As we saw last week there are powerful reasons why global competitiveness has become so important in discussions about development strategies. The ability of exporting firms to expand their market shares is one test of their ability to sustain and/or increase their profitability. If each firm seeks to do the same then we have what is known in local parlance as a "dog-eat-dog situation." Or in formal language, we have a zero-sum game where the winner takes all. Nations do not engage in global trade on the same basis as firms, since by exchanging on the basis of their comparative advantages all nations can potentially benefit from trade, even when as I pointed out last week they do not in the process alter their relative standings. However, what nations do, and in particular their governments, is influence the competitiveness of the firms operating in them. In this way therefore the pursuit of global competitiveness must involve the government and the broader society.
The New Global Trade
This relentless pursuit of global competitiveness, which is a hallmark of present-day globalisation, has produced some quite remarkable transformations in the nature of international trade. These changes make global trade today something I believe that is qualitatively different from the global trade that existed as recent as two or three decades ago. Because we live through these transformations ourselves it is sometimes difficult for us to be truly aware of them, unless we are able by training or circumstances to take a step back, as it were, from the processes that are unfolding. In this week's article I shall present some evidence to illustrate what I mean.
For a long time in our history large countries even though they traded substantially were thought of as being more or less self-sufficient or at least capable of so being. Government policies were often directed towards this end. Here I refer to countries like the USA, China, India and Russia. As a consequence of the liberalisation policies that have accompanied globalisation, however, these countries have been deliberately pursuing global trade as a means of enhancing their wealth and the welfare of their populations. The result has been that for the first time in history global trade is rising sustainably faster than the growth of global output, signifying that all countries are becoming increasingly open. This openness means a rise in their ratio of trade (exports plus imports) to GDP.
The Rise of the Services Trade
When we examine the pattern of this trade two remarkable features are apparent. One is that trade in services has been growing faster than trade in goods. Prior to the rapid globalisation of the world economy the overwhelming bulk of trade was trade in goods. It is true that some CARICOM countries have been for decades now mainly exporting services like tourism, off-shore financial services, and in the case of Antigua and Barbuda, internet gambling. But taking the world as a whole trade in services then was far less substantial than trade in goods.
Today all that has changed with far-reaching consequences. With the formation of the WTO efforts have been underway to bring the trade in services under the same disciplines and regulations as trade in goods. This is a very difficult task but efforts are already well underway.
Intra-Industry Trade
The other notable feature of global trade is that while previously trade principally involved the exchange of products from distinctly different industries, this is no longer the case. In the past we exported sugar, rum, rice and bauxite and imported a host of other goods out of the foreign exchange that was earned. This is called inter-industry trade, reflecting the exchanges between distinctly different industries. Today on the whole, most of global trade is within the same industry. Countries produce motor vehicles, cell phones, chemicals, computers and a host of other goods, which they also import. Indeed Europe imports sugar from CARICOM (it has been the world's largest sugar importer) and also exports sugar to the rest of the world (it has been one of the world's largest exporters of sugar). This type of trade is called intra-industry trade. It refers to international trade within the same product group.
This development reflects the further consideration that trade among the rich developed economies now dominate the global trade pattern. The classical colonial division of labour, which was based on the exchange of raw materials for manufactured goods no longer holds sway.
The spurt in the growth of this type of intra-industry trade was facilitated by the formation of the European Union (EU). Indeed the EU became the fastest growing trading region in the world. Intra-industry trade was also aided by the growth of large firms which struggle to capture market share for their products by branding and differentiating them from others in the market. Consumers and other buyers were encouraged through marketing and product quality to prefer particular brands. The result has been that much trade is now propelled not by differences in comparative advantage of countries based on the resources they are endowed with, but on the behaviour of firms in the global market place.
Readers should therefore not be surprised when they hear of the dominant role these firms (transnational enterprises or TNCs) play in global trade. This is so far reaching that in this regard we find that presently trade is least like trade in the earlier days before the present wave of globalisation. These firms have set up global chains for their products - all the way from research and development (R and D), and design, to production, distribution, maintenance, and marketing. They use the world as the basis of their production platform and much of the effort of governments is to secure for their territories some activity along these global value chains. Thus production plants are established in one place, while marketing, distribution and maintenance plants go to other places.
Trade in this sense therefore is really the exchange of part-processed products within the same firm structure. This is clearly not the classic arms-length trade that prevailed earlier, one in which firms exchanged products through different owners. The present situation has raised many issues pertaining to the nature of trade. For example, how are the prices for the part-processed products fixed? Clearly we can see that this is not fixed in open competitive markets, thereby reinforcing several of the points I made last week concerning the relation of competitiveness to competitive markets. These economic changes have far reaching implications for the global capitalist system and next week I shall continue this discussion.
Describing it as "comparing then and now", last week I started to illustrate some of the far-reaching changes that have been made in the structures and patterns of global trade over what has been a relatively short period of time. Thus I indicated that the growth of global trade has been speedier than global output and that the share of services in total trade has also been increasing. Economies everywhere are becoming more open and reliant on services. I had also stressed the new phenomenon where trade has been taking place increasingly among the rich developed countries, as they exchange more or less similar products, which are then sold under different brand names. This latter occurrence has fostered the growth of global transnational corporations (TNCs), which now dominate global trade. As a result of these features much of what we call international trade today is largely transactions taking place within the same corporate group, as TNCs have established units of activity in global chains stretched across several countries in order to produce and market their products on a global scale.
If the changes I have listed so far were all, we could say at this stage with certainty that in the age of globalization, international trade has become but a distant cousin of what it was as recently as only three decades ago. Remarkably there have been other marked changes, which I shall refer to in today's article.
Price and Innovation
One of these is based on the connections between the changes already noted to firm competition, and in particular the drive of firms to expand their market share in order to increase profitability. These connections are portrayed in the rapid growth of technology and its linkage to global production. As a rule, technical advances depend significantly on firm investment in research and development (R&D). And, since much of global trade is a reflection of the way TNCs compete, global trade in turn has come to depend on these technical advances and innovation, which are the cornerstone of TNC competitiveness.
While some of the technical advances are applied to the processes of production, marketing, finance and so forth, much of it is directed at improving existing products or inventing new ones. Throughout this process close attention is paid to design, improved quality, and back-up services. Firms can no longer successfully compete merely on price differences. This situation is paralleled in international trade, where both price and innovation go hand-in-hand as firms struggle to maintain and expand their shares of the global market. To repeat, a cheaper price is no longer enough. Firms must innovate to survive and as a direct consequence of this, countries must create an environment where knowledge is seen as the key input to the efficient functioning of the economy, along with the requisite training and skills of the work force.
China Inc.
When we examine the geography of trade, we see that similar radical changes have also taken place. One such change is the rise of China (China Inc. as it is called) as a global power-house of trade. Just as the formation of the European Union (EU) had led to the phenomenal growth of what was termed last week as inter-industry trade, China's explosive growth has made the much vaunted trade achievements of the former "Asian tigers", pale in comparison. China has already become today the world's second largest trading economy. It gobbles up most of the production of global raw materials because it has become the manufacturing hub of the global economy.
This change has been so dramatic that despite long standing ideological, political, and geo-strategic reservations, the USA, Europe and Japan could not resist the inevitable entry of China into the World Trade Organisation.
The paradox of excluding the world's fastest growing node of exports of manufactures and imports of raw materials would have been far too great for an organization with pretensions of being truly global in its scope. If China's trade is added to that of the rest of the developing world we would see some reversal of the tendency of the developing world as a whole to be overshadowed by the rich countries in determining the configuration of world trade and the role of manufactures in that trade.
About a year ago I had already in this series examined the rise of China. I do not wish at this stage to refer to the issues raised then, except to stress that apart from a few other newly industrializing countries (NICs), the traditional role of the developing countries in global trade has not altered nearly as much as the other changes being described here.
The New Protectionism
I shall expand on the changing geography of global trade next week when I refer to the formation of regional groupings. Here I wish to draw attention to two new features of global trade by way of conclusion. One of these is liberalization of global markets, which is pushed by the rich countries. These countries however, practise awful double standards in this regard. When faced with threats from imports of developing countries into their domestic markets, they often practise new and subtle forms of protectionism, which have earned the description of the "new protectionism". These new forms of protection exploit technical, environmental and security specifications to keep out exports from developing countries, which threaten to displace their domestic suppliers.
The current case of textiles and clothing is an excellent example of the practice of double standards. After the recent removal of trade restrictions on these items as was agreed would occur ten years after the establishment of the WTO in 1995, the extraordinary upsurge in Chinese exports of these products has led to charges that China is "dumping cheap products", "using disguised subsidies through its exchange rate policies", followed by threats to re-impose trade barriers.
Finally a new feature of global trade today is acceptance in the WTO arrangements that the regulation of trade in goods and services cannot be isolated from the regulation of all "trade-related measures", including competition policy, investment, environment, social issues related to trade, technical matters related to safety, and security. Previously (except perhaps for the linkage of trade and aid) such matters were treated as separate issues outside the global trade regime. Today they are not.
All these changes in the global trade structure have helped promote, and in turn have promoted, the development of an entirely new global architecture to regulate this trade. Its apex is the WTO.
Next week I shall continue this discussion of the new global trade regime.