Box 2: The Case for Trade and Competitiveness
Trade and competitiveness are intimately connected. As demonstrated by the East Asian “miracle economies” (Hong Kong SAR, the Republic of Korea, Singapore, and Taiwan), trade and investment integration can improve competitiveness through two channels: first, by increasing the size of the market available to domestic firms; and second, by driving productivity and innovation by exposing firms to international competition, expertise, and technology. No country has developed successfully in modern times without opening its economy to international trade, investment, and the movement of people across borders.
Conversely, it is the competitiveness of economies—the level of productivity of continents, nations, subnational regions, and even cities—that determines how well they translate openness to trade and investment into opportunities for their firms, farms, and people.
Trade and competitiveness come together in global value chains (GVCs). Trade no longer means merely goods crossing borders; rather it is the international, interconnected flow of goods, services, investment, people, and ideas along a value chain. Production stages that previously took place in a single factory, or in a single country, are now dispersed across many factories in many countries. GVCs are the key drivers of employment, productivity, and growth in international trade. They create niches for developing countries to industrialize faster and better, and they enable developed countries to specialize in higher-value production in goods and services, thus improving wages and consumer choice.
Taking advantage of GVCs demands more than keeping borders open to trade and investment: a whole host of domestic non-tariff and regulatory barriers also need to be removed as well as a welcoming business climate provided. Unilateral measures can help countries take advantage of GVCs, but they work best when they are locked in by international agreements such as those negotiated by the World Trade Organization, bilateral investment treaties, and regional trade agreements.
Openness has non-economic benefits, too. Wider and deeper cross-border economic integration has contributed greatly to overall peace and stability since World War II. It has increased individuals’ freedom to produce and consume in daily life, widening the life choices and chances of large numbers of ordinary people.
However, openness and the links between trade and competitiveness have fallen off the agenda in recent years. Since the 2008–09 crisis, policymakers have been in fire-fighting mode, focusing on fiscal and monetary macroeconomic stimulus and financial reregulation. This has arguably come at the expense of supply-side issues and structural reforms needed to address sluggish productivity growth. Supply-side constraints to growth—distortions in product and factor markets, education, skills, infrastructure—have not been sufficiently addressed; if anything, market distortions have increased since the crisis, undermining competitiveness. And although protectionism has not surged, there is evidence of creeping protectionism, especially with increasing non-tariff barriers to trade. Global trade growth is weaker than at any time in the last two decades.
Strengthening both global openness and domestic competitiveness has never been more important. To revive sluggish productivity and tap new sources of growth, innovation, job creation, and development, a trade-and-competitiveness agenda should be a priority for policymakers around the world.
This box is based on a report prepared by the Global Agenda Councils on Competitiveness and Trade and FDI. For the full report, go to http://www.weforum.org/content/global-agenda-council-competitiveness-2014-2016-0.