Ensuring that the Gains from Trade are Inclusive and Sustainable

Globalization - Trade

This article was previously published in the Ideas Matters Blog, on December 5, 2019.

Thirty years ago, as part of their development strategy, and after many years of protectionism, the countries of Latin America and the Caribbean embarked on a process of ambitious trade liberalization.

This was only one of many different reforms made in the framework of the Washington consensus. But it was without question the most important one. Tariffs were eliminated, non-tariff trade barriers were torn down, and countries—some more than others—signed ambitious preferential trade agreements.

Chile was at the vanguard of this process. As we describe in our new flagship publication, Trading Promises for Results: What Global Integration Can Do for Latin America and the Caribbean, it began to liberalize in the 1970s, more than a decade before the rest of the region. Then once its democracy was reestablished, it reaffirmed its commitment to integration through the signing of a variety of free trade agreements, and this was supported by a broad consensus of the population.

A few years ago, when we launched the research project on economic trade policy that contributed to one of the report’s chapters, a very well-known economist told us, “This topic is boring in Chile, everyone agrees with free trade.”

How things change.

The discussion surrounding the Trans-Pacific Partnership (TPP)—now the CPTPP—is no longer so boring. Today, Chile is undergoing a political and social crisis in which its whole economic model, and particularly the way in which the benefits of growth are distributed, is being called in to question.

The Chilean anti-poet Nicanor Parra, Violeta’s brother, described the sentiments of critics very clearly: “There are two loaves of bread. You eat two. And I eat none. Average consumption: one loaf of bread per person.”

Voices against trade getting louder

Of course, Chileans are not alone in this. The anti-trade rhetoric is growing stronger, not only in Latin America but throughout the world. Over time, we have seen important setbacks in trade policy, including in some developed countries. As our flagship publication shows, most Latin Americans support free trade. But in a world of sudden change, like the present, today’s support can quickly change into tomorrow’s opposition.

What should the countries of the region do in this context? To answer that question, we have to look back and objectively evaluate the impact of the great liberalization. We need, for example, to look at the way this opening has impacted growth, wellbeing, employment, and inequality.

Having done that work, we can firmly say that liberalization has had positive and tangible impacts on economic growth. One of the most noteworthy findings of our new report is that, without liberalization, the region’s per-capita GDP would be between 30% and 40% lower. Few public policies can produce an impact of that magnitude.

Shortcomings in jobs and equality

It is clear, however, that liberalization was not up to the excessive expectations placed on it from the beginning. When we look at its impacts, its results in terms of jobs and inequality fell short. As theory predicted, trade increases general welfare. But it also produces winners and losers. Some eat two loaves of bread. Others go hungry.

Of course, this does not mean we should stop or reverse our opening to trade. Nor does it mean we should listen to protectionist voices. There remains much to do when it comes to trade policy in the region, from defending the multilateral system under attack, to extending regional integration and continuing down the path toward unilateral openings. Processes that facilitate trade must be encouraged, regulatory issues that affect them must be addressed and integration into global value chains must be improved. There also must be—among other things—a modernization of the corresponding trade institutions and the transportation infrastructure that makes the reduction of transaction costs possible.

Protecting those who lose out

But trade policy alone is clearly not enough. If everyone is to benefit from the opportunities offered by global integration, and we are to protect those who lose out,  we need to consider a complementary agenda. Its goal must be inclusive and sustainable growth that incorporates sectors currently lagging behind, including women, small and mid-size enterprises, and indigenous peoples.

Labor market policies that facilitate the reassigning of labor to competitive sectors are part of this complementary agenda. So are other mechanisms to provide compensation and a social safety net to protect those who are affected by trade liberalization. These policies also are key for building important partnerships and sustaining trade reform to prevent setbacks and disappointment.

There also remains much to do with regard to productive policies. We must target competitive sectors beyond manufacturing, for example, by adding value in traditional sectors like agriculture and mining. And we must address other challenges to enable the region to exploit opportunities associated with new technologies, like e-commerce.

As discussed in our report, there is much work to be done. We hope our ideas can lay the groundwork for discussions moving forward.

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