63 United Nations Sustainable Development Goals 129 United States 43, 103, 205, 205 – 207 unit root tests 162 – 164, 163, 181, 181 Uruguay Round 59 US Bureau of Labor Statistics 146

Index  227 value-added exports see higher valueadded exports value-added manufacturing 122, 124 value chain 106 vectorautoregression (VAR) 158, 162, 164, 172 – 174, 177, 180 Vietnam 105, 124 Wald Statistic 164, 178 Washington Consensus 58 West African Economic and Monetary Union (UEMOA) 85

World Bank 51, 93, 116, 158, 159 World Development Indicators 93 World Trade Organization (WTO): accession impact on RTAs 143; globalization and 195, 210; introduction to 3, 4, 7; multilateral negotiations 122; postwar era 52, 58, 61; RTA database 71; RTA variable 146 – 157, 147 World War I 29, 34, 39, 50, 52, 92, 204 World War II 1, 3, 7, 50, 90, 204; see also post-war era