A far-reaching transformation of world trade took place during the first decade of the new millennium. The result will be a decisive impact on economic relationships among the principal economic powers and on the international economic system.
Fuels share (predominately petroleum) of global merchandise exports rose from 12 to 18 percent, resulting in a $1.5 trillion per-year increase in revenues for exporters that comprise a relatively small share of the global population. It’s a per capita income bonanza for them – primarily the result of higher oil prices – but this could be transitory.
Exports of business and financial services also grew rapidly, with India passing Japan in 2010 to become the third largest exporter. The European Union (EU) and the United States still account for half of global exports, but the next four largest exporters, all Asians led by India, now hold about 25 percent of global exports, and their share is rising.
However, the most important change occurred in the dominant manufacturing sector – which accounts for two-thirds of merchandise trade – with China’s dramatic rise as the number-one exporter and the equally dramatic decline of the United States and Japan. The Chinese share of global exports of manufacturers soared from seven percent in 2000 to 20 percent in 2010, while the US share dropped from 19 to 13 percent. The Japanese share was down from 13 to nine percent, and the EU share held steady at 20 percent. Even more disturbing was the rapid growth in trade imbalances for manufacturers by the five largest exporters. In 2010, surpluses of $582 billion by China, $333 billion by Japan, $255 billion by the EU, and $172 billion by South Korea stood in striking contrast with the $425 billion US deficit.
Another important change in the manufacturing sector was the shift in Chinese exports from labor-intensive to high-technology industries. During the decade, the share of Chinese manufactured exports in the principal labor-intensive industries (dominated by apparel and clothing) declined from 37 to 14 percent, while the share held by the nine largest high-technology sectors increased from 38 to 55 percent. In 2010, Chinese exports in these nine sectors totaled $818 billion, or 44 percent larger than US exports of $568 billion.
These are the basic facts of the radical restructuring of trade during the past decade, and this leads to two follow-up questions:
- Will these restructuring trends continue in the second decade of the new century?
- What impact will this transformation of trade have on the international economic system?
The surge in oil export revenues during the past decade could level off or decline, depending on global supply and demand and consequent impact on prices. The transforming trends for trade in manufacturers and commercial services, however, on present policy course, are likely to continue for the most part. This clearly happened for Chinese and US trade in manufacturers in 2011. Chinese exports of manufacturers grew by 21 percent in January-November, compared with 2010, and the trade surplus rose by 23 percent, while US exports grew by only 13 percent, together with a 12 percent increase in the trade deficit. As a result, Chinese-manufactured exports in January-November 2011 were 56 percent larger than US exports, and they were on track to double by 2015.
Other principal trading nations also continue the past decade’s restructuring paths. India and some other Asian nations continue to gain global market share for both manufacturers and commercial services. The EU share of global exports of manufacturers held steady at 20 percent
through the decade, largely through the eurozone impact, whereby the northern tier export powerhouses benefit from an increasingly undervalued euro. EU-manufactured exports to non-members, at parity with US exports in 2000, rose to 50 percent larger in 2010, in part as a result of the eurozone. However, the eurozone’s future course remains highly uncertain.
International triggers for a continued restructuring of global exports – the declining US share in particular – relate to exchange rate and trade policies, which lead to the second question and the historic changes ahead for the international economic system. The international trade and financial system launched at Bretton Woods in 1944 was an extraordinary success for more than half a century. It served as a rules-based system of balanced, non-discriminatory – and ever more open trade – and it effectively coupled with increasingly market-oriented exchange rates. Apogee was reached in the final decade of the 20th century, via the 1994 Uruguay Round agreement that substantially reduced tariffs on a most-favored-nation basis and broadened the substantive scope and geographic participation of the trading system through the creation of the World Trade Organization (WTO), plus definitive movement toward market-based exchange rates.
However, during the first decade of the new century, this multilateral system went into serious decline, due to two important factors:
- Trade liberalization shifted from the deadlocked multilateral Doha Round to a proliferation of bilateral free trade agreements;
- Exchange rates were increasingly manipulated to gain an unfair competitive advantage in trade.
On current policy course, the Bretton Woods multilateral system, in operative terms, is increasingly dysfunctional.
A substantial violation of the Bretton Woods paradigm is the surge in mercantilist exchange rate policies. IMF (International Monetary Fund) Article IV obligates members not to manipulate their currencies to gain an unfair competitive advantage in trade, with currency manipulation defined as protracted, large scale official purchases of foreign exchange, which hold the currency below its market-based level. Most importantly, Chinese official purchases over the past decade totaled $3 trillion, far and away the most protracted and largest scale currency manipulation in the history of the IMF. Moreover, China claims complete sovereignty over exchange rate policy. This amounts to an official repudiation of its IMF and related WTO exchange rate obligations. Surprisingly, the United States has agreed with the Chinese sovereignty claim.
As for trade policy, the continuing spread of preferential bilateral and sub-regional free trade agreements converts the “most favored nation” tariffs bound in the WTO into “least favored nation” rates in practice. Meanwhile, Uruguay Round obligations not to link approval of foreign investment to trade and intellectual property commitments are increasingly violated.
The broadening, deepening mercantilist actions foster a reaction that will most likely come from the United States, which suffers the largest adverse trade impact and has witnessed reduced production and jobs – concentrated in the technology-intensive manufacturing sector. The substantial increases in the US trade deficit in manufacturers in 2010 and 2011 resulted in a net loss of several hundred thousand manufacturing jobs each year. Further increase in the deficit andjob loss in 2012 could make retaliatory US actions, directed toward protectionism, an election issue.
There’s an alternative, a clearly preferable one: A US reaction that calls for necessary reforms in the international trade and financial system. Such reforms would steer away from the current, highly unbalanced, mercantilist course. In the longstanding dollarized global economy, the United States has often served as the passive importer of last resort, permitting others to pursue export-led growth and large trade surpluses, offset by an increased US deficit. This asymmetric deficit role intensified over the past decade. But, now, as the US share of global exports continues to decline, trade deficit remains unsustainably large, and foreign debt increases by a half trillion dollars each year, fundamental change is in order, or else.
It is time for a critical, in-depth assessment of the decline and pending fall of the Bretton Woods structure and what should be done to restore a balanced, cooperative, and rules-based multilateral economic system.
As an historical point of departure, economic leaders met at Bretton Woods explicitly to replace the currency manipulation and preferential bilateral trade agreements of the 1930s with a rulesbased, multilateral system – the same challenge, with considerable irony, facing global leaders today. Moreover, the Bretton Woods conference succeeded in extremely difficult economic circumstances thanks to the determined and forward-looking transatlantic leadership provided by Harry Dexter White and John Maynard Keynes. Such leadership has been sadly absent from the current policy dialogue, especially across the Pacific.
Ernest H. Preeg is senior advisor for International Trade and Finance for the Manufacturers Alliance for Productivity and Innovation (MAPI). He is currently developing a re-assessment of the Bretton Woods structure (titled “The Decline and Fall of Bretton Woods”) anticipated for mid-2012 publication. Meanwhile, a full report of points made in this article is available at http://members.mapi.net/ISGweb/Purchase/ProductDetail.aspx?Product_code=ER-733