Export-led growth and the false promise of TPP

Casting around for a good reason to pass the Trans-Pacific Partnership into which Barack Obama’s administration has put so much lobbying effort, some economists have alighted upon the potential development benefits to the pact’s poorer members and particularly Vietnam.

The argument goes that Vietnam, which has largely been following a classic east Asian development model of export-led growth in manufacturing (and some agriculture such as rice and coffee), will benefit from the reductions in tariffs that will enable it to sell more garments into the vast US market.

There are, though, problems with this thesis, which apply more generally to any attempt to draw a substantial causal link between specific preferential trade deals and export-led growth.

One is that such deals tend to be qualified by restrictions that in practice largely diminish their usefulness. Another is that some of the most spectacular export success stories have taken place without much assistance from bilateral or regional trade agreements. Finally, in a more recent development, the changing patterns of world commerce mean the opportunity for trade-led growth may well have diminished.

As Kim Elliott of the Center for Global Development points out, the benefits of the TPP to clothing exporters like Vietnam will be reduced by the US’s so-called “yarn forward” rules. The policy restricts the use of raw materials and textiles from countries outside the agreement — in this case largely China. The US textile industry is not the lobbying force it once was, but it is certainly strong enough to punch loopholes in the fabric of trade deals.

(Speaking of malign and powerful US trade lobbies, nor will the US liberalise its own trade-distorting agricultural support programmes such as the rice subsidies that disadvantage Vietnamese exporters in third markets.)

The changing patterns of world commerce mean the opportunity for trade-led growth may well have diminished

Such so-called “rules of origin”, designed to prevent exports from one country essentially being imported and re-exported by another to take advantage of trade privileges, have reduced the impact of many rich countries’ trade preference schemes.

However, though freer trade in garments would be good news for Vietnam, it has been doing pretty well without it. High productivity and good infrastructure are often much more important than low tariffs in making producers competitive. Vietnam is already the US’s second biggest source of imported garments, with 11 per cent of the total. In doing so, it has out-competed other apparel-producing countries, including those with lower costs and larger populations such as Bangladesh.

It has also done much better than economies facing fewer US trade restrictions, such as the African nations whose trade preference scheme, the US’s African Growth and Opportunity Act (AGOA), has more relaxed rules of origin allowing it to use imported fabric.

AGOA was touted as a way for Africa to export its way out of poverty, but the rise in non-oil exports, while statistically significant, has been limited. The main beneficiaries with regard to clothing exports have been countries that had already attained middle-income status (Mauritius, South Africa) plus a couple of lower-middle income economies (Kenya, Lesotho).

For poorer countries without established clothing industries and with weak productivity and poor transport networks, lower tariffs are not enough to make their products competitive. Although it is about twice as well-off as Kenya and Lesotho, Vietnam has outcompeted Africa despite facing substantially higher tariffs.

Indeed, the export-led growth star to beat them all, China, saw explosive growth in overseas sales during the 1990s before it was even a member of the World Trade Organisation. True, the US gave China “most-favoured nation” status that supposedly put it level with all WTO members. In practice, other developing countries got the paradoxical better-than-MFN access through preference schemes, and nonetheless China outpaced them.

The growth of “Factory Asia” — the internationally disaggregated supply chain for electronics, toys and other manufactured products — during the 1990s and 2000s was a thing of wonder. But it is hard to point at any particular trade agreement that played a big role in facilitating it. Asean, the 10-member Association of Southeast Asian Nations, agreed a regional trade pact in 1991. But a subsequent study by the Japanese export agency Jetro concluded that it had played little role in fostering these trade links.

The Information Technology Agreement (ITA), a plurilateral deal for certain electronic goods and components agreed under the auspices of the World Trade Organisation in 1996, may have been somewhat more influential in the creation of Factory Asia. But the ITA is an open agreement whose benefits in terms of lower tariffs are extended to all WTO members, not just the signatories, and which essentially acts as a means of countries locking in unilateral liberalisation to signal that they are a reliable trading partner.

And if the boom in emerging market exports and imports owed relatively little to formal trade deals, nor does their slowing relative to GDP have a lot to do with protectionism. The internalising of previously externally disaggregated supply chains within some big emerging markets, notably China, may well have reduced the ability of other developing economies to follow the east Asian tradition of labour-intensive export-led growth.

Whether that avenue is now harder to follow remains to be seen. What does appear to be true is that we should be wary of trade deals promising a big development boost to emerging markets where concessions are shot through with crafty loopholes, where there is a history of such agreements being neither necessary nor sufficient and where external circumstances are likely to reduce the potential for export-led growth in any case. The TPP may have some virtues — the search for them goes on — but liberating poor economies through export-led manufacturing growth is unlikely to be one.

Source: ft.com