McKinsey Report on Trade Myths

The McKinsey Global Institute has come out with a report titled "Trading Myths: Addressing Misconceptions about trade, jobs, and competitiveness" that exposes largely held myths about the impact of international trade on economies, which foster "protectionist" tendencies. The 6 myths that are discussed are:

"MYTH 1: MATURE ECONOMIES ARE LOSING OUT TO EMERGING MARKETS IN TRADE AND THUS FACE INCREASING TRADE DEFICITS 

Reality: The trade balance for mature economies in aggregate has remained largely stable and in fact has begun to improve. Wide variations exist between individual countries, but there is no evidence to support the view that there has been a wholesale deterioration in the trade balance between mature and emerging economies over the past decade. In fact, the balance of trade in goods and services of minus 1.5 percent of GDP in 2011 was slightly better than a decade earlier. 

MYTH 2: MANUFACTURED GOODS DRIVE TRADE DEFICITS 

Reality: Imports of primary resources, whose prices have been rising sharply, were the largest negative contributor to the trade balance of mature economies. In 2008, mature economies ran a deficit of 3.3 percent of GDP in their trade in primary resources. In contrast, mature economies ran a small surplus of 0.3 percent of GDP on all manufactured goods and a significant surplus of 1.3 percent of GDP in knowledge-intensive manufacturing in 2009. Exceptions are the United States, the United Kingdom, Spain, Portugal, and Greece, all of which ran trade deficits on knowledge-intensive manufacturing. 

MYTH 3: TRADE IS AT THE HEART OF THE LOSS OF MANUFACTURING JOBS 

Reality: The decline in manufacturing jobs in mature economies—and the shift in jobs among sectors overall—is dominated by changes in the composition of demand and ongoing increases in productivity. The share of manufacturing employment in mature economies is bound to decline further, from 12 percent today to below 10 percent in 2030, according to our analysis. 

MYTH 4: MATURE ECONOMIES CREATE JOBS ONLY IN LOW- PAID, LOW-VALUE DOMESTIC SERVICES 

Reality: Mature economies continue to create high-value, knowledge-intensive jobs in tradable sectors—but more in services than in manufacturing. From 1996 to 2006, mature economies created 15 million jobs in knowledge-intensive services, a share of them related to increasing exports of knowledge services. Wages in service sectors are comparable when we look at factor intensity, and it is demonstrable that tradable service jobs offer some of the best wages in these economies.5 In any case, the boundaries between manufacturing and services appear increasingly blurred, as manufacturers move into service-type activities such as sales and customer care that, for instance, accounted for 39 percent of Sweden’s manufacturing employment in 2007. And manufacturers build global supply chains of service- and assembly-type activities with strong links to service suppliers. In Germany, service suppliers already contribute 34 percent of the total domestic value added in manufacturing exports. 

MYTH 5: SERVICE TRADE IS SMALL, AND EMERGING ECONOMIES WITH LOW-COST TALENT WILL CAPTURE ANY INCREASE 

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. When we adjust for the high services and import content in manufacturing exports, services value added exported greatly exceeds the manufacturing value added embedded in exports in a number of economies. And, despite fears of offshoring, mature economies are running increasing surpluses in services, particularly in knowledge-intensive services that generated a strong and rapidly growing trade surplus of 0.7 percent of GDP for mature economies in 2008. 

MYTH 6: “SERVICE ECONOMIES” SUCH AS THE UNITED STATES ARE THE WORLD LEADERS IN SERVICE TRADE 

Reality: The European Union (EU) is ahead of the United States in service exports in both gross and net terms, even when we look at only extra-EU trade. In 2009, Germany’s service exports amounted to 7.1 percent of its GDP (of which 3.3 percentage points were extra-EU exports), compared with 3.5 percent for the United States."

Arguing against the trend of protectionism, the Report argues that developed countries should resist inward looking policies:

"The facts do not support the arguments advanced by some that trade—especially so-called unfair trade—has destroyed jobs. Mature economies that need to deleverage will be able to grow out of their debt overhangs and boost net exports only if the global trading system remains open—and becomes even more open, especially in services. Yet rising protectionism is a major threat that is likely to increase if unemployment stays high. It is essential to use the facts to counter siren calls of protectionism and also to renew trade negotiations, if only on a bilateral or regional basis following the failure of Doha, to further liberalize trade."

It concludes: 

"With these facts in mind, it is important that mature economies fully realize the opportunities of growth in emerging markets rather than being fearful of the rise of these new economies. Above all, political leaders should resist protectionist pressures. In particular, they should push vigorously for fuller liberalization of trade in services, where restrictions remain high. Trade-related policy should be geared to supporting, and benefiting from, comparative advantage in attractive stages of global value chains and avoiding an emphasis on sustaining or creating direct employment through manufacturing exports. Any improvement in net trade will offset the headwinds caused by deleveraging and, therefore, domestic job creation. An important, but under-emphasized, lever for improving net exports is an intensified push for more resource productivity. Continued investment in education, infrastructure, and innovation will be necessary to sustain that comparative advantage and continue to create high-value jobs. Economic statistics and trade measurements must also improve so that they can provide a quantitative understanding of global value chains, as well as robust and sufficiently granular reporting in service trade."

Will domestic compulsions allow balanced debate about trade, job loss and negative impacts of openness and reduction of barriers? The report says " Above all, political leaders should resist protectionist pressures." Will the pressures of domestic constituencies allow such an attitude? While it can be argued that openness and reduction of trade barriers will have an overall positive impact on the economy, the specific impacts of job loss and imports are felt in local constituencies. To ignore this reality and espouse a larger, more "mythical" global or national "good" is a challenging task. nevertheless more effort to address the negative impacts of global integration to local industry must go hand in hand with espousing its positive side. It is becoming increasingly difficult to convince domestic political interests about the benefits of a globalised world of reduced barriers. This report is a step in that direction.