International

DEVELOPED COUNTRY TRADE WITH DEVELOPING COUNTRIES: IS IT HARMFUL?

Many industrialised countries--and specific groups within these countries-- view the rapid growth of developing countries, particularly in Asia with some apprehension. Indeed, political tensions have been caused by the rapid growth of South-East Asian countries compared to the slow growth and increasing unemployment levels in industrialised countries, especially those in Europe. This had led to a real possibility of a protectionist backlash in industrialised countries and calls only too recently to link trade and market access for developing countries to labour and social standards, human rights and even the pace of the development of democratic institutions or other perceived political imperatives. I believe these arguments to be false or at best misleading. I would like now to confront these arguments with some recent data particularly with respect to South-East Asia which has been perceived to pose the greatest competitive threat.

Exports from rapidly developing countries in Asia (mainly South-East Asia) comprise less than four per cent of the total consumption of manufactured goods in the United States and the European Union. They add up to less than three per cent of the combined GDP of the United States and the European Union. The competitive threat to US and EU markets is therefore greatly exaggerated. If we look at data for the developing countries as a whole, this tells a similar story.

Trade with developing countries is only a very small proportion of the total trade of industrialised countries. In 1990, for example, industrialised countries spent only 1.2 per cent of their combined GDP on imports of manufactured goods from developing countries. The figure now is probably only 2 per cent. Most industrialised countries--particularly those countries in the EU--trade mainly with each other and not developing countries. For example, 80 per cent of the United Kingdom's trade is with other EU countries.¹³

¹³ However, it should be said that although the absolute value of EU trade with developing countries is small compared with trade with other industrialized countries, this trade-- particularly with Asian countries--is growing quickly and will continue to do so in the foreseeable future. For example, imports from Asian countries only accounted for 1.3% of total EU GDP in 1995 but Asian countries accounted for 18% of total EU imports from the rest of the world. Asian exports are not restricted to traditional, low-skilled products such as clothing and textiles. High-skilled, capital intensive goods such as machinery and transport

One often hears that a special threat is posed because of low wage costs in Asian countries compared to industrialised countries. But to pose the argument in these terms is also misleading. Why? Simply because to concentrate on wage differentials between industrialised and Asian countries ignores the fundamental productivity differences between them. It is generally the case that low wages in developing countries--and Asian countries are no exception-- simply reflect lower productivity. To give one example, average wages in manufacturing in Malaysia and Thailand are only about 15 per cent the level of manufacturing wages in the United States. But the value added per worker in manufacturing in Malaysia and Thailand is only about 15 per cent of value added per worker in the United States. One should not also forget that low wage cost imports are often cheaper than domestically produced goods. This is clearly to the benefit of consumers in industrialised countries.¹⁴

Still, it has to be admitted that there has been a significant fall in the demand for unskilled workers relative to skilled workers in recent years. But even the most pessimistic studies find that trade can only explain 10-20 per cent of the inequality in the wages and unemployment of less skilled men.¹⁵ Most studies find that the trade effect is small or insignificant or that technological change is a better explanatory factor. That is, a key factor behind the decreasing demand for unskilled workers in industrialised countries is technological change. Technological advances have reduced the need for many types of unskilled workers in these countries. Many recent studies show that the gap between employment levels and wage differentials between skilled and unskilled workers has more to do with productivity, technological change-- particularly the introduction of micro-technologies and new flexible production techniques such as Just-in-Time inventory control and Total

equipment and other high-tech products represent a fast growing share of Asian exports to the EU. This may have been due to EU access restrictions to sensitive products’ markets (textiles, clothing, steel and iron). As a result, EU countries could face increasing competition from Asian exports. See European Economy 1997, no. 63, p. 47, European Communities, Brussels, 1997.

¹⁴ Paul Krugman (1995) op cit. and statement by H.E. Mr. Belahari Hausikan, Permanent Representative of Singapore to the United Nations, to the G-77 South-South Conference on Trade, Finance and Investment, San José, Costa Rica, 15 January 1997.
¹⁵ Rodrik (1997) op. cit., and Robert Z. Lawrence, Single World, Divided Nations? International Trade and OECD Labour Markets, Organisation for Economic Cooperation and Development, Paris, 1996. Rodrik has recently argued that the effect of trade on inequality of wages may be significantly underestimated, if the main impact of globalization is an increase in the actual or perceived elasticity of demand for unskilled workers and not a reduction in demand per se. However, although interesting and plausible, there is as yet little substantive evidence for this “increased elasticity” hypothesis. This is not to say it might not be forthcoming, only that the evidence to date is mainly “impressionistic and anecdotal” (see Rodrik (1997), p. 27).
Quality Management techniques--than increased trade with developing countries.¹⁶⁾

This is why the fall in demand for less skilled workers in industrialised countries has been in a wide range of industries not just in labour-intensive industries which compete with developing country exports. This drop in the demand for less skilled workers has also occurred in industries which do not produce goods or services that can be traded on international markets and which therefore do not compete with exports from developing countries.

But isn't the real policy issue what can be done to improve the unemployment situation of low-skilled workers? After all, there is no necessary direct connection between a problem and its cure.¹⁷ It may therefore be better to concentrate on what can be done to aid the restructuring process, smooth its adverse effects by training low-skilled workers and provide appropriate social nets, rather than worry whether their plight is caused by low-cost competition from abroad, technological changes, the demise of trade unions, etc. But whatever the reasons for the plight of unskilled workers, there are good reasons to believe that they are more likely to be solved by appropriate domestic policies than blaming globalisation.

To complete our discussion of the alleged threat that trade with developing countries poses to industrialised countries we should now ask a related question: Is it true that industrialised country firms are rushing to relocate in developing countries to take advantage of low wage costs? Clearly, it is true that some TNCs from industrialised countries are doing this, but the extent of this movement is far less than the popular media would lead us to believe.

First, the extent of globalisation is probably a little exaggerated. There are few truly global companies producing in all regions of the world. Even with the new micro-electronic technologies, it is difficult to control global operations in all dimensions of production. Most TNCs branch out at the regional level--thus US firms generally first spread into North America and into the rest of the world, if at all.¹⁸

Second, the new flexible technologies associated with globalisation and emphasis on quality and customised production imply that low labour costs are

¹⁶ Lawrence (1996) op. cit.
¹⁷ See the interesting discussion in Richard B. Freeman “Toward an Apartheid Economy”, Harvard Business Review, September-October 1996, pp. 114-121.
¹⁸ Paul Hirst and Grahame Thompson, Globalization in Question: the international economy and the possibilities of governance, Polity Press, Cambridge, 1996.
less important than quality considerations in determining competitiveness. They also imply that there are strong incentives for producers and suppliers to cluster together to ensure quality and low inventory levels. This is the case with Benetton and its suppliers in the textile industry in Italy. This tendency towards clustering of producers and suppliers would reduce the incentive to relocate in developing countries.¹⁹

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