International Trade and Employment

TURIN 16 July 2007

Esther Busser

ITUC

Trade and employment

• Most jobs are not directly linked to trade or foreign investment, and can be found either in non-tradable services in developed countries or in non-tradable agriculture or informal work in developing countries

• Growth of trade and investment flows has so far been highly concentrated, both in terms of a north-south divide, as well as, within the south, in a small number of developing countries (including India and China).

Trade and Decent Work

How does trade affect Decent Work?It affects the four pillars of Decent WorkHow does trade affect labour standards?Competition forces down standards and wages due to high

supply and weakest players in the chainHow does trade affect social protection?It leads to job shifting and possibly net job losses, which

requires reallocation of jobs, unemployment benefits, skills, training etc.

Health and safety are also affected by trade and competitive forces

Trade and Decent Work

• How does trade affect creation of productive employment?

Trade rules can impact on the ability to create value added jobs through prohibition of instruments and trade policy, through trade defense instruments, and through tariff escalation and subsidies

• How does trade affect social dialogue?Trade union rights and collective bargaining are

often undermined; Trade agreements get inputs from business but not labour; No consultations take place with labour

Trade and Decent Work

• How does Decent Work affect trade?

• How do labour standards affect trade?

Competitiveness increasing versus decreasing

• How does social protection affect trade?

Can make shifts in jobs smoother and take advantage from efficiency gains

Trade and Decent Work

• How can social dialogue affect trade?Assists in restructuring of the economy; can make

trade reform more acceptable and widely owned; will provide more balanced outcomes if equal participation of players

• How can employment creation affect trade?Productive employment creation is key, value

added production and diversification is key, and many jobs that are created now are not productive

Trade in Goods

• Exports of goods do affect the employment levels

• Exports of goods and the need to compete do affect quality of employment

• Export Processing Zones are a well known example

• EPZs are characterised by a.o. long working hours, trade union repression, discrimination and often exemptions from legislation

Trade in Goods

• Imports affect the domestic production and employment if products that are imported compete with domestic products

• Imports of inputs at low tariffs can make export products more competitive and thus benefit employment

Trade in Goods

• Capital intensity versus labour intensity

• Are imports labour intensive or capital intensive?

• Are exports labour intensive or capital intensive

• Case of South Africa

Trade in Services

Four modes of supply:

• Buying a service across a border, such as telemedicine diagnostics: Mode 1

• Going to another country to buy a service, such as going abroad for cheaper health services: Mode 2

• Establishing a commercial presence abroad to provide services, such as opening a clinic: Mode 3

• A service worker moving abroad on a temporary basis to provide a contracted service, such as an engineer whose firm has won a contract to build a bridge: Mode 4

Services sectors• Business services (including professional services and computer

services) • Communication services • Construction and related engineering services • Distribution services • Educational services • Environmental services • Financial services (including insurance and banking) • Health-related and social services • Tourism and travel-related services • Recreational, cultural and sporting services • Transport services • Other services not included elsewhere

Trade in services and employment

• Market access commitments will allow foreign service suppliers to enter the market

• This can lead to both employment creation and destruction

• Regulatory capacity of governments is affected

• More competition affects the quality of jobs and services

Agriculture

• Distortions in agriculture are export subsidies and domestic support

• They lead to dumping of agricultural products on the global market

• Dumping can have disastrous effects on local markets and wipe out local production in developing countries

• Examples are US rice in Haiti and EU chicken in Africa

Quantity of employment

• Tariff reduction can lead to inflow of products which has an impact on local production and local employment

• FDI related to trade can have an impact on employment creation. Linked into value chains

• Trade defense measures such as safeguards and anti-dumping can have employment effects

Quality of employment

• Quality of employment is a growing concern in a globalised world

• EPZs are characterised by low quality jobs and trade union repression

• Agriculture processing and plantation work characterised by low quality jobs and trade union repression

• Growing casualization of work

Global Employment Agenda (GEA)

• First core element of the GEA is “Promoting trade and investment for productive employment and market access for developing countries”

• It states that: “One fundamental condition for unleashing the job creation potential of trade and investment in developing countries is a shift of the export base from primary commodities to manufactures and modern services by promoting appropriate physical infrastructure and the required skills of the labour force in an appropriate trade regime in which exports are promoted.

• This can extend beyond a mere blanket prescription. Indeed, a useful role of the Global Employment Agenda could be to help developing countries identify industries in which they have or could develop a distinctive comparative advantage, and to assist in marshalling the resources that countries need to move up the value chain.

• The ILO’s main concern is to ensure that trade liberalization leads to pro-poor, decent employment growth”.

• It is exactly this role of identification of industries in which countries have or can develop a comparative advantage and to assist countries to move up the value chain that will be severely compromised by the impacts of trade agreements.

Stages of industrial development

Three stages can be distinguished:• First there is dependence on primary

commodities• This is followed by resource based and

labour intensive manufacturing• The final stage is characterised by the

production of technology intensive high value added products

(Source: Akyuz)

Sectoral pattern of industrialization

The sectoral pattern is characterised by three stages as well:

• Early stages: concentration/specialization based on natural competitive advantages

• Intermediate stages: diversification: based on comparative advantage acquired through policies and capacity building

• Maturity: concentration/specialization at a high technological level

(Source: Akyuz)

Tariff patterns in industrialization process

• Coexistence of very low and very high tariffs during the process

• Sectoral tariff dispersion first rising then falling

• Tariffs raised on some products lowered on others

• Average tariffs first rising then falling(Source: Akyuz)

Industrial developmentWhy industrial development?

On the supply side there is a strong potential for productivity growth:

-Greater scope for specialisation and hence for economies of scale;-Greater scope for learning by doing;

On the demand side there is a high income elasticity of demand and hence favourable global market and price conditions;

Balance-of-payments constraint: Per capita income growth raises domestic demand for manufactures in terms of volume and variety which makes production and earning sufficient foreign exchange to import manufactures crucial.

Source: Unctad

• During the process of structural change, the share of industry in employment first rises – industrialisation – and then falls – de-industrialisation (Source: UNCTAD)

Composition of manufacturing value added (1)

(per cent of constant 1985-US$ values)(Source: Unctad)

Republic of Korea

0.0

20.0

40.0

60.0

80.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Resource-intensive manufactures Labour-intensive manufacturesTechnology-intensive manufactures

Open-economy industrial policies

– Industrial policies were important in East Asia;– Adverse effects because of departure from efficient

resource allocation;– But growth entails more than the efficient

allocation of resources.

• Constraints to implement pro-active trade and industrial policies:

– Rent seeking – this is largely a question of appropriate institutional settings;

– International rules and disciplines, particularly from WTO.

Source: Unctad

Why do governments have an industrial policy?

• Supporting the creative functions of markets:

• Dynamic scale economies giving rise to increasing returns of scale at the firm level (much of productivity growth results from investment);

• Complementarities in investment, production and consumption that, if unchecked, result in coordination failures (importance of linkages);

• Information externalities associated with investment in new goods or new technologies (profitability of innovative investment and speed of imitative entry).

(Source: Unctad)

The pattern of industrial policy in an open economy

• Strategic trade integration, which– Represents a mix between

• Import substitution through temporary protection and• Export promotion through temporary subsidies;

– Embeds industrial policy in a wider outward-oriented industrialization strategy;

– Involves a change in the product categories that receive public policy support, with their skill and technology content gradually increasing.

(Source: Unctad)

Stylized representation of open-economy support polices (Unctad)

Support MTpolicies HT

LT

RL

TimeRL: Resource-based and labor-intensive manufacturesLT: Low technology-intensive manufacturesMT: Medium technology-intensive manufacturesHT: High technology-intensive manufactures

WTO rules

• Trade-related investment measures (TRIMS):– Prohibits performance requirements on foreign

investors; would be important to foster linkages and technology transfer particularly in international production networks;

– Allows granting licenses for FDI contingent on technology transfer, establishment of intermediate input production, etc. – but key question is leverage over foreign investors.

(Source: Unctad)

WTO rules

• Trade-related aspects of intellectual property rights (TRIPS):– Restricts reverse engineering and other forms of

imitative innovation;– Asymmetry because IP governed by binding rules,

while commitments to technology transfer are phrased in terms of ‘best endeavour’;

– Allows granting narrow patents (enabling ‘minor’ innovations) and compulsory licenses (non-voluntary licensing of patented inventions).

(Source: Unctad)

An illustrative list of WTO-rules• Agreement on Subsidies and Countervailing Measures:

– Prohibits specific subsidies, e.g. those conditional on export performance or use of domestically produced goods.

– Allows subsidies for research, regional or environmental objectives;

– Hence, categorisation of subsidies favours pushing out technology frontier rather than catching up;

– Moreover, budgetary constraints limit subsidization;– Possible way forward: setting aggregate limits to subsidies

but allowing flexibility in allocation among firms and economic sectors.

(Source: Unctad)

An illustrative list of WTO rules: Industrial Tariffs

- Tariffs are in many respect not the best tool to promote industrialization and technological upgrading; they, nevertheless, were widely used in past industrial development experiences;

– Multilateral negotiations on NAMA aim at low and uniform tariffs will full binding coverage;

– Tariff policy support industrialization and technological upgrading: maintaining bound tariffs at relatively high levels and modulating applied tariffs on particular sectors around relatively lower levels; this would require tariff reduction obligations to extend only to average tariffs, rather than to individual tariff lines.

(Source: Unctad)

Some developing countries’ tariff regimes allow modulating applied

tariffs

Applied tariffs, bound tariffs, binding coverage, 2005, per cent (Unctad)

Country

Argentina 10.9 31.6 100.0

Brazil 12.6 30.6 100.0

Chile 5.0 25.0 100.0

Mexico 8.5 35.0 100.0

China 9.5 9.5 100.0

India 17.7 35.5 71.5

Korea Rep 7.2 11.3 94.8

Egypt 19.0 28.4 99.2

Applied Bound Bindingcoverage

Conclusions• Industrial policy must be part of a wider outward-

oriented development strategy;• Multilateral disciplines constrain use of some

traditional support policies – this makes flexible tariff policy relatively more important;

• Multilateral agreements protect weak countries, while bilateral agreements are often much more constraining;

• Developing country governments must use remaining degrees of freedom and prevent further limitations of policy flexibilities.

(Source: Unctad)

Employment impact assessments

• There is a lack of employment impact assessments of trade agreements

• Ex ante assessments are needed

• Set of “best” policies to be designed

• Some show that industries can be wiped out completely if trade liberalization takes place too deep and too fast

Carnegie

• Assessments of the current WTO Doha Round using a GTAP model

• losses in labour intensive sectors will be found in South Asia (except India), the Middle East and North Africa, Bangladesh, Argentina, Brazil, Mexico, the rest of Latin America, Sub Saharan Africa, and South Africa

• The report further notes that “significant increases in unskilled employment (from 0.6-1.4%) are realized by China, Indonesia, the rest of ASEAN and India” and that “the three poorest regions will actually lose unskilled jobs in manufacturing

Carnegie

• though the liberalization of manufactured goods increases the demand for labour in the developing world (with the exception of the poorest countries), wages for unskilled labour do not increase

• This is because of both the abundant supply of labour and the fact that liberalized trade in labour intensive manufactures drives down world prices for such goods and returns to workers and firms in those sectors

Carnegie

• The report notes that only a few developing countries will increase their labour intensive production in manufacturing but there will be some shifting of production among developing countries.

• The more significant changes are to take place in metals motor vehicles, electronics and machinery.

• All these changes will have substantial adjustment costs in the countries concerned and the report acknowledges that one of the shortcomings of such models is that adjustment costs are not part of the models, therefore overstating the gains

textiles clothing leather footwear

chemicals

Woodproducts

Paperproducts

FabricatedMetalproducts

Plasticproducts

Rubber products

automobile

furniture machinery

India1999

1,471,000 144,000 39,000 35,000 653,000 38,000 131,000 254,000 63,000 118,000 447,000 4,000 349,000

Indonesia (2001)

678,670 462,223 284,511 Included in leather

212,519 407,855 115,297 116,972 292,267 Included in plastics

48,676 300,519 49,214

Mexico(2004)

270,600 701,900 234,200 Included in leather

258,100 117,300 94,800 336,600 290,300 Included in plastics

522,600 379,900 84,700

Morocco (2000)

69,621 134,930 4,952 9,566 35,974 7,436 8,738 16,956 11,690 2,901 13,823 2,796 5,992

Peru (2004) 30,100 80,900 24,100 - 26,100 3,600 3,000 19,100 15,700 Included in plastics

6,700 51,000 10,500

Philippines (2004)

96,000 370,000 69,000 Included in leather

66,000 142,000 41,000 111,000 56,000 Included in plastics

39,000 143,000 64,000

ITUC: Employment figures for some selected countries

ITUC simulations:Reductions in applied rates with coefficient of 15

India 33 14 na na 19 3 28 28 28 28 73 30 32

Indonesia 15 30 12 12 - - - - 15 15 61 4 -

Mexico 66 70 70 70 - 33 - 38 62 24 - 38 -

Morocco 70.3

78 78 76 29 64 76 - 67 75 60 77 -

Peru 50 50 17 50 - 4 3 - - - - 4 -

Philippines - 33 13 13 - - - - 13 - 61 9 -

UNCTAD

• global CGE model, the Global Trade Analysis Project (GTAP) model

• Results differ per sector and per country• The use of national unskilled labour, which is

mostly engaged in leather, lumber, paper products, apparel, light manufactures and electronics, is positive but small in response to liberalisation

• Some sectors are very sensitive to the use of labour and to changes in the use of labour due to liberalisation. These are textiles, wearing apparel, leather and motor vehicles

Previous experiences

• Previous liberalization also shows substantial employment effects from tariff reductions.

• Research by Buffie in 2001 collected results from trade liberalization in African countries, all with severe effects on employment

• For Latin America liberalization in the nineties had led to large formal job losses and the worsening of underemployment in Peru, Nicaragua, Ecuador and Brazil.

Previous experiences• UNCTAD country studies (2006) show experiences from Malawi,

Zambia, Brazil, Jamaica, Bangladesh, India, the Philippines and Bulgaria.

• Especially the rapid growth of imports of industrial products led to the closure of some local industries and to stagnation or low growth in industrial jobs.

• For example in Zambia, tariff reductions led to job losses, due to relocations and closures. In the period 1981–1990, formal employment as a percentage of the labour force averaged 23 per cent. It fell to an average of 12 per cent in 1991–2000, due to the liberalization, and by 2003 it had fallen further to 8.1 per cent.

• Countries like Malawi and Jamaica also showed a decline in the manufacturing sector and in employment.

• The study on India showed a decline in wages as a proportion of total value added for manufacturing as a whole, due to increased capitalisation and growing casualisation of contracts

Do you have examples of trade related jobs in your country?

Do you have examples of how trade liberalization has affected the quality and quantity of jobs

in your country?