Gross ‘guesstimations’ and assumptions drive our trade agenda

Explore similar themes
Politics & economyTrade

Australia is now five months into its presidency of the G20, but from the very beginning it has put trade high on the agenda.

According to the leaders of the world’s richest nations, trade agreements, whether negotiated in the World Trade Organisation (WTO) or through regional and bilateral trade agreements, enable the private sector to create badly-needed jobs and growth.

Opening trade would lead to an economic restructuring which in turn would lead to a more efficient reallocation of resources. Based on this assumption, economists until now have argued that people who lose their jobs in non-competitive sectors will find new ones in the exporting sectors that will flourish thanks to new market access.

The Australian presidency is not the only one making this argument. Previous G20 presidencies, as well as the negotiating parties of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnerships (TTIP) claim the same.

Also in December 2013, the world press and governments cheerfully welcomed the Trade Facilitation Agreement concluded at the 9th WTO Ministerial Conference, which is supposed to increase our collective wealth by one trillion US dollars.

However, the assumption that opening trade automatically leads to job creation in the long-term is no longer accepted as gospel.

Recent research, including the International Collaborative Initiative on Trade and Employment (ICITE) and a joint European Union (EU)/International Labour Organisation (ILO) publication with the catchy title Trade and Employment: From Myths to Facts, has proved that the realities of the trade-and-growth nexus are much more nuanced.

In fact, “a reason why companies in expanding sectors do not increase their workforce is likely to be the increase of the average productivity in these sectors” says the EU/ILO publication.

It also finds that, in few cases, policy reforms resulting from trade agreements may lead to the collapse of uncompetitive firms whilst giving little expansion to other firms.

Indeed, whether trade creates jobs depends on the level of diversification of the economy, the country’s institutional development and many other factors at national and regional levels.

For instance a study by John Haltiwanger in the WTO/ILO publication “Making Globalization Socially Sustainable” finds that the level of development in financial, transportation and communication infrastructure, problems with graft and corruption and the effectiveness of competition policy all play a role in whether trade creates jobs.

The list of factors is by no means exhaustive.

More importantly, the EU/ILO publication also finds flaws in the current economic modelling methodology used by economists to predict a trade agreement’s impact on employment.

Economic and sustainability impact assessments, for instance, have been found to overstate the benefits of opening trade; they do not take informal economic activity into consideration; and they base their results on “strong simplifying assumptions” about the functioning of labour markets – for example, the assumption that most or all of the labour force is employed or that productive assets are highly diversified.

In short, trade impact assessments are unreliable, based on ‘guesstimations’ and one can find little science in them.

Therefore, it is not surprising that although the WTO Trade Facilitation Agreement was said to create one trillion US dollars, The Economist quotes another assessment that puts the benefits considerably lower at US$68 billion.

Yet, instead of investing time and resources to fix the economic modelling, the G20 presidency, the WTO secretariat, the Organisation for Economic Co-operation and Development (OECD) and several governments have made baseless public claims that trade agreements are always for the benefit of all of their citizens.

It is not all a big lie. Under certain conditions free trade does play a significant role in development.


More wealth for all?

Based on an impact assessment by the Centre for Economic Policy Research (CEPR), EU and US officials affirm that the TTIP will create an average €545 (US$755) of additional wealth for each European family.

But in their rhetoric, they deliberately hide parts of the truth; that according to the impact assessment this value will accrue 10 years after and only if the agreement achieves zero tariffs and grandiose cutbacks of non-tariff barriers.

Furthermore, this figure is based on another obvious simplification: that the benefits will be equally divided among people.

Much of the illuminating and eye-opening new pieces of evidence sprang from the ICITE or from collaboration between major international organisations including the ILO and the WTO.

However, as often within international organisations, there is a great lack of cooperation between the research departments, the policy makers and the technical staff on the ground.

Many policy-makers have failed to inform their narrative with the outcomes of the new research conducted by ICITE, the EU/ILO and WTO/ILO. As a result, policy recommendations remain unchanged.

A brave and honest revisiting of trade’s role in development based on these studies would help WTO negotiators from developed and developing countries grow understanding for each other’s positions and possibly unlock a pro-development agreement that would conclude the Doha Round and deliver the Round’s mandate: the Doha Development Agenda.

Incorporating those studies in trade policy-making could result in better trade agreements; the ones that really benefit all.

It would also enable governments to design accompanying policies to deal with economic adjustment cost.

Above all, it would make the trade discourse sound less ideological, rigid and naïve.

It is imperative that the global trade governance institutions engage in creating more research and agree on a new credible and reliable modelling for trade’s impact on employment.

And it is equally important to feed this new knowledge to their staff members and representatives so that we can enjoy policy change on the ground in Geneva, Brussels, Washington and wherever trade agreements are being negotiated.