Comment on “The Future of East Asia’s Trade: A Call for Better Globalization”

Abstract

There is much to admire and agree with in the stimulating and comprehensive paper by Pangestu et al. (2018). Pangestu et al. maintain that the “new normal,” of an increasingly open global economy, that has underpinned East Asia’s strong and successful export orientation, is under serious threat. They also argue that Asia needs to respond not by a resort to protectionism but by continuing to open up unilaterally and by playing a constructive role in keeping the global system open. On factors explaining the slowdown in trade, the authors refer to the slower growth in both productivity and innovation. The patent data do support the authors’ contention that innovation is slowing down, yet some of the predictions of the ongoing information technology (IT) revolution, robotization, and so on suggest that these data may be an imperfect proxy. Pangestu et al. also contend that the maturation of global value chains (GVC) explains the slower trade growth. The intuition here is that major producers like China have less need to source inputs from other countries as their industrial competence spreads ever more widely. Incidentally, the GVC are measured by the proxy of trade in machine goods. Other authors (e.g. Athukorala) have an alternative Standard International Trade Classification (SITC) definition. It might be interesting to know whether the results are sensitive to the latter definition of GVC. Pangestu et al. argue that rising economic and political uncertainty is just as important, if not more so, than rising protectionism. I suspect that the jury is still out on this issue, especially as Pangestu et al. show clearly that the resort to nontariff measures (NTM) since the global financial crisis has intensified. They caution that these NTM do not necessarily indicate rising protectionism. I would add the caveat that there are invariably protectionist interests lurking behind (or gravitating to) calls for better environmental or labor standards, and so on. In their discussion on trade and inequality in Section 4, Pangestu et al. cite various studies that globalization appears to be associated with rising intracountry (but not intercountry) inequality. I would emphasize “appears” as the key consideration is surely how open economies are managed. That is, as Pangestu et al. rightly emphasize, it is the accompanying policies that matter – education and training, the tax system, social safety nets, geographic poverty traps, and so on. This points to an argument that is now gathering global momentum, that the defenders of open economic policies need to pay more explicit attention to an active, redistributive social policy agenda. (Of course, the arguments are not all that new. Bhagwati (2004) addressed them comprehensively in his classic volume.) Looking ahead, is the World Trade Organization (WTO) now a lost cause (and with it the Doha Round)? That is, has it become so weak as to be an ineffectual leader? My sense is that, unless the major economies (or perhaps something like the G20) reinvigorate it, the WTO may wither on the vine, except perhaps for its dispute resolution procedures, which are in any case widely perceived to be dominated by rich-country lawyers. What are the alternatives? It is not yet clear whether the revised Trans-Pacific Partnership (TPP) will be all that effective. Although it had some attractions, even TPP-12 had notable drawbacks, particularly the exclusion of China (Menon, 2016). Next, will the “spaghetti bowl” collapse into some sort of plurilateral agreement? I doubt it. There are simply too many “termites” (Bhagwati) in the system. In particular, the major economies, which basically set the rules, have differing priorities in their trade negotiations, with regard to sensitive items such as intellectual property and labor and environmental standards. Thus, it is unlikely that these many agreements could ever be melded into some sort of standard template. Can East Asia step up, intellectually and politically?