Trésor-Info - Publications de la direction générale du Trésor - growth

Internal Migration: A Cornerstone of China’s Economic Model

2025-01-28T00:00:00+01:00

Since 1978, hundreds of millions of people in China have migrated from the countryside to cities, mainly in the east, fuelling the country’s remarkable industrial transition from an economy previously dominated by agriculture (see Chart). In 2023, 66% of the population lived in urban areas.

Rural-urban migration has been driven by a gradual easing of the hukou, a household registration system for Chinese citizens based on their place of origin and their status (agricultural or non-agricultural, or rural or urban). The hukou is often compared to an “internal passport”. Dating back to the Mao era, it was introduced to control population flows and encourage migration to areas needing workers, while preventing slums from forming on the outskirts of large cities.

The rapid growth of internal migration has bolstered the working-age population without a hukou corresponding to their actual situation (177 million people, or 22% of the working-age population). While internal migration is now allowed, migrant workers from rural areas seldom obtain hukou from the city in which they reside or access the entitlements that come with an urban hukou. Migrant workers also work mainly in flexible, low-skilled jobs paid at a lower rate than workers with an urban hukou. Migrant labour is cheap for employers who pay virtually no social security contributions for migrant workers. China’s two-tier labour market thereby contributes to wage moderation, maintaining China’s cost competitiveness.

Living in a city without an urban hukou restricts access to property ownership, although restrictions have been relaxed in recent years in response to the real estate crisis. More importantly, migrant workers are not eligible for healthcare, education or government pensions in the same way as other workers. Migrant workers therefore save at higher rates than the rest of the population and human capital accumulation is slower at the aggregate level.

There has been much talk of reforming the hukou system and restrictions have been eased gradually, mainly in small- and medium-sized cities which attract fewer migrant workers.

Japanification: a Risk for China’s Economy?

2024-11-05T00:00:00+01:00

The “Japanification” of a country alludes to Japan’s economic situation starting from the early 1990s following decades of rapid growth. It is characterised by weak growth and inflation rates, and extremely low interest rates.

China currently bears many similarities to early-1990s Japan – its growth model is centred on industry and investment, and is reliant on buoyant exports. China is also laden with debt, and suffers from a population decline, a downward trend in growth (see Chart) and inflation, as well as a property sector crisis since 2021.

However, the extent of the decline in growth may be less considerable than in Japan given some of the Chinese economy’s strengths and its ability to learn from Japan’s difficulties. While China has reached the technological frontier in an increasing number of sectors, it is also looking to switch to a new growth model more focused on new technologies and on ramping up productivity.

The implementation of this new model could be hindered by China’s debt-laden local governments, and more generally there are lingering doubts over this model’s ability to sustain high levels of growth.

A similar fate to that suffered by Japan would mean a severe slowdown in the catch-up process, but not necessarily smaller productivity gains than in other countries: when adjusted for demographics, Japan’s growth had been indeed similar to that of other major advanced countries since 1990.

How Dependent Are Emerging Market Economies on China's Growth?

2024-01-30T00:00:00+01:00

China is now the top export market for many emerging countries, as its average share of exports from these economies rose from 4% in 2002 to 12% in 2022. Additionally, the growth of outbound Chinese tourism has created new forms of dependence, especially for certain Asian countries.

Emerging economies are also financially dependent on China through commercial and sovereign loans. The main recipient sectors (energy, mining and transport) and regions (Asia and Africa for almost 60% of the loans) are in line with China’s strategic priorities, particularly in terms of its supply needs. China’s total outward foreign direct investment (FDI) flows remain low in relation to loans, but Chinese FDI accounts for a significant share of the FDI stock of several countries (Pakistan, Angola, South Africa and Thailand).

China’s slower medium-term growth – which the IMF has projected will fall to 4% over the next few years, down from 8% in the 2010s – will affect emerging economies through two primary channels. On the trade side, slower Chinese growth will result in (i) a decline in domestic demand and imports, and (ii) price and volume effects on commodities. On the finance side, China’s slowdown will play a role in the continued push, which began in 2015, to reduce the flow of its financing (loans and FDI) to emerging economies (see Chart), and in the country’s geographic and sectoral refocusing, as already reflected in the shift in the official stance regarding the Belt and Road Initiative (BRI). Asian countries and commodity-exporting countries are expected to be the most vulnerable to China’s structural slowdown due to their close trade ties with Beijing.

Interest Rates, Growth and Public Debt Sustainability

2023-10-17T00:00:00+02:00

The sustainability of public debt depends on its long-term trajectory. This trajectory depends in turn on fiscal policies (i.e. the accumulation of annual primary balances) and the differential between the interest rate (r) and the growth rate of GDP (g).

If the primary balance is zero, the ratio of debt as a percentage of GDP increases, if the interest rate is greater than the growth rate (r–g>0) and it decreases in the opposite case. In the case of a primary deficit, the effect is more ambiguous: a positive r–g differential accelerates the increase in the debt ratio, while a negative differential contains the increase in the ratio and may even reduce it in some cases.

For France, and other major advanced countries, the interest rate-growth differential has been very volatile and positive over long periods (see Chart). Since the end of the 1990s, the interest rate-growth differential has narrowed for structural reasons, notably with excess savings at the global level which lowered risk-free interest rates, and even became negative in the past decade.

As measured by nominal borrowing rates, the differential could turn positive again in certain advanced economies as soon as 2023-2024, given the factors impeding growth and the surge in interest rates. As measured by the implicit interest rate, meaning the average cost of debt, the differential should remain negative in the medium term.

Caution is called for when using the observed interest rate-growth differential as a fiscal policy indicator, since it is impossible to foresee its future values. Furthermore, a negative interest rate-growth differential is not, generally speaking, sufficient to contain government debt in the presence of a primary deficit.

History shows that the link is not one-way, because the interest rate-growth differential is affected by the debt ratio: the greater the increase in the debt ratio, the greater the increase in the r–g differential.

Southern Africa Economic Dashboard

2018-07-17T00:00:00+02:00

A recovery in regional economic growth unevenly distributed among the countries of the region

The latest IMF data released in April 2018 (World Economic Outlook, April 2018) confirms an increase in sub-Saharan Africa economic growth from 0.7% in 2016 to 1.4% last year, which is higher (by 0.1 percentage point) to last October's forecast, and expect an upward trend with + 1.9% in 2018. Nevertheless, this recovery effect is very unequally distributed among the different countries of the zone: while some experienced relatively robust growth in 2017 (+ 4% in Malawi, + 3.6% in Zambia, + 3.1% in Lesotho, + 3% in Mozambique and Zimbabwe), that of South Africa remains modest (+ 1.3% after + 0.6%) and the other countries have seen their activity stagnate (0.2% in Swaziland , +0.7% in Angola) or even decrease (-1.2% in Namibia due to the slowdown in the construction sector, a very moderate recovery in mining activity and a weak Angolan demand) despite an improving global environment and the good recovery in commodity prices. In addition, the improvement in growth rates for 2017 possibly reflects the catching-up of 2016, particularly for Angola (-0.8 %), Swaziland (zero growth), South Africa (0.6 %) and Zimbabwe (0.7%).

For South Africa, the region's leading economy, growth, although still sluggish, has been well above the expectations of IMF analysts, who were still forecasting 0.7% last October: with 1.3% annual rate in 2017, it sharply accelerated compared to 2016, driven by the good performance of the financial, agricultural and mining sectors. The implementation of the new government, led by Cyril Ramaphosa, and the first measures taken (governance of public companies in particular) reassured foreign investors and prevented a deterioration of the rating agency Moody's, which had increased access costs to international financing.

In Angola, on the other hand, the performances are well below the forecasts established at the end of 2017: the rebound of oil production was less strong than envisaged, and growth only reached +0.7% against the + 1.5% expected. On the other hand, GDP /capita has started to rise in the country after 3 consecutive years of decline, but still remains below the level of 2013.

Improved weather conditions and rising world prices as key drivers of the economic recovery, with also a drop in key rates allowed by maintained inflation

In 2017, the two main drivers of economic recovery were improved weather conditions and rising global commodity prices. Indeed, most Southern African countries have a large agricultural sector (Lesotho, Malawi and to a lesser extent South Africa and Zimbabwe) and/or a mining sector providing the majority of their exports (Angola, Zambia, and Namibia especially, but also South Africa and Zimbabwe). On the one hand, the end of the drought has allowed the normalization of agricultural yields after the sharp declines observed in 2016. On the other hand, the rise in commodity prices has supported growth through increased exports, both in terms of value and volume (recovery of activity in some mines and opening of new ones). Since January 2017, the main mining and energy products have seen their price rise: + 6% for coal, + 12% for gold, + 19% for copper and up to + 30% for oil and + 40% for nickel, largely contributing to the reduction in the trade deficit of several countries.

In addition, monetary easing continues in the region : the policy rate was cut by 25 basis points in South Africa and Lesotho respectively in March and April 2018, by 50 bps in Zambia in February, by 125 bp in Mozambique in March 2018 and 200 bp in Malawi in December 2017. These successive decreases have been made possible by a favorable trend in inflation for several months in almost all countries, particularly those with very high levels of inflation : in Angola, inflation stands today at 20.9% against 36.5% at the same period last year, slowed nevertheless by the introduction of a floating exchange rate since the end of 2017 which caused a sharp devaluation of the Kwanza ; in Malawi it fell by almost 10 percentage points in 2017 while in Mozambique the rate fell from 20.6% in January 2017 to 3.1% last month. In Zimbabwe, on the other hand, inflation is on an upward trend due to electronic money creation. Thus, at the regional level, inflation is now 7.6% against 13.5% in early 2017, also as a result of the appreciation of most local currencies against major international currencies. As an indication, over the course of a year, the Rand appreciated by + 10.1% against the US dollar, the Botswana pula by + 8.5% and the Mozambican metical by + 17.8%, a sign of a slight renewed confidence of foreign investors, as well as an improvement in the economic context. The fall in key rates is good news in countries where the majority of loans are at variable rates, because it helps boost household consumption, lower the cost of credit for businesses and therefore contribute positively to growth. Central banks, however, remain cautious in the decline in interest rates (real rates are often high) particularly in view of the prospect of monetary tightening in the United States and the euro zone.

Finally, the recovery in global growth continues to have a positive effect on the economies of the region by pulling up their exports through an increase in external demand and by reducing their trade deficit. According to IMF data, overall growth is up + 3.8% in 2017, supported by a rebound in global trade, and is expected at + 3.9% for the coming year.

The fragility of public finances continues to weaken the economic situation of the countries, accentuated by the weakness of the diversification of activities and the anchor to South Africa’s economy

The question of the sustainability of public finances has been the main concern for Southern African countries in recent years : with the exception of Botswana, whose public debt amounts to only 15.6% of GDP in 2017, all the others countries in the region have either high levels (102.2% in Mozambique, 78.4% in Zimbabwe and 65.2% in Angola in 2017) and/or rising levels of public debt (+12 points in South Africa, +16 points in Malawi, +22 points in Namibia and +37 points in Zambia since 2012). In 2016, the deterioration of public finances was accentuated by the decline in revenues from the Southern African Customs Union (through the gradual decline in tariffs and the slowdown in the South African economy) which had deteriorated the current balance of already structurally deficit countries.

However, in 2017, all deficit countries saw their balance improve due to the better performance of tax revenues related to exports. Overall, the fiscal deficits remain relatively large and are leading to the creation of arrears in several countries, particularly in Mozambique, which has been in debt since the disclosure of hidden debts in 2016 and whose arrears are now accumulating at USD 710 million (approximately 5% of GDP). In Zimbabwe, the deficit was -9.6% in 2017, mainly because the announced measures to freeze salaries in the civil service were not taken. In Zambia, the effort of fiscal consolidation and reduction of arrears continues[1] but meanwhile, new investment projects threaten the sustainability of the public debt, with a risk deemed high by the IMF with which the discussions for a program are blocked.

Nevertheless, governments have put in place increasingly serious and credible fiscal consolidation measures with regard to different international organizations. In Angola, public spending decreased from 40 percent of GDP in 2013-14 to 21.4 percent in the 2018 finance bill, and wages remained almost flat, despite significant inflation in the country. In Mozambique, public spending was also reduced by 3.4 percentage points of GDP in fiscal year 2018/2019. Finally, in South Africa, the new budget in mid-February presented a sustainable budget path that has reduced the pressure exerted by rating agencies since mid-2016.

In addition, the fragility of public finances highlights the problem of the low level of diversification of economic activity in some countries, particularly in Zambia where 90% of exports are dominated by copper or in Malawi where the predominance of agricultural activity (29.5% of GDP) makes the country particularly vulnerable to climatic hazards and external shocks in general. In addition, the virtual stagnation of activity in South Africa in 2016 and the moderate recovery in 2017 penalized many countries that are still very dependent on the region's leading economy. In Namibia, export earnings fell sharply, with South Africa being the country's largest trading partner, and in Zimbabwe, transfers from Zimbabweans abroad fell from US $ 1,277 million in 2015 to US $ 1,105 million anticipated in 2017 as a result of sluggish South African activity (where the Zimbabwean diaspora is concentrated).

New governments in place in recent months seem to be aware of the need for structural reforms to improve the business climate and restore the confidence of foreign investors.

Beyond the necessary efforts to clean up public accounts, the development of the attractiveness of the country for foreign investors involves improving the environment of the business environment and launching reforms of public companies, which can now to be driven in many countries by the change of government. In Zimbabwe, the fall of Robert Mugabe, who has been in power for more than 30 years, suggests better prospects for improving the country's governance, while in South Africa, the election of Cyril Ramaphosa as head of the ANC has been very well received by the business community. These new leaders place at the center of their political agenda a reform of the governance of state-owned enterprises, together with a more efficient and transparent management of public finances. In Botswana, Mr. Mogkweetsi E. Masisi, the president elected in April 2017, has enshrined his government in the continuity of the previous power, both socially and economically, but with an economic policy a priori more open to foreign investment to accelerate the diversification of its economy. Finally, in Angola, the end of the dos Santos era suggests better prospects for transforming the structure of the economy. These reform efforts remain essential in order to restore the attractiveness of countries and attract new flows of foreign investment, down in recent years.

The deterioration of public finances as a factor in lowering the sovereign debt ratings of the different countries of the region

In 2017, for almost all southern African countries, sovereign ratings were lowered, placing them in the speculative category. In January 2017, Mozambique is placed in selective default by Standards & Poor's following the disclosure of hidden debt and the revaluation of the debt level, estimated at more than 100% of GDP. Then in April 2017, it is South Africa that sees its sovereign rating be degraded by one notch (from BBB- to BB +) in the speculative category by S & P, followed by a similar decision by Fitch a few days apart . The decision comes mainly in response to the large-scale cabinet reshuffle that President Zuma made on March 30 with the replacement of Pravin Gordham as Minister of Finance, and further deterioration occurred during the presentation of the multi-year budget in October 2017. Namibia was also doubly degraded by Moody's and Fitch (respectively in August and October) and ranked in the first tranche of the speculative category. Finally, during the summer, Angola's rating is lowered by both S & P (in August) and Moody's (in September) and is now one step above the "high risk" category. The poor ranking of all economies in the region (with the exception of Botswana, rated A2 by Moody's and A- by Fitch) is one of the factors behind the decline in FDI inflows in recent years and is thus depriving countries of access to international financing that would allow a revival of growth in a context of sluggish domestic demand and restriction of public investment. Prospects look more optimistic for 2018 with an increase in the outlook for Angolan and South African notes in March and April and a confirmation of the investment category for South Africa by Moody's.

Completed on May 25^th2018

[1] In Zambia, the public deficit trajectory is very different in cash accounting - which influences the dynamics of indebtedness - (5% in 2016, 7% in 2017 and 6% in 2018 where the deficit is increased by arrears reimbursement) and accrual accounting - which reflects the effort or not to reduce expenditures or increase revenues - (10% in 2016 when arrears accumulate, 5% in 2017 and 4% in 2018).

Trade openness, growth and inequalities

2017-06-26T00:00:00+02:00

Les Entretiens du Trésor is a yearly conference which focuses on a key economic issue and its associated policy challenges. This event is hosted by the French Treasury, at the Ministry for the Economy and Finance. Theme of the 2017 edition : “Trade openness, growth and inequalities”.

⇒ French version

Joseph Stiglitz, Nobel Prize in Economics highlighted that doubts from the academic world have emerged regarding the capacity of international trade to generate positive gains unless it is better managed. In developed countries where there is no full employment, free trade may foster more job losses than job creation. Any limited gains are unequally shared, with unskilled workers benefiting the least from trade. Distribution effects, e.g. from weakened bargaining power, may even make them worse off. Measures of social support are required to compensate for the negative consequences of international trade.

Despite limited forecasted gains from trade agreements, Stiglitz argues that well-managed economic integration is still desirable. The reality of interconnected supply chains make protectionism very costly to national economies as well as the global economy. Trade barriers may lead to market inefficiencies and the appreciation of local currencies.

The international community is increasingly concerned about how to cope with the rise of protectionist measures in the US. According to Joseph Stiglitz, the rest of the world has a responsibility to strengthen and reform the international trade rules to make them more equitable in face of this American protectionist turn.

Roberto Azevêdo, Director General of the WTO reminded the audience that fears on the potential risks caused by trade liberalization had already been expressed by political leaders attending the last G20 summit. These objective difficulties are not questioning the economic benefits of trade openness. It creates jobs (20% of French employees work in exporting companies), it pushes prices down which thus accelerates consumption and supports improvement in living conditions of the poorest (1 billion people would have been risen out of poverty thanks to international trade).

Trade openness is often stigmatized as the unique responsible for the rise in inequalities. In fact, technological change causes 80% of job losses. It is a crucial diagnosis to undertake relevant economic policy reforms to fight against growing inequalities. Without more focus on improved national redistributive policies some countries will continue to see the unequal redistribution of trade liberalization gains.

Marie-Ange Debon, Vice President International Division CEO of SUEZ pointed out the fact that the debate on trade openness should not be limited the issues related to trade in goods. Trade in services and capital flows should also be duly taken into account. Foreign direct investments, such as infrastructures, including green ones, contribute to economic integration and reduction in inequalities.

Furthermore, analyzing international trade only through country-by-country trade is not the most relevant. A regional and territorial approach now seems more powerful to understand international trade. However it makes trade negotiations more complicated. For instance, infrastructure developments are designed across countries, and cities play a growing role in the expansion of international trade.

Branko Milanovic, Professor of Economics at City University of New York explained that two groups most benefited from globalization since the 1980s: middle classes from emerging countries and the top 1% in richest developed countries. Those who benefited but less from this period were lower middle classes from developed countries. While standards of living converged between people from developed and developing countries, inequalities increased inside developed countries. These patterns were partially caused by an unequal repartition of the gains from trade gains.

The fact that trade openness generates aggregated gains does not mitigate skepticism regarding the effective benefits from globalization for members of this “lost generation”, which lost their jobs and won’t be able to find a new one. Nevertheless, the major part of this shock looks behind us: 15% of world jobs are being currently affected by trade, while 30% of jobs were exposed during the previous period.

Philippe Jahshan, President of the NGO Coordination Sud voiced the predominant views of civil society on trade openness. According to him, there are risks that international trade negatively impacts the environment and hinders sustainable development, for instance by facilitating uncooperative olicies such as fiscal dumping which can contribute to the deterioration of public finances and interferes with State’s ability to pursue ambitious social measures. It also led middle class from developing countries to compete with middle class from developed countries, and this also increased competition with different social models. It can also negatively affect the climate, by increasing polluting freight transportation and marine transportation. Developing countries are far more affected on that front. Trade openness impoverishes local and familial farming, whereas they are crucial for subsistence and resiliency of entire populations. Every trade liberalization leads to winners and losers. However, losers lack compensations with respects to their needs. Thus, inequalities increase significantly. New generation agreements can even exacerbate these collateral damages, because they deal with regulations and they introduce a dispute settlement mechanism to resolve disputes, which might overlap with state competence to regulate. Democracy is the most important issue raised by trade agreements. Nevertheless, border shutdown is not the solution. Trade policy must be revised in order to make trade agreements not an end in itself, but a lever and an instrument for higher objectives such as sustainable development. Commercial law should not take over other laws. We should sign these agreements in coherence with other international agreements, social and environmental rules (e.g. COP, ILO) in order to ensure that trade supports a fair and sustainable project.

Paul Romer, Chief Economist of the World Bank Group suggested that debates regarding the economic impact of trade openness are a theoretical topic which generates ambivalent reactions because of ongoing socio-economic mutations. Thus we should focus on the concrete effects caused by trade openness. International trade allowed developing countries to improve their standard of living by helping them have access to new technologies. As no one is ready to give up these economic improvements, we can hope that developing countries will not follow developed countries’ example in turning back to protectionism.

Trade does not bear the sole responsibility for increasing inequality, and a whole array of public policies is available to States to cope with these collateral effects. Since the 1990s the US and Denmark have been confronted with the same economic mutations but they have not followed the same path in terms of inequality. Inequality has declined in Denmark (Gini coefficient went done from 31% to 21%) while it has increased in the US (Gini coefficient went up from 43% to 47%). Choosing protectionism is synonymous with not trying to deal with these redistributive fiscal challenges.

Jean-Luc Demarty, Director-General for Trade of the European Commission explained trade agreements are a ley vehicle to regulate globalization, by integrating new issues such as best practices and regulatory cooperation, social and environmental dimensions, intellectual property and investment protection, as well as disciplines in competition. To a large extent, monitoring norms is equivalent to monitoring markets (even if regulatory cooperation doesn’t mean co-legislating), whose openness remains a key determinant of trade negotiations. Although trade generates losers, it is a positive sum game between countries and trade policy is not responsible for these negative externalities. However targeted adjusting policies such as training and social protection should accompany trade liberalization. We should also take into account civil society concerns as regards greater transparency in trade negotiations. By defending our economic interests, trade policy positively impacts growth and employment.

Sébastien Jean, Director General of the CEPII raised the question of the legitimacy of “new trade agreements” which includes nontrade chapters (social, environmental and fiscal clauses). Through these chapters, trade may be used as lever for increased cooperation in other fields. Supporting trade between two countries makes regulation discrepancies more costly. Yet, non-trade chapters may overload or paralyze negotiations – increasing the mixed nature of trade agreements – and bear the risk of interfering with national issues. Greater integration of non-trade chapters should be investigated. Different options should be studied such as: supporting a minimum level approach, binding automatic commitments, agreeing on auditable criteria and accepting to give up some trade negotiations if they conflict with other objectives. Indeed trade is more a tool than an end in itself.

Yann Delabrière, Chairman of Faurecia highlighted the priority given the current general context for preserving major regional trade agreements such as NAFTA. Any break in trade relations could have harmful effects on the US industry. Protectionist policies to support local production in Russia and Brazil in the automotive sector turned out to lead to blatant economic failures. 15-20% of North American automobile production and 50% of automobile components come from Mexico. The importance of challenges related to norms (electrical and connectivity ones) is going to increase because of the development of connected cars. Nowadays, the main part of industrial automobile production is made in South-East Asia (Philippines, Indonesia, and Thailand) and China will account for 60% of the world automobile market in 2030. Thus, the European Union should orientate its strategy towards Asia, and more precisely South-East Asia and ASEAN.

However, international trade is not the only one responsible for manufacturing sector difficulties in the US / UK. When you look at Germany for instance, you see a different trend. For 15 years, French production has decreased by 1.5 million while the exact opposite happened in Germany. Yet, they supported the same shocks. Education and interaction between public and private research are two other parameters that should be taken into account.

Pervenche Berès, Member of the European Parliament considers international trade is following cycles. We are currently experiencing a new model. Despite she doesn’t want to give up gains from trade and its redistributive fallouts, she raises out the fact that the overall economic context has changed:
1/ WTO did not meet expectations but it does not question all multilateral negotiations: COP was a success and a source of hope.
2/ The challenge of defining norms: emergence of new stakeholders such as China forced developed countries to define new rules more in line with developing country standards.
3/ new types of trade: goods and intangible products are not comparable. We underestimate new questions arising on protecting personal data.
4/ Trump coming to power may slowdown trade.
5/ Brexit: Theresa May has been in line with her political camp: she wants Great Britain to recover its ability to negotiate trade agreements.

According to Pascal Lamy, we are switching from protection to precaution agreements.The European Commission should take into account these mutations and propose a new doctrine. It should:
1/ respect of GI and SPM,
2/ Cope with fiscal issues by forcing better cooperation between countries,
3/ require an exhaustive list of public procurements,
4/ get dispute settlement mechanisms, permanent court or any other mechanism,
5/ ability for countries to refuse regulatory cooperation to respect capacity of states to legislate.

CETA does not meet these requirements. Access to markets is not the only one reason for questioning CETA. It’s a question raising lawmaker concerns and which fuels transparent critics. With that route, we should redesign the whole international trade doctrine. Meanwhile, we should also react to potential fiscal dumping from Great-Britain. Pervenche Berès added that: “Fair global economy is much richer than Free Trade.”

Guntram Wolff, Director of the think-tank Bruegel indicates that many countries have benefited from economic integration. It is for instance the case in Europe where we have seen a reduction in inequalities and a convergence of standards of living thanks to the economic catch-up of Eastern European countries supported by Union integration dynamics. Moreover, Europe’s social models have been better in reducing inequality than the “Anglo-Saxon” social models.

Donald Trump seems to try revitalizing manufacturing employment thanks to protectionist measures but it won’t help the American economy in the long run. It could have damaging economic consequences for Europe. Trade slowdown between the US and Europe could lead to a 0.4% decrease in GDP and 240,000 job destructions according to a recent paper by Hylke Vandenbussche (those figures may be under-estimated because European vulnerability to American investments is insufficiently reflected in the model). WTO should address increasing risks of the rise in trade barriers from the US and EU should support WTO. The EU should have fiscal and other measures ready to react if the US administration decides to introduce measures that are not compatible with WTO against EU.

Philippe Aghion, Professor at the Collège de France presented briefly his economic analysis on the relation between trade growth and innovation based on Schumpeterian theory of growth. Long-term growth is supported by innovation in developed countries. On the one hand trade contributes to growth through innovations thanks to three mechanisms: it increases market volume (market size effect) and thus incomes from innovation. It stimulates competition (competition effect) and facilitates technology transfer. On the other hand, trade generates inequalities and weakens low-skill workers and those who find it hard to adapt to change. Ensuring that economic liberalization of trade is correlated with an inclusive educational system is crucial. Reforming the labor market to provide genuine security for career paths is also essential. Not supporting trade liberalization with active policies in education, training and individual protection to cope with risks related to creative destruction would be a serious mistake. Reagan and Thatcher liberalization policies missed the inclusive dimension. They lead to populist stalemates in the Unites-States (with Trump) and in Great-Britain (with Brexit).

Martin Kaufman, Assistant Director Strategy, Policy and Review Department, IMF emphasized that in past years the focus was on how to advance trade integration, regionally and globally, in a context of new trade policy frontiers (e.g., non-tariff barriers, regulatory coherence, protection of physical and intellectual investment); the advent of global supply chains and production fragmentation;
and services as the next ‘extensive margin’ for trade. The challenge now is how to advance trade integration in a different context
of greater distrust about globalization in many countries and avoid potential escalation of trade tensions. This would require restating
and re-thinking key questions: How to make trade work for all? How best to address possible dislocations? What is the role for re-training and addressing other barriers to labor and resource re-allocation to those sectors of the economy that would be expected to expand? How to address such dislocation in an integral way in any future trade initiatives?

Mrs. Liina Carr, Confederal Secretary at ETUC emphasized that ETUC is not againsttrade. However it considers that current trade negotiations are not meeting trade union expectations for two reasons:

(i) trade agreements are negotiated secretly

(ii) trade negotiations which do not deal only with tariff barriers do not take into account the trade unions and Civil society concerns especially as regards public service protection and sovereign right to regulate (workers’ rights and working conditions, social and environmental norms, health and consumer protection).

They are questioned by dispute settlement mechanisms between investors and States which imply a separate legal system. More generally, Mrs. Carr is supporting closer cooperation between WTO and ILO. Globalization should take into account Human rights as well as social and environmental problematics. National social models and trade policies should be better articulated, especially in developing countries. Fiscal coordination at the international level should be
also addressed as it has direct implications on firm competition and employment.

Based on his experience in Mexico, Juan Manuel Gomez Robledo, Ambassador of Mexico in France explained that articulation between multilateral trade system and regional trade agreements works well and facilitates regulation of trade frictions. Mexico signed up to the GATT in 1986 while concluding many regional and bilateral free-trade agreements (46). There are other ongoing negotiations with Jordan, Turkey, Brazil and Argentine. Mexico negotiated agreements on investment protection as well to strengthen credibility and attractiveness of the country towards international investors.

According to the Ambassador, multilateral and regional approaches have additional benefits. Regional trade agreements supported growth of trade flows while being in accordance with WTO rules. At that time, legal experts feared that multiplying trade agreements could lead to a legal chaos. In practice, this risk has remained theoretical. Mexico experienced many times WTO and regional dispute settlement procedures (as advocate or complainant) and considers that their solutions is relevant to cope with trade frictions.

According to Hendrik Bourgeois, VP European Affairs and General Counsel Europe, General Electric Europe while trade openness and globalization support innovation, entrepreneurship, competition and growth protectionist barriers are on the rise. International trade serves as a scapegoat for all types of critics on growth, employment and growing inequalities. However productivity is the main challenge. International trade is no longer a technical field. It is now a highly political topic which fuels critics. It is partly due to the fact that trade agreements deal now with regulatory and environment topics. The European Union should rethink governance and political trade mechanisms. The European Commission has an exclusive competence regarding trade which makes its decisions difficult: it needs a strong political mandate to lead trade negotiations in a more legitimate and inclusive manner, while trying to support SME.

While the positive impacts of international trade on wealth is widely shared between economists, Philippe Martin, Professor of Economics at Science Po Paris points out the fact that there is no consensus on the means to mitigate inequalities fostered by globalization. Public policies failed to redistribute efficiently to the losers of globalization benefits from trade either through fiscal policies or through professional training and education. Globalization is not politically sustainable if, at a time when inequalities are increasing, governments see their tax base move to other countries, which implies lower capacities of financing public policies. Making globalization more acceptable is through managing financial globalization by fighting against non-cooperative fiscal strategies and tax evasion. The European Union should use trade agreements as instruments to promote fiscal cooperation. The link between trade and taxation arose still more strongly with the arrival of the new American government, which aims to reduce corporate taxation, and with future trade negotiations following Brexit.

M. Angel Gurria, Secretary-General of the OECD spotlighted the fact that we are going through a critical period with general loss of
confidence and since a decade in OECD countries a deep increase in income and wealth inequalities (In OECD countries, the revenue of the richest 10% is now 10 times higher than the revenue of the poorest 10%, whereas the gap was equal to 7 in 1980). There are several causes for reluctance to globalization and its consequences are obvious. It implies an amplification of protectionist threat. Globalization should be “more inclusive” integrating new concepts such as cooperation and shared commitments. It should also support more inclusive productivity. Due to the slowdown in productivity growth and the surge in inequalities the OECD has launched several studies on the links between productivity and inequalities (topic discussed during the 2016 Ministerial Council Meeting and a paper published on “productivity and inequalities”). Public leaders should take into account the transformations as well as the risks induced by automation for a segment of population (PIAAC study of the OECD; new horizontal project of the OECD on digital transformation supporting inclusive growth and well-being). The OECD is currently leading a major tax reform to support justice and transparency. Tax international cooperation especially with BEPS project (“Base Erosion and Profit Shifting”) and the automatic exchange of information are essential. The theme for this year’s OECD Ministerial Council Meeting which will take place in June 2017 will be “Making globalization work: better lives for all”.