International Monetary Fund
Published Date:
August 1997
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Richard Jackman

It is important not only to recognize that there are no clear-cut, systematic results from the current research on the effects of expanded trade but also to follow through the close reasoning as to why it is so difficult to isolate effects in this area. The lack of a clear “message” from these estimates is probably a reflection of the situation in the real economy—namely that there are no clear-cut, systematic effects from trade. Rather than getting involved in the technicalities (which are already very complicated), what I will do in the short time I have is to make a few comments on each of the preceding presentations.

I think the message that comes out very clearly in Peter Dittus’ paper is that exports from the East European countries are small relative to the West European economies. Why, therefore, make such a fuss about them? Why not just let them all in, and let Eastern Europe enjoy, as indeed it deserves to, the benefits of export growth? The West can try, in some way or another, to pay off the producers and others that are affected in the West. But is it right to think that because things are very small, they don’t really matter very much? I am struck, for example, by Charles Wyplosz’s figures on U.S. imports from East Asia, which apparently amount to 1.7 percent of GDP. This amount again may seem quite small, but to Americans it does not look that way. Certainly the political process in the United States doesn’t seem indifferent to the fact that imports from East Asia have grown from virtually nothing to 1.7 percent, even though this increase has occurred over 30 years, not overnight. There has been a long period of time for people to adjust to this development, but it has still had an important impact. I was tempted to say that in the 19th century many free trade liberals in Britain might well have been comforted by the thought that British industry couldn’t possibly be threatened by countries with tiny manufacturing sectors, such as Germany or the United States. If a country opts for free trade, however, it has essentially made a policy decision for a different regime. The commitment to protect the country in some way from fluctuations in the world trading environment has been abandoned.

Leaving this point aside, can the numbers discussed here be regarded as small? There are two things that worry me. First, if I understand them correctly, Mr. Dittus’ figures are calculated on the basis of scenarios relating to the Czech Republic, Hungary, Poland, and the Slovak Republic. These countries account, Mr. Dittus says, for 85 percent of existing trade with Western Europe. But it is surely unrealistic to think that any trade agreement could be confined to these four countries for very long. Once it becomes clear that behind these four lie the immediate claims of Bulgaria and Romania, the imminent claims of the former Yugoslavia and the Baltics, and the perhaps slightly more distant claims of Ukraine, Belarus, and Russia, it also becomes evident that perhaps the concession that is being made is not at all small. Actually, what is being discussed is trade with a bloc that is potentially larger than Western Europe.

The second worry I have is that there is a willingness to underestimate the costs of restructuring. After making errors of several orders of magnitude in thinking about the costs the East European countries will incur in changing their industrial structure, I think it is important to be sensitive to what these costs mean for Western Europe. The changes in employment should be regarded not so much in relation to other things that have happened as in relation to unemployment rates. The gross employment losses in the sensitive sectors should be looked at in the light of unemployment rates, in comparison to which they are not insignificant.

Most people tend to think that protection covers specific sectors, such as agriculture and textiles, and that therefore specific mechanisms for those particular sectors are needed to overcome it. In other words, the farmers or the producer interests that suffer need to be bought off. Mr. Wyplosz’s paper raises a much more fundamental and serious problem, which is whether trade liberalization will exacerbate the difficulty of finding well-paid jobs for relatively unskilled people to keep them working and off the welfare rolls. This concern is generally justified by reference to the United States economy and the widening of the wage distribution in that country.

I do not accept, however, that this concern for the employment prospects of unskilled labor is in practice fundamental to protectionist pressures in Western Europe. I believe the normal way of thinking is more relevant, for three reasons. The first is that it is something of an oversimplification, as Mr. Holzmann has already said, to regard the European Union as having been uniformly protectionist in relation to Eastern Europe. The Association Agreements abolished tariffs on many industrial products, and most of the remaining tariffs on industrial products are to be phased out within the next few years. What was not liberalized was agriculture, as has been mentioned, and the “sensitive sectors,” in particular textiles and steel. So protection is clearly sector specific. It is interesting to look at the table of labor-intensive sectors identified in Mr. Wyplosz’s paper and to find no close correlation between the sensitive sectors, which are being protected, and the labor-intensive sectors. Protection is also increasingly taking the form not of tariffs but of contingent protection—antidumping measures, for instance—which again are industry specific and tend to be used when specific industrial sectors feel they are at some sort of competitive disadvantage.

Second, while it is undoubtedly true that wage inequality has increased sharply in the United States and the United Kingdom, it has not been an issue in most European countries. In most of Europe, neither the wages nor the unemployment rates of unskilled workers have changed much relative to national averages. Unemployment has gone up everywhere, but it is not true that unemployment among unskilled workers has risen, nor have the countries with the biggest increases in wage inequality seen less growth in unskilled unemployment than others. The belief that there has been a collapse in the demand for unskilled labor does not prevail in continental Europe, despite the belief that there has been a general loss of manufacturing jobs.

Finally, if Western Europe had been particularly concerned about protecting labor, it could have linked the removal of tariffs to the adoption of social protection measures, as set out in the Maastrict Treaty. The fact that this link was not established suggests that protecting labor has not been the prime concern of West European policymakers.

Let me make just a couple of other points. I think the question of whether it is possible for Western Europe to have a big positive effect on Eastern Europe and to feel only a small negative effect itself may also be related to the question of capital mobility. One important respect in which Eastern Europe differs from the West is that its labor force is in many respects skilled, but its wage levels are much lower than in Western Europe. The implication is that Eastern Europe offers unrivaled opportunities for firms to invest and set up plants close to the borders with Western Europe, undercutting European operations. According to this argument, free trade between the East and the West at current relative wage levels can be expected to lead to an enormous capital inflow into the East. Most economists would see such a development as entirely sensible, perhaps because of the idea that Mr. Wyplosz mentioned earlier—that this shift is the only way to stop the excessive migration of labor between the two parts of Europe. But there seems to be no doubt whatsoever that such a development would be very difficult for politicians to handle, for Western producers would see themselves as very clearly threatened. The contingent protection the European Union has clung to is aimed precisely at preventing the problems that could arise from heavy capital investment by West European companies in areas of Eastern Europe close to the western borders. This very practical response is a further indication of the way in which Western Europe’s reaction to trade with the East is producer-interest specific and stems from less-than-perfect mobility within countries. It is difficult to restructure internally, and politicians are therefore sensitive to existing producer groups.

My final point concerns a problem Mr. Wyplosz addresses carefully: namely, the disentangling of trade effects from technology effects. I think it was clear from his presentation why separating the two is so difficult. The questions I would like to ask concern the payoffs that can be expected and the possible effects on policy decisions should it become clear that trade has influenced relative factor prices. Technology is basically something that nobody can do very much about, and if people feel threatened by trade (whether or not what has happened in the past has been due to trade liberalization or technology) politicians will be under pressure to take whatever measures they can to assist the most seriously affected groups. It can be argued that whether or not job losses are caused by technology, the same pressure for protection is there.

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