UNCTAD: Trade Wars a Symptom of a Deeper Malaise

The world economy remains on shaky ground a decade after the 2008 financial crisis, with trade wars a symptom of a deeper malaise, according to UNCTAD’s Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion.

While the economy has picked up since early 2017, growth remains spasmodic, and many countries are operating below potential, states the report. This year is unlikely to see a change of gear.

“The world economy is again under stress,” UNCTAD Secretary-General Mukhisa Kituyi said. “The immediate pressures are building around escalating tariffs and volatile financial flows but behind these threats to global stability is a wider failure – since 2008 – to address the inequities and imbalances of our hyperglobalized world.”

According to the report, global trade continues to be dominated by big firms through their organization and control of global value chains with, on average, the top 1% of each country’s exporting firms accounting for more than half its exports.

The spread of these chains contributed to a rapid growth of trade from the mid-1990s up to the financial crisis, with developing countries posting the fastest growth, including by trading more with each other.

But the report shows that countries have had to trade more intensely to generate the same growth of output as in the past and that too much of this trade has been unequal, with gains skewed in favour of lead firms through a mixture of increased market concentration and control of intangible assets.

The report documents a general decline – with China an exception – in the share of value added from manufacturing activities in these chains and a rise in the share of pre- and post-production activities. The rents captured at these ends of the chain have had a pronounced effect on the distribution of income in all countries.

UNCTAD believes that recent rounds of tariff hikes, whether they amount to a trade war, will disrupt a trading system drawn increasingly around value chains, although trade growth in 2018 will likely be similar to that of 2017.

However, the knock-on effects of any serious escalation could, through heightened uncertainty and reduced investment, bring more damaging consequences in the medium term, the report says. These could be particularly serious for countries already facing financial distress.

Moreover, because tariffs work by altering the profitability of firms in the tradeable sectors, they carry distributional consequences and affect demand in ways that require careful assessment.

As explained, free trade has shown itself to be an ideological fig leaf that has curtailed policy space for developing countries and cut away protections for working people and small businesses, even as it protects the rent-seeking proclivities of big firms.

In the real world, trade wars are a symptom of a degraded economic system and multilateral architecture, the report says, while the disease is a vicious circle of corporate political capture and rising inequality where money is used to gain political power and political power is used to make money.

To avoid repeating the mistakes of the 1930s, UNCTAD suggests returning to the Havana Charter, which was the initial attempt to establish a managed multilateral trading system.

At a minimum, it would prioritize three actions: tie trade discussions to a commitment to full employment and rising wages, regulate predatory corporate behaviour and guarantee sufficient policy space to ensure that countries can manage their integration in line with the Sustainable Development Goals, adopted by the international community in 2015.