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Those in the West, who do not blame rising unemployment on technological advancement, usually blame it on trade. Business and economic literature is replete with articles stating that the high-wage industrial nations will suffer rising levels of unemployment due to the growth of imported goods from low-wage developing countries. The completion of the Uruguay round of GATT trade negotiations was delayed for years because this view fostered protectionist sentiment in the bastion of free trade Western nations. This issue elicits heated emotional debate that often overlooks obvious facts. For instance, increasing trade with East Asia and with low-wage developing countries is cited as a major cause of the fall in the wages of unskilled workers in the United States. As in the case of technology, there is evidence that free trade destroys jobs in some industries, especially unskilled or low-skilled jobs in high-wage economies. In some instances the devastating impact of increasing imports may justify a gradual approach to removing trade barriers. However, the overall impact of manufactured exports from developing countries has been vastly exaggerated. Exports by the Newly Industrializing Economies to the United States have risen from 1.1 to 2.1 per cent of US GNP over the past decade. America’s share of trade with low-wage countries represents only 3 per cent of GDP, compared to 2 per cent in 1960. For the OECD as a whole, imports from low-wage countries represent only 1.5 per cent of total expenditure on goods and services.
On the other hand, there is irrefutable evidence that expanding international trade creates large numbers of jobs, even in high-wage economies. The real issue, therefore, is whether the overall balance favours net job creation or net job destruction for each nation and for the global economy. On this issue the evidence is clear. Protectionism reduces overall economic welfare, often hurting those with the lowest incomes. In the long term greater international trade, like technology, expands overall employment opportunities substantially. Trade also counters the tendency of prices to increase along with incomes in more developed countries. Living standards rise as consumers benefit from the availability of lower-priced imported consumer goods.
One of the greatest barriers to solving the world’s employment problem is the perception that trade destroys jobs. As in the case of technology, the interactions are complex and must be viewed in their entirety, rather than in isolated industries. The global economy is not a zero sum game in which increased production by one country must necessarily result in reduced production by another. Trade opens up new opportunities. It permits each country to specialize in industries where it possesses a ‘comparative advantage’. This specialization enables it to evolve improved processes to achieve higher levels of quality and productivity, larger production volumes and lower costs. This results in higher incomes for its workers and makes their products more affordable in other countries, which in turn raises standards of living abroad. The resultant rise in real incomes domestically and overseas stimulates demand for more of these products as well as for other products that can be produced locally or imported from overseas.
Trade also tends to raise the quality of jobs in an economy. It forces higher-wage countries and their workers to specialize in technology-intensive and skill-intensive occupations that pay higher wages. At the same time, it also raises the wages of less-skilled jobs in low-wage countries by increasing the demand for workers to produce for overseas markets. The problem in the more developed countries is that the demand for low-skilled jobs declines and the gap in wages between skilled and unskilled jobs tends to increase, resulting in a decline in incomes and employment opportunities for lower levels of the population in these countries. This is a natural, healthy process of social development in which different sectors serve as engines for growth at different stages. The upward job displacement that earlier shifted job opportunities from agriculture to industry now shift them to higher-skilled jobs in manufacturing and services. The negative side-effects of this process on some sections of the population alert us to areas where society must make special efforts to speed their development. As in the case of technology, research is needed to document this complex process across industries, between countries and over time. One product of these studies could be the development of specific job coefficients measuring the impact of growth in trade in different industries on overall employment.
Trade becomes of even greater potential benefit to industrial nations during the coming decade when economic growth in these countries is expected to be significantly slower than in the developing world. The pent-up demand generated by the destruction of Europe during the Second World War, the rapid expansion of population during the baby boom generation, and the explosion of new technologies in the past few decades, all generated strong internal demand in the OECD countries, resulting in steady economic growth. The slow growth of population and productivity in more recent years means that these factors cannot be expected to drive further economic expansion at the same rate. In contrast, average growth rates in developing countries are expected to be two to three times higher than in the industrial nations. The increase in the dollar output of developing countries was actually bigger than that of the most economically advanced nations in 1992 and 1993, and this trend is expected to continue. Measured in terms of purchasing power parity, developing countries now represent more than one-third of the world economy. More than 40 per cent of US exports now go to developing countries and two-thirds of the increase in US exports in recent years has gone to these nations.
The rising expectations and upward mobility of millions of people in developing countries represent a vast potential source of demand, higher incomes and jobs for the West. Increasing incomes among the poorest countries has the greatest multiplier effect on global aggregate demand, because even small increments in per capita income can lead to large increases in the number of households with incomes above the threshold for buying consumer goods. Asia is expected to generate half the growth in gross world product and world trade during the 1990s. This region will have one billion consumers of televisions, refrigerators and motor vehicles by the year 2000 and a rising appetite for both imported consumer and capital goods. East Asia alone, excluding Japan and China, will spend about $900 billion on infrastructure between 1992 and 2000. During this decade, China and India will add 21,000 megawatts of electricity generation every year and more telephone switching capacity than the United States and Japan combined. Latin America’s annual requirements for investment in power, water and sewage, telecommunications and transport infrastructure are estimated at $60 billion. Rising incomes and increasing exports to the dynamic economies of Asia and Latin America could generate as many as 1.7 million jobs by the end of the decade in the United States alone.
The growth of the developing economies could provide the major impetus for economic expansion and job creation in both developed and developing countries. Government policies based on recognition of this fact can considerably improve the climate for development of these nations and correspondingly stimulate further growth in the West. Freer international trade will generate a flood of cheaper goods from the developing world that will give rise not only to greater purchasing power and higher standards of living for the Western consumer, but also to a ‘demand boom’ for sophisticated Western goods and services to improve infrastructure and meet the needs of billions of consumers in developing countries. The vast inequalities in living standards that persist within both developing and industrial nations, and between the most and least economically developed countries, result in an enormous global loss of incomes and jobs. Accelerating the development of poorer nations and poorer sections of the population in each country is the most powerful instrument and the surest guarantee of continued growth of jobs and incomes for everyone in the next century.
This article is an excerpt from chapter 4 of the ICPF's report.