Bangladesh and the new economic world order
Bangladesh has so far been watching from the sidelines as a major international shake-up currently takes shape in the global economic and political landscape. While all the major pieces of this new global scene, which I will call “The Twenty-first Century International Economic Order” (TCIEO), are not yet in place, we can sense from recent moves by USA, UK, Germany, Russia, and China that it will have USA and Russia forging greater ties, and China carving out its own area of influence in the Pacific Rim, and some major realignments of trade relationships. In this new TCIEO, international trade, which played a major role in economic development of developing countries, will witness some major realignment, and USA will play a secondary role in world affairs. Countries that are expected to take a leading role in the coming years are Germany, China, and India. For a trade-dependent country like Bangladesh, while its position as a major exporter of cheap consumer goods is secure in the short-run, it has to seize new trade opportunities that will open up by the constantly shifting cross-currents of the global supply chain. We need to stay ahead of the curve as competition is going to be intense, and only the most efficient producer will be able to take advantage of new technology, cost reduction, and constantly evolving taste and products.
Bangladesh has a huge stake in this international economic order. During the period of 1960-2015, Bangladesh has emerged as an open economy as measured by trade openness index i.e. exports plus imports as percent of GDP, which was 42 in 2015. The average value during that period was 25.37 percent with a minimum of 11 percent in 1975 and a maximum of 48.11 percent in 2012. We are aiming for Middle Income Status by 2021, and on our journey along this path, we can expect our export-dependent RMG industry, other newly emerging export-oriented ‘thrust’ sectors, and remittances to boost our export earnings to top the USD 70 billion mark by 2021. Therefore, we need to forge new trade alliances, promote investment, both domestic and foreign, in our manufacturing, infrastructure and ICT sectors. The bottom line is, Bangladesh cannot remain a bystander as the world economy pivots and positions itself for changes that will define the New Industrial Revolution.
Since the Brexit vote in the UK in June and the US presidential election in November there have been concerns voiced in various quarters about the future of free trade. However, the current times are more than just a matter of trade relations; it is also about global geo-political alignment. Russia has started asserting its dominance and exerting its muscle power in Europe and the Middle East. And so has China. In the last three quarters of 2016, China’s economy grew at 6.7 percent rising to 7 percent last month boosted by two years of monetary easing and fiscal stimulus. However, we are likely to witness some major changes in flow of goods, labour and capital in TCIEO. US might cut its demand for products that are labour-intensive, and Britain, while keeping its ties with EU, will be open to trade pacts with its former colonies including Australia, New Zealand and the Indian subcontinent, as well as the Pacific Rim nations with or without the USA.
What role will trade play in TCIEO? According to the Brookings Institution, the global economic network has experienced its most significant slowdown in international trade in fifty years. Global trade increased 27-fold between 1950 and 2008, three times more than the growth in global GDP leading to a rise of the ratio of trade-to-GDP, which rose from 25 percent in the 1960s to 60 percent today. However, since 2009 this ratio has remained stagnant, and there is some speculation that this ratio might have reached a peak. These are legitimate concerns and particularly so for those who believe that free trade is largely beneficial for the world economy, and are aware that trade restrictions have either hurt the general population or led to military warfare in the past. Without giving away the central point of my argument, allow me to mention that it is an open secret that there are many uncertain elements that will unfold in the next few months, particularly after the new year, and we still need to watch and keep our hopes that 2017 will not bring as many shocks as did 2016.
Let me step back a little. Nobody foresaw last January that UK would vote to cut its ties with the EU, a body which has been heralded as the most important economic and political force since the end of WWII. While Britain waited until 1973 to join this group, since the fall of the Berlin Wall in November 1989 EU has developed into a major international powerhouse with 28 nations in its fold. EU started out as a ‘customs union’ where members decide to lower their tariff and remove non-tariff barriers, but it has concurrently made significant strides in other areas including free movement of labour and capital, and a common currency. With the Brexit vote, the British electorate appeared to have turned its back on all of this, and set a bad example for the rest of the world. However, the principal take away from the British experience is that often free trade is not a panacea and can hurt the common people as much as it benefits others. In a recent op-ed piece entitled “The Challenge of Economic Inclusion”, Christine Lagarde, managing director of IMF, decries any “retreat from free trade and open markets”, and strongly advocates policies to address various forms of inequalities to preserve the gains from economic openness.
Finally, it would be wrong to interpret the Brexit vote as evidence or ‘data point’ showing that free trade is not beneficial. In fact, data shows that Britain has reaped enormous gains by joining the European market. And, we should note that one of the key goals of Theresa May’s government is not to break away from EU completely, but to seek the same level of open market access that Britain had enjoyed before breaking away from EU. Britain’s beef with EU is not about trade but about migration.
‘Trade bashing’ in the USA has been rising for some time. Many leading economists have voiced their concerns about promoting free trade agreement without policies in place to address the negatives, such as retraining and income support. Nearly two decades ago, Dani Rodrik, Professor of International Political Economy at Harvard University asked rhetorically, “Has Globalisation Gone Too Far?” Let’s take the case of the North American Free Trade Association (NAFTA). US balance of trade with Mexico went from a USD 1.7 billion surplus in 1993 when the treaty was signed to a USD 54 billion deficit in 2014. Economist Dean Baker of the Centre for Economic and Policy Research (CEPR) argues that increased imports from Mexico caused the loss of up to 600,000 US jobs over two decades. Unfortunately, the benefit that free trade brings, particularly lower prices and increase in US productivity due to increased competition, got lost during a charged election season.
Nevertheless the ‘resurgent protectionism’ seen in the USA and UK should not be seen as closing the world economy to trade, nor is it an indication that countries in the West are looking to raise tariffs on imports from emerging economies. In a proactive approach, world leaders raised their voice against protectionism at a recent gathering of the heads of state of the 21-nation Asia-Pacific Economic Cooperation (APEC). The host, Peruvian President Pedro Pablo Kuczynski, warned, “In the US and Britain, protectionism is taking over. It is fundamental that world trade grows again and that protectionism be defeated.”
While global movement for freer trade received a setback after the demise of the DOHA Round, the sentiment among advocates of free trade is altogether pessimistic. One commentator observed, “With major trading countries holding positions that appear to be far apart, it may not be possible to negotiate anything at the WTO these days. And perhaps that is fine. The WTO has achieved so much already, and relying on it as the arbiter of existing rules may be enough. Currently, it serves as the main constraint on the use and abuse of antidumping duties, as well as protectionist domestic regulations. Having the WTO as the global oversight body for rules against protectionism is extremely valuable.” A stalwart in this group, economist and Nobel Laureate Joseph Stiglitz offered some reason to be optimistic. “Globalisation has meant that the world economy has become integrated, that there cannot be a major downturn in the world’s richest country without implications for every other country.” And a final word from me. Brexit, demise of TPP, and the failure of the Doha Round do not mean the end of free trade; it is rather a reboot. Hopefully, we will live to see freer trade without the shackles of free trade agreements.
The writer is an economist who writes on international economic policy.