Myths about trade, jobs, and competitiveness

By Richard Dobbs, Jan Mischke and Charles Roxburgh

Are emerging markets a threat to jobs and competitiveness for the industrialized countries? This column argues that such concerns are often based on myths. Armed with the facts, policymakers in mature economies should focus on the opportunities emerging markets present rather than viewing them as a threat,write Richard Dobbs, Jan Mischke and Charles Roxburgh in VoxEU.

This is not a happy time for mature economies. They are facing:

  • Anaemic growth; a jobless recovery;
  • The decline of manufacturing;
  • Debt and trade deficits;
  • Rising inequality; and
  • A perception that they are losing ground to those in the developing world.

With domestic consumption weak, many mature-economy policymakers are looking to stimulate investment and net exports – focusing in particular on manufacturing.

But are these analyses and conclusions based on facts? Much of current thinking seems to rely on anecdotes about trade, competitiveness, and jobs, rather than the facts – call it experiential policymaking rather than evidence-based policymaking. This sort of policymaking carries risks. For instance, there has been a dearth of empirical research on the size, scope, and potential impact of the services trade, as Brad Jensen of the Peterson Institute for International Economics notes in his recent book (Jensen 2011). Our recent research suggests the gulf between perception and reality is wide and deep (MGI 2012). Here are just a few examples:

  • Myth: Mature economies are losing out to emerging markets and are therefore facing increasing trade deficits

Reality: The overall trade balance of mature economies is stable and has begun to improve.

There are vast divergences among mature economies, and the gulf between deficit countries like the US, UK, or Southern Europe, and surplus economies in Continental and Northern Europe needs to narrow. But there is no sign in trade balances of a wholesale decline of mature economies.

  • Myth: The demise of manufacturing is why trade balances are deteriorating.

Reality: Imports of primary resources, whose prices are rising sharply, have been the main negative contributor to trade balances. In 2008, mature economies ran a deficit of 3.3% of GDP on trade in primary resources, but a 0.5% surplus on manufactured goods.

Even the US and UK, two economies with significant domestic oil production, saw a deterioration in their primary resource trade balances over the past decade similar to that of mature economies in aggregate.

In contrast, mature economies ran a small surplus of 0.3% of GDP on all manufactured goods and a significant surplus of 1.3% of GDP in knowledge-intensive manufacturing in 2009. Exceptions are the US, the UK, Spain, Portugal, and Greece, all of which ran trade deficits on knowledge-intensive manufacturing, and past McKinsey research has shown a declining US competitiveness in those sectors.

  • Myth: Trade is at the heart of declining manufacturing employment.

Reality: Manufacturing job losses are a long-term trend of productivity growth outpacing demand (demand is shifting to services). The Great Recession further caused manufacturing output and demand to collapse and job losses to accelerate. Of the 5.8 million US manufacturing jobs lost between 2000 and 2010, in our estimates, one fifth is down to trade or offshoring, concentrated in apparel and electronics. Most sectors have suffered from declining output due to weak domestic demand after the recession while trend growth in productivity continued. Clearly, all job losses result in a serious human cost and should not be treated lightly, however, it is wrong to blame trade for the majority of these losses.

  • Myth: Trade in services is small and low-cost economies will capture any increase through activities such as off shoring call centres.

Reality: Service exports already make up one-quarter of the overall exports of mature economies and that share could rise to one-third by 2030. Measured by value added, the share of services is already around one half of total exports. In any case, the distinction between manufacturing and services is increasingly blurred, and both are entirely synergistic parts of the economy.

  • Myth: “Service economies” such as the US are the world leaders in service trade.

Reality: The EU is ahead of the US in service exports in both gross and net terms, even when excluding trade within the EU-27 (4.1 vs. 3.5% of GDP, respectively, in 2009).

Armed with the facts, policymakers in mature economies should focus on the opportunities emerging markets present rather than viewing them as a threat. This means pushing vigorously for fuller liberalisation of trade in services, where restrictions remain high.

To sustain comparative advantage in export sectors, governments should continue to invest in education, infrastructure, and innovation in order to stimulate demand for new technologies and business models that can support high wage levels at attractive stages of global value chains. To reduce imports, given the negative impact on trade balances of resources, the priority should be a push for higher efficiency in the extraction, conversion, and use of those resources, coupled with the expansion of domestic production. This could also help stimulate investment, crucial to meeting the need for increased savings as households deleverage. Finally, the statistical measurement of services trade must improve, as well as the understanding and measurement of global value chains.

Today, we are hearing protectionist noises in some policy circles, which could compromise the global recovery. Yet the facts about trade, competitiveness, and jobs point the way to a less risky and potentially much more fruitful agenda for growth and renewal.

This article originally ran in VoxEu.

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