International trade as a promoter of employment

Inclusive Economy12 Aug 2014David Cheong

International trade is a force of structural change and productive transformation and can therefore promote employment.

In a report entitled ‘Payoff from the World Trade Agenda 2013’ released 8 months before the Bali WTO Ministerial Meeting, economists Gary Hufbauer and Jeffrey Schott estimated that if WTO members ratified a package covering seven trade-related areas “total global jobs supported by export expansion could number 34 million”. Employment impact assessment of trade policy (or any intervention) is, however, a very tricky endeavour. There are difficult methodological issues and great uncertainty attached to any estimates. Unfortunately, the report’s job claims were widely cited prior to the Bali Ministerial and continue to be so with neither caveats nor proper explanation of how international trade translates into more and better jobs.

To understand how trade can promote employment, it is useful to look at it from two angles. First, trade is a force of structural change in an economy. It is expected to have uneven and asymmetric effects across sectors, firms and workers. Policymakers need to properly anticipate these effects in order to program suitable adjustment assistance. Second, trade can induce productive transformation. Export demand allows economies of scale and scope. Imported intermediates and equipment can raise the productivity of domestic factors. Trade-related foreign investment can bring finance, new technologies and managerial know-how. Participation in international supply chains can promote finer specialization, efficiency and innovation. However, a developmental state is needed to channel trade towards developing productive capabilities while contributing to the achievement of national employment objectives and development goals.

The export-led industrialization experiences of many Asian countries provide some ideas on how trade can catalyze productive transformation and improve labour market outcomes. Industrial planners encouraged long-term investment in export activities with fiscal incentives. Imports of capital and intermediate inputs for export production were tariff-free. Exchange rates were managed for stability. Working capital was provided to exporters and export performance was used to evaluate firms’ competitiveness and decide on further financial support.

The initial employment effect of fostering export activities was the massive mobilization of workers into assembly-type operations. Many were paid wages for the first time, especially women. Exporting involved foreign partners who brought modern HR practices and training to upgrade and develop workers’ skills. In coordination, industrial planners revamped technical and vocational education systems, built specialized industrial training institutes and created funds to support training and skill upgrading. These efforts led to real wage increases and over the long-term to better work conditions.

Because of the currently weak global economy, some have become sceptical of export-led development. They contend that there is too much export competition (given China and India) and that the focus should be shifted to domestic demand. However, most countries in the world are small with limited domestic markets, much economic activity – including services – is or is becoming tradable, and labour is the most abundant resource of these countries. Therefore, advising them to turn away from exporting diminishes efforts at delivering job opportunities where they are most needed.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the ILO.