A multilateral approach to trade rules should allow room for proactive trade and industrial policies for sustained and inclusive growth

As the international community sets about defining a new set of development goals, it is vital that countries have sufficient policy space to match the heightened ambitions of any new agenda, UNCTAD insists in its Trade and Development Report, 2014: Global governance and policy space for development launched on 10 September 2014. With a new set of wide-ranging sustainable development goals already tabled in New York, a post-2015 development agenda will not be feasible without the availability of more instruments and greater flexibilities in policymaking.

The report emphasizes the role that proactive trade and industrial policies can play in the post-2015 development agenda and points to various policies which, in the changing dynamics of the world economy, can help achieve sustained income growth, full employment, poverty reduction and other socially desirable outcomes.

On trade, the new report argues that negotiations on rule making need to refocus on multilateral agreements which recognize the legitimate concerns of developing countries. Multilateral rules and disciplines check inward-looking national economic policies – such as mercantilist trade policies – through which influential countries can harm the economic performance of others. But multilateral agreements should not encourage or push developing countries to relinquish policies that support economic development. Even though existing multilateral agreements have maintained some flexibilities for all World Trade Organization members and incorporated some special and differential treatment for least developed countries, they have also come with restrictions on the conduct of a widening array of trade and industrial policies.

The report also argues that developing countries should carefully consider the loss of policy space when engaging in bilateral and regional trade and investment agreements. Such agreements often come with stricter commitments in areas covered by multilateral agreements or extend to new areas, requiring policymakers to forsake the use of instruments that have proved effective in supporting industrialization. Conventional wisdom suggests that accepting such stricter policy and regulatory commitments is necessary to attract foreign direct investment and to enable firms from developing countries to join global value chains. The report, by contrast, suggests that while these commitments may provide short-term trade and employment benefits, in the longer run they can trap producers into commodity enclaves or low-value niches of manufacturing. The report also points to problems arising from the current international investment framework and the related ad hoc arbitration tribunals that have assumed important law-making functions usually allocated to States. In addition to the lack of transparency and coherence often observed in the operations of those tribunals, this set-up follows a model developed for resolving disputes between private commercial actors, and thus the tribunals have no reason to consider the broader interests of a host country and its development strategy.

The Trade and Development Report, 2014 highlights four elements of a more flexible approach to the choice, design and implementation of policies which will be required to attain the new set of development goals:

• First, industrial policy matters; even developed countries are again acknowledging its role in boosting productivity growth, encouraging innovation and creating decent jobs. The report points to the approach of the United States of America to industrial policy, often wrongly seen as a hands-off approach, which combines an “entrepreneurial State” with a “coordinating State” to skilfully use the policy space not circumscribed by international rules and commitments for sector-specific measures to support its manufacturing sector. The experience of the European Union illustrates how the adoption of a more horizontal – or economy-wide – approach risks hampering the achievement of wider policy objectives.

• Second, in commodity-dependent economies converting natural resource rents into sustained growth and structural transformation will require accelerating industrialization through a high level of investment and incentivizing a virtuous link between trade and capital accumulation. An industrial policy that supports the private sector in identifying and expanding activities in promising manufacturing sectors could greatly facilitate such diversification efforts.

• Third, global value chains are spreading and can open new opportunities for industrial development and job creation – but that should not mean simply aligning policy measures to the interests of the lead firms. The evidence that integration into these chains spurs industrialization is at best ambiguous: structural transformation episodes even if initially successful, are often linked only to “thin” industrialization that offers few opportunities for economic and social upgrading. The risk of being trapped in a low-level niche of the value chain may be too high for countries to forsake the use of instruments that have proved effective in supporting industrialization. The report notes that even in China, which has successfully used value chains to boost its trade in the electronics sector, only 3 per cent of global profits in the sector accrue to Chinese firms.

• Finally, the developmental effects of export-led growth strategies more generally appear to be running out of steam since the Great Recession, owing to the growth slowdown in developed countries and a reduced elasticity of their demand for imports from developing countries. To avert the risk of a sharp slowdown in growth, developing countries may wish to rebalance their growth strategies towards less emphasis on exports to developed countries and a greater role of domestic and regional demand. Pursuing proactive trade and industrial policies could help to make the necessary adjustments to developing countries’ productive capacity.

• With the fiftieth anniversary of UNCTAD coinciding with the seventieth anniversary of the Bretton Woods institutions, the report also looks at how, after the end of the Second World War, the international community tried to build a more inclusive and sustainable international economic order around effective multilateral supports and disciplines without unduly compromising the policy space needed to meet a new set of economic and social goals. Taking that history seriously, the report suggests, means that today’s efforts to ensure adequate policy space within the global trading system will deliver the desired outcomes only if accompanied by effective reform of the global financial architecture to ensure more stable and long-term financing, both public and private, for poor economies.