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Discussion paper

The Global Deal and Trade:

Harnessing the Benefits for Greater Development, Equality and Growth

By Sabina Dewan (JustJobs Network) and Jens Suedekum (DICE and CEPR)

November 2017

Table of Contents

Context ............................................................................................................................ 2

How did we get here? ....................................................................................................... 3

Where from here? Charting a new path through the Global Deal ...................................... 8

Policy Implications............................................................................................................ 8

References ..................................................................................................................... 12

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Context

Globalization, manifest in technology, flows of capital, people, goods and services, weaves

economies together. Increasingly open and unrestricted trade in goods and services improves

productivity and contributes to economic growth. The availability of a greater variety of

cheaper products, the creation of new and different opportunities for work, and the possibility

for countries to specialize in the production of what they are good at (IMF, World Bank and

WTO, 2017), has lifted millions out of poverty and raised living standards for billions

(Gresser, 2009). An exchange in goods and services also comes hand in hand with an

exchange of new ideas, innovations and technologies.

But every coin has two sides. Trade also sets off restructuring of economic activity. In the

process, some workers gain jobs while others lose them; some workers see their wages rise

while others see them stagnate or decline.1 Recent decades have also seen a reorganization of

trade into increasingly complex value chains. World trade in intermediate goods is now

greater than all other non-oil traded goods together (ILO, 2016). Up to 80 percent of global

trade measured in gross exports is now linked to the production of multinational firms

(UNCTAD, 2013).

In recent years, inequality between nations has declined due to growth in emerging

economies, but inequality within nations has increased. This is true for many developing

economies as well as most members of the Organization of Economic Cooperation and

Development (OECD, 2017). The gap between the rich and the poor is at its highest level in

decades in developed economies. The picture is more mixed in emerging and developing

countries, but access to quality education, healthcare, finance, housing and other basics

remain deeply unequal in many nations (Dabla-Norris, M.E., et al. 2015).

These facts raise two important questions. First, how to govern trade and value chains in a

way that minimizes the adverse effects? Second, how can the benefits of trade be distributed

fairly to enable more people to benefit from a growing economic pie, and which policy

interventions are appropriate to do so?

The challenge before global policymakers is to revive support for a global trade agenda when

many politicians and citizens blame it for the economic hardship confronting many. And at a

time when workers need a collective voice, unionization rates are at an all-time low.

Reviving support for trade depends on rethinking trade policy at the international, regional

and national levels, as well as ensuring that the benefits of trade are shared more broadly.

This calls for a Global Deal that engages the private sector and labor in addition to

policymakers to chart a new path forward.

In this context, the Global Deal is about promoting and strengthening industrial relations

institutions and the processes for social dialogue toward better quantity and quality of work,

and inclusive development. This would help improve economic and social policies, ensure a

fairer distribution of gains, and assist in designing measures to address the costs.

1 This is the essence of the seminal theorem by Nobel laureate Paul Samuelson and Wolfgang Stolper. (1941).

which is one of the most widely recognized results in international trade theory.

3

Following the introduction, the second section of this policy brief examines broad

movements in global trade in industrialized and developing economies over the last couple of

decades to trace how we got to this juncture of a public backlash against trade. The third

section goes on to discuss how the Global Deal can help chart a new path forward, breaking

away from business as usual to protect the value of work in these turbulent times.

How did we get here?

One of the major developments in the modern era of globalization has been the growing trade

with emerging economies in Asia, especially China. In the mid-1980s, China was essentially

still a closed economy. This has changed dramatically since 1990, especially after China’s

accession to the World Trade Organization in 2001. As of today, China accounts for almost

one quarter of all merchandise exports in the world.

This emergence and rapid growth of relatively labor-abundant, low-wage countries mainly in

Asia has created many new opportunities in those economies, and lifted millions of workers

out of extreme poverty (Bacchetta and Jansen 2011). It has also created benefits for

consumers in rich, industrialized countries. Taking the United States as an initial example,

Chinese imports to the U.S. soared from less than 12 billion USD in 1989 to more than 460

billion in 2016.2 This brought American consumers access to a wide range of new and

cheaper products (Feenstra and Weinstein 2016). Poorer households benefited more because

their consumption baskets tend to include more traded goods where price decreases due to

globalization have been strongest (Fajgelbaum and Khandelwal 2016). In short, both

emerging and the industrialized countries have seen gains from trade.

But in developed economies trade has also induced distributional shifts and adjustment costs

on the labour market. These have been contentious and they played a major role in the 2016

Presidential election in the United States, in the Brexit referendum in the United Kingdom,

and in several other recent electoral campaigns in Europe where support for populist and

protectionist policy agendas was often voiced by blue-collar workers who consider

themselves losers from trade, and globalization at large.

How do losses come about and how to alleviate them?

Trade theory suggests that globalization induces industrial change within countries. Some

industries shrink and domestic production is replaced by imported goods. Exporting

industries expand to produce for foreign markets. In theory, displaced workers from import-

competing branches are instantaneously absorbed by expanding export-oriented ones. But

empirical evidence shows that this labor reallocation process can be slow, frictional, and

scarring. Workers in import-competing industries face a substantially higher risk of

unemployment (Autor et al. 2013). And when they lose their jobs, many of them do not

transition into well-paid jobs in expanding sectors at all, but are pushed out of the

manufacturing sector altogether often ending up in low-paid service jobs suffering a

cumulative loss of earnings over their career trajectory (Autor et al. 2014).

2 See US Census here: https://www.census.gov/foreign-trade/balance/c5700.html

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To make globalization work for all, and to avoid individual losses, it is essential to facilitate a

smooth adjustment in the labour market, and to support workers to find their way back into

better jobs quicker in case of a trade-induced job loss.

Another important question is how international trade affects the overall manufacturing

employment in an economy. In the 1960s, about one in four American workers were

employed in the manufacturing sector. This share has declined over the years going from

roughly 12 percent at the turn of the millennium to below nine percent today. This decrease

in manufacturing employment is worrisome to many observers, because those jobs are still

widely considered good and accessible to workers at lower skill levels. They typically pay

higher wages relative to other sectors, and they tend to provide higher levels of worker

protection, through unionization for example.

Globalization, and particularly rising trade with China, has been blamed for a substantial part

of this decline in manufacturing jobs in the United States. Nonetheless, the decrease in the

employment share started during the 1960s, much before China entered world trade.

Moreover, the U.S. share of manufacturing in real output is basically the same today as it was

roughly 60 years ago (Bailey and Bosworth 2014). In other words, the U.S. economy has

produced more industrial goods with fewer workers. This evidence suggests that technology

is an important driver of the long-run decrease of manufacturing employment.

It is difficult to disentangle the employment impacts of technology, trade, and other facets of

globalization, such as offshoring in global value chains. In absolute terms, between 2000 and

2014, there were approximately 5 million fewer manufacturing workers in the U.S. A certain

portion of this decline is attributable to rising import penetration (Acemoglu et al. 2016;

Krugman 2016; Pierce and Schott 2016). But the conclusion that trade contributes to the

overall decline of manufacturing employment may not apply equally to all developed,

industrialized countries. The US runs a large and persistent current account deficit. This

means that the displacement effects for low-skilled manufacturing workers from rising import

penetration where only to a lesser extent countervailed by employment and wage expansions

in export-oriented sectors.

The experience of Germany -- a traditional manufacturing powerhouse, may be particularly

interesting in this respect. German trade with China also picked up quickly in the 1990s, and

especially after the China’s WTO accession. European countries also experienced another

major event during the same time frame, namely the fall of the iron curtain with the

subsequent transformation of the formerly socialist countries into market economies. German

trade volumes with Eastern Europe increased even faster after 1990 than with China. Yet

Germany’s trade relationship with China and Eastern Europe is much more balanced than

America’s trade relationship with China. Dauth et al. (2014) find that the impact of

international trade exposure on the German labor market is more balanced between adverse

effects from import penetration and offsetting positive effects from rising export

opportunities.

The experiences of other industrialized countries range somewhere in between the American

and the German case.3 All of them tend to observe a secular decline of manufacturing jobs.

3 Examples include Spain (Donoso et al. 2014), or the United Kingdom (Pessoa 2016). A study by Balsvik et al.

(2015) for Norway also finds negative employment effects from the China shock, but at a more moderate scale

than in the United States. Also see Jansen et al. (2017) for a broader overview across countries.

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Technology certainly adds to this trend, as production processes become increasingly

automated and digitalized everywhere (ILO, 2017). But the contribution of international trade

to the decline of manufacturing employment varies substantially across different countries. In

some cases, globalization has reinforced it. But that pattern is not inevitable, because in other

instances trade even worked against it.

More generally, the technology trends of automation and digitalization introduce challenges

on the labor markets of rich, developed countries that are related to those posed by

international trade. Technological progress – for example through new and smarter machines

such as industrial robots – may also generate notable welfare and productivity gains for the

economy. By facilitating new and cheaper products it may benefit virtually all consumers. In

addition, it benefits those workers which possess abilities and skills complementary to the

new technologies. But for some workers those technologies also represent threats, because

they may replace existing jobs and lead to unemployment.

Recent research has specifically investigated the impact of industrial robots on manufacturing

workers in the United States (Acemoglu and Restrepo 2017) and in Germany (Dauth et al.

2017). One general conclusion from this research is that workers in relatively routine-

intensive jobs with low or medium levels of qualification are most vulnerable. Robots induce

significant wage declines for those workers in the middle of the distribution. High-skilled

workers (such as scientists, lawyers or managers) as well as capital owners even gain from

robots in terms of higher earnings. Put differently, robots represent a form of skill-biased

technological change that affects the income distribution.

But the countries’ experiences differ when it comes to the impact of robots on the total

number of jobs. Acemoglu and Restrepo (2017) find strongly negative overall employment

effects from robots in the United States, while the diagnosis for Germany is more positive.

Dauth et al. (2017) find that in Germany, robots have not caused direct displacements of

manufacturing workers, but only reduced the creation of new jobs. Moreover, all job losses in

manufacturing seem to be fully offset by new employment opportunities in the service sector.

The evidence cited so far suggests that countries with stronger welfare states and industrial

relations between employers and employees met the challenges of globalization and

technological progress more successfully over the last few decades. For example, the German

system of work councils, which recognizes industry-wide collective bargaining agreements

but allows for flexible wage and working time arrangements at the firm level, may be one

important reason why robots have, so far, had less adverse employment effects. Similarly, the

Nordic model of the welfare state combines high levels of social protection with strong

incentives for qualification and re-training in case of an individual job loss.

Summing up, both trade and technological progress generate large gains for the economy.

The goal of inclusive growth is, however, not automatically achieved by the market, as so-

called “trickle-down” theories of economic growth assume. A free trade agenda requires a

complementary set of policies to compensate those that stand to lose from trade.

Although the same forces – trade and the emergence of value chains in an era of technology -

- act upon industrialized and developing economies, their impact plays out differently. For

many developing nations, trade provided a vehicle for integration, economic growth and

development. Trade agreements backed by capacity building assistance can provide an

impetus to strengthen institutions for governance and social dialogue (Dewan & Ronconi,

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2014; ILO, 2016). But continuing to reap the benefits of trade requires the right domestic

policy framework, institutional capacity, and economic infrastructure to apply its benefits

toward achieving development goals.

In The Globalization Paradox, Dani Rodrik notes that the countries that benefited most from

opening their economies – for instance China, India and South Korea, spent several years

protecting and subsidizing important industries before exposing them to foreign competition

(Rodrik, 2011). The 1980s and 1990s then marked a period of significant, though iterative,

economic reforms in several of these developing nations. Developing countries, most notably

China, gradually shifted away from import substitution to a model of export-led growth

introducing a new and potent source of low-wage competition into the global economy.

By the middle of the 1990s, the economies in developing countries like China, India and

Brazil were rapidly developing their export sectors. India and Brazil became members of the

World Trade Organization (WTO) in 1995 when it was founded, and China acceded in 2001.

The WTO provided new opportunities for these emerging market economies to become

players on the global stage.

These nations did not just offer cheaper labor, they had more of it. This allowed for larger-

scale and faster production that catered to shifting consumer preferences in the global North,

facilitated by technological advancements and cheaper transportation. Ricardian theory of

international trade was premised on a world where nations traded in primary commodities or

simple finished goods produced close to where they would be consumed. Cheaper

transportation and technology upended these assumptions creating a world in which

developing and emerging economies began to stake larger claims in the global economy as

well as assert greater authority in the production processes that drove it.

But leveraging a greater supply of low-wage, low-skilled labor as a comparative advantage

comes with several problems. First, it can create incentives to maintain low standards.

Suppliers depress wage costs, sometimes for higher margins, other times because of pressure

from buyers and brands – intra-industry trade -- to keep costs and/or the time it takes to

produce a good, low (WRC, JJN and CAP, 2013). This also leads to a disempowerment of

social institutions, such as unions, that fight for higher standards and fair compensation.

Second, using trade as a spring board to spark development is also contingent on a countries’

capacity and willingness to (i) move from low value add production to higher levels of

production, (ii) diversify their economies to provide greater opportunities for employment at

different skill levels, and (iii) redistribute the gains from trade through domestic policies that

help people adjust to the churn.

Some countries find themselves stuck in low-value-added stages of global production. One

can find examples of developing countries that use low-wage labor to fuel a labor-intensive,

low-value added textile and garments sector, for instance. Despite its high levels of economic

growth, real wages, working conditions and living standards remain poor (WRC, JJN & CAP,

2013). Some of these countries have not diversified their economies.

Others, by contrast, have diversified their economies. Vietnam for instance has expanded

from sectors such as textiles and garments into small electronics as well. In a side agreement

accompanying the now halted Trans-Pacific Partnership, Vietnam consented to a ‘Plan for the

Enhancement of Trade and Labor Relations for Vietnam’. It had agreed to specific legal and

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institutional reforms allowing for independent trade unions, and their vertical and horizontal

integration in five years.4 And these reforms are likely to continue because policymakers see

this in their own economic interest, though perhaps in a longer time frame.

An increasing number of developing countries recognize that “race to the bottom economics”

is detrimental to their own development trajectories. Trade agreements, accompanying

capacity building and technical assistance can help equip these nations in building the

institutions that ensure that regular workers benefit from an expanding economic pie and that

trade is pursued in service of development (Dewan, 2016).

Rodrik, Acemoglu and other scholars have asserted that greater economic openness is fruitful

when complimented by institutions that ensure that the benefits are widely shared. The

absence of appropriate social, political and legal institutions leads to elite capture of benefits,

high adjustment costs and growing inequality, which is ultimately bad for economic growth

in developing and developed countries alike (Jaumotte and Osoria 2015). Labor’s shrinking

share of income and the growing divergence between productivity growth and wage growth

are outcomes of weak institutions -- inadequate regulations and enforcement, and fragile

industrial relations (IMF, 2017).

Other less developed economies are struggling to become global industrial players in a

landscape that has grown ever more competitive and crowded. Industrialization through

participation in global value chains has therefore, in some countries, failed to bring about

labor market parity or meaningfully reduce inequality. The Philippines and Malaysia, for

instance, sit near the top of the OECD’s Global Value Chains Participation Index,5 but the

Gini coefficient – the most commonly used measure of income inequality -- in both countries

has stagnated or even increased over the last decade.26

Global Value Chains have also concentrated in Asia and Eastern Europe and not as much in

Latin America. Many countries in Africa struggle with poor infrastructure, low regional

integration and weak political institutions to fully participate in value chains.

While technology at one time enabled developing nations to participate in the global

economy, it now threatens to disrupt their economies in at least three ways. First, the threat

of automation and robotics looms over developing nations as it does over industrial ones;

though the impact and pace of change is likely to vary across countries based on their level of

development. Automation and robotics threaten to prompt a decline in manufacturing’s share

of employment. Second, there may also be a shortening of supply chains where cheaper

4 Under TPP, Vietnam would have allowed workers to establish and join an independent union, with full

autonomy to elect their leaders, adopt a constitution and rules, manage their affairs, bargain collectively, and

strike -- to be accomplished prior to entry into force of the TPP agreement. Vietnam had also committed to

allowing the formation of larger workers’ organizations that are horizontally affiliated with other

enterprise/industry unions, or those in different geographies within the nation, as well as affiliated vertically

with federations or confederations. However, Vietnam had committed to this within five years of the

agreement’s entry into force. Finally, the plan established a review mechanism for periodic monitoring by an

independent “labor expert committee” starting after two and a half years for at least ten years. United States

would have been able to withhold or suspend tariff reductions if Vietnam did not comply with its commitment

to provide the right to form labor unions across enterprises and vertically within five years. 5 https://stats.oecd.org/Index.aspx?DataSetCode=GVC_INDICATORS

6 http://data.worldbank.org/indicator/SI.POV.GINI

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technology makes it possible to produce closer to consumers and innovation centers fueling a

reshoring phenomenon that is aided by protectionist sentiments. And third, though both these

threats may still be some time away for developing nations, greater technology threatens to

make employment more skill biased, changing the task requirements especially in mid-level

occupations. A lot more can be said about the nexus of technology, trade and the world of

work, but that warrants a separate in-depth research and discourse.

Charting a new path through the Global Deal

Policy Implications

1. Trade liberalization must be accompanied by policies that actively re-distribute the gains from globalization across all members of society.

We have argued above that a free trade agenda must be accompanied by a complementary set

of policies to share the gains from globalization and technological progress, and compensate

those that stand to lose from these processes. A combination of liberalization and appropriate

redistributive measures, which are feasible given the aggregate welfare gains that are

generated, is preferable to a protectionist agenda from an economic and social point of view.

The latter may shield certain groups from individual losses in the short term. But it foregoes

the various benefits from globalization, and thereby misses the potential to improve living

standards at large.

The fact that such compensatory policies have not been sufficiently implemented in practice

has been pointed out often (Rodrik, 2017). This lack of implementation may, in turn, at least

partly explain the recent surge in populism and the backlash against globalization observed in

many countries.

Even if many agree, in principle, that those that lose from globalization should be

compensated, there is still only a small literature with proposals explaining what such

compensatory policies would look like. The traditional view among economists, following

the logic of the seminal work by Nobel laureate John Hicks and Nicolas Kaldor, has

interpreted compensatory policies literally as monetary transfers to those that stand to lose,

implemented for example via the tax system.7

Although important, this classical approach of income re-distribution may not be sufficient to

meet the challenges posed by globalisation and technological change. It must be

complemented by efforts of stakeholders, and specifically targeted public policies in the

labour market where most individual losses from trade and globalisation typically have their

origin. By supporting inclusive wage policies, the Global Deal has already contributed

substantially to this broader goal. This effort must be continued and reinforced further.

7 This notion is formalized in the recent contribution by Antras et al. (2017) who discuss the role of the

progressive income tax schedule. A classic in this literature is Dixit and Norman (1980).

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2. Labour market policies are an important and practical step to compensate those that stand to lose from trade and globalization. After a trade-induced job loss, the goal should be to foster a quicker comeback into better jobs.

International organizations have recently developed some proposals on how to tackle the

challenges that globalization creates in developed and in developing countries (IMF, World

Bank and WTO, 2017). A strong focus lies on policies which target the labour market. This

focus is exemplified, in particular, by the G20 which explicitly recognizes the contribution of

“social dialogue and partnership, minimum wages and collective bargaining adapted to

national conditions ….. so that strong, sustainable wage growth can help address inequalities

while promoting vibrant employment growth (ILO, 2016).”

Labour market policies may be specifically tailored toward workers who face trade-induced

job or wage losses. Such Trade Adjustment Assistance (TAA) programs already exist in

Europe and the US, although in low volumes. But the reasons for an individual job loss are

often difficult to identify is practice. Moreover, technology shocks matter for workers just as

much, if not more, as rising international trade exposure. The appropriate policy response to

globalization, therefore, is a general increase of active and passive labour market policies, not

just specific trade assistance programs. This is a goal that the Global Deal can help further.

Such labour market policies do not just redistribute income or compensate those that stand to

lose from globalization through passive monetary transfers. They take an active approach and

underscore work as a crucial element in an individual’s life. Specifically, they try to facilitate

a quicker comeback into better jobs after a job displacement, for example through

qualification and re-training efforts.

3. Industrial Relations and Social Dialogue as an important tool for adjustment

Ensuring a well-functioning labour market in which all economic players can adjust to trade

and other economic shocks requires the cooperation of multiple stakeholders. Policy cannot

solve all problems related to adjustment.

The private sector must be an integral part of both the demand and supply side solutions.

Supply side solutions include the provision of benefits, especially where these are not

provided by the state, but also active measures such as training, retraining, and life-long

learning efforts.8 There is a need to understand in greater detail how to engage companies in

supply side interventions to help a nation’s workforce adjust to economic change.

Unions also have an important role to play in representing workers in a rapidly changing 21st

century economy. This includes advocacy agendas for greater transparency in value chains,

better governance and regulation of international, regional and domestic trade, and domestic

policies that ensure a fair distribution of the benefits from trade. Workers’ organizations

should also explore how new technology and digital platforms can help mobilize and

organize workers around these causes.

As major transformations ranging from technology to the fragmentation of trade into value

chains rapidly alter labour markets, the private sector and their representative organizations,

8 But skills training and retraining must be built on a foundation of a strong education system not in place of it.

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and workers’ organizations must form a renewed partnership to cope with the changes. This

is an economic imperative because strong, stable labour markets benefit the economy at

large. Sound industrial relations and social dialogue are essential to this effort. The Global

Deal provides a platform to broker social dialogue in a safe space and renew trust between

the two sides toward mutual gain.

4. Qualification and re-training efforts should be accompanied by regional policies

One important challenge for this policy agenda of addressing the individual losses from

globalisation and technological change by means of labour market policies is the regional

dimension. The problematic consequences of those major economic shocks – the

displacements, the wage reductions for some workers – are often much stronger in some local

labour markets within a country than in others.

Vulnerable regions often have a strong local concentration of import-competing or

automatable manufacturing. Examples include the American Rust Belt in the Midwest, the

industrial area in Northern England, or the Ruhr area in Germany. In recent elections, those

regions also tended to be more prone to populist and protectionist agendas. Active labour

market policy should therefore be complemented by regional transfers to the most exposed

areas, and provide incentives for firms to create jobs in those communities.

Redistributing the gains is undoubtedly highly important to achieve inclusive growth and to

allow more people to benefit from globalization and technological progress. But the Global

Deal should also rethink the way we conduct trade, especially as value chains become more

fragmented and complex, and the role of the State, the private sector and workers’

organizations prior to redistribution.

5. Global Deal should propose tangible steps for deeper cooperation between the WTO and ILO, complimenting domestic policies with multilateral instruments, to manage the trade and employment nexus in a 21st century context of value chains and technology.

The ILO and the WTO should deepen their cooperation. The WTO preamble, written in

1995, commits the institution to pursuing trade policy consistent with “ensuring full

employment”. However, cooperation was slow to begin between the WTO and ILO – the

latter has the remit for labor and employment issues among the United Nations agencies.

Recent years have seen greater collaboration between the WTO and ILO (ILO and WTO

2017), but this could be strengthened even further.

Recent events and trends in the global economy – the 2008 financial crisis, the phenomenon

of jobless growth, public dissatisfaction with free trade agreements – demonstrate that

separating trade and employment policy is no longer tenable. But major questions loom as to

how institutions, multilateral and national, should manage the trade and employment nexus.

The Global Deal could help delineate an agenda in this regard.

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6. Engage and connect with the private sector – employer’s representatives as well as individual multinationals and brands – on issues that matter to them to build trust and broker stronger industrial relations.

The Global Deal must engage the private sector in creating a system of global governance

that ensures that trade improves job creation and the quality and conditions of work

worldwide. We must do this because elaborate value chains mean that trade is governed

through the private law of contracts. Where enforcement capacity is weak in many

developing countries, suppliers are more inclined to act based on pressure from

multinationals and brands.

The Global Deal should provide a platform for companies, brands and industry groups to air

their concerns about the impact of technology on their business, responsible supply chain

management, workforce development without attribution. These concerns can then be

presented to all partners of the global deal and be taken into consideration when crafting

solutions.

Furthermore, the Global Deal can help advance one coherent framework governing the

behavior of multinationals, bridging multiple guidelines from the Ruggie Framework to the

OECD guidelines. Voluntary private initiatives should complement the ratification of

international labor standards and efforts to support public governance to implement

standards.

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