Delivered in Parliament on 14 September 2021
Free Trade Isn’t Always Fair, But We Can Make It Fairer
Mr Speaker, thank you for the opportunity to participate in this debate. Before I continue, I wish to declare that I am an educator at an institution of higher education, delivering courses in international trade and finance.
Last month, Ministers Ong and Tan provided thoughtful expositions about the benefits of free trade for economic growth and prosperity. Minister Ong has also shared with us his perspective—which I am convinced is deeply embedded in his intellectual DNA—as a trade negotiator (while simultaneously exposing us to the delicacy that is samsu). He also clearly articulated the government’s position, that anxieties on jobs—while legitimate—are distinct from both free trade agreements (FTAs), in general, and Comprehensive Economic Cooperation Agreement (CECA), in particular.[1]
In my contribution to this motion, I will argue against the blanket claim that the precarity felt by our workers has absolutely nothing to do with free trade and or, for that matter, free trade agreements.
Free trade has distributional implications
The proposition that free trade is a net positive for national welfare has long and illustrious roots, dating back to the 18th and early 19th century.[2] In my courses, I teach this idea in my very first lecture: that countries are better off when they specialize and trade, instead of trying to take on the burden of producing everything within its own borders. This is the case even for an advanced economy, in possession of technological capabilities to produce all manner of goods more efficiently than others can. The conclusion is counterintuitive, but once one embraces the logic, it is incontrovertible, and the insight deeply satisfying. Indeed, this insight has been characterized as both nontrivial and elusive.
In my second lecture, however, my students quickly learn that free trade is not an unadorned good. Even in the simplest of models, trading relationships between two countries will throw up both winners and losers. In general, for a capital-rich, advanced economy, the gainers will, unsurprisingly, be industry, leaving the lot of workers worse off.[3] By a similar token, higher-skilled labor in developed countries tend to benefit from trade opening, while the lower-skilled ones are often left behind.
But this unequal outcome need not be the death knell for free trade. In the longer run, as workers displaced by trade find new jobs and reallocate to in-demand sectors, wages and employment would even out. Furthermore, since the gains outweigh the losses, it is entirely possible for the winners—in this example, capitalists or higher-skilled professionals—to compensate the losers, the workers, at least in part. Doing so leaves everyone better off, and helps ease the transition into a more liberal trading regime.
And there you have it: the case for free trade, which has survived many generations of subsequent elaborations with bells and whistles thrown in. Thus, as long as we keep in mind the pressing need to ease the distributional consequences, we can always build a national consensus in support of trade liberalization.
Free trade is not the same as free trade agreements
Alas, in the real world that we inhabit, many policymakers have often forgotten this important imperative. So, globally, the pursuit of trading relations has often left losing parties to fend for themselves.
When Singapore was a relatively poor, underdeveloped economy, this mattered a lot less. After all, the gainers in that case were our masses of low-skilled labor, hungry for jobs and opportunities that would be ushered in by embracing globalization. With so many with so little to lose, it was straightforward to build a large coalition in favor of free trade.
But we are no longer poor, and this complicates matters. Today, the major gainers from our nation’s stance on free trade are the high-skilled and those with access to capital. These groups benefit disproportionately from our open trading regime, leaving our less well-off working class—now, decidedly, the minority—in an even worse position. It should therefore be of little surprise that, all over the world, we have witnessed populist challenges to globalization: from the 1999 Seattle WTO protests, to the 2011 Occupy Wall Street movement, to the recent Gilets Jaunes in France.[4] And, Mr Speaker, may I venture that, the backlash against CECA also has its roots in the perceived inequality of deal for our local workers.
After all, this all comes to down to the recognition that free trade and free trade agreements (FTAs) are hardly the same thing. Many of these agreements have been concluded with insufficient attention to the distributional consequences for the minority that has been hard done by the deal. As a result, we have ventured far from the rules of thumb on compensation that economists have routinely advocated to secure support for free trade.
Reskilling as trade adjustment assistance
To be completely fair to governments worldwide, including this one, the standard prescription for compensation has not been completely ignored. The United States first enacted trade adjustment assistance programs under the Trade Expansion Act of 1962. The EU created a Globalisation Adjustment Fund in 2007. Closer to our neighborhood, South Korea rolled out an adjustment program targeted at SMEs that same year.
But in many instances, these programs do not do enough. Qualification criteria for assistance tend to be stringent, and those who ultimately benefit from such programs turn out to be only a small fraction of those who have lost jobs.[5] Some programs are not even specifically targeted at displacement due to trade, and as a result, underemphasize the importance of retraining and reskilling.
Our equivalent adjustment program is WSG and SkillsFuture, although these are not explicitly targeted at addressing trade-related job displacement alone. I had previously spoken, during this year’s Committee of Supply debates, on potential refinements of our reskilling and reemployment programs, including rolling out redundancy insurance, and making the Jobs Growth Incentive and Professional Conversion Programme permanent features of our policy landscape.[6] Other Workers’ Party colleagues have also spoken of challenges faced by our workers as they adapt to changes wrought by trade, such as Aljunied MP Sylvia Lim on underemployment, and my Sengkang colleague, Louis Chua, on expanding worker protections. But suffice to say that there is more we can do to provide an end-to-end jobs safety net that can help our workers cope with pressures from globalization.
A foreboding preview: the China shock
This renewed attention to adjustment costs and distributional consequences has also come under greater reexamination even within the economics profession. This was prompted, in no small part, by the harsh realities of the so-called “China Shock,” which accompanied the entry of China into the World Trade Organization in 2001.[7]
The comfortable consensus in support of free trade that had existed for so long began to be seriously questioned. Emerging evidence from the widespread displacement of workers in industrialized economies—especially in the manufacturing sector, where China has proven to be a formidable competitor—revealed that output, wages, and employment losses in sectors particularly exposed to imported Chinese goods tend to be large and significant.
These effects were not limited solely to sectors confronting Chinese import competition. The spillovers left whole regions—which used to hum with economic activity and offer respectable middle-class jobs—decimated, leaving behind armies of unemployed, disaffected workers, while also inducing declines in the wages of even those workers who worked in unrelated sectors.
A closer look at CECA
With this general preamble on the merits (and demerits) of free trade agreements, it is appropriate for us to turn to a more careful examination of CECA. While the deal may, prima facie, look like an FTA just like any other, it actually carries its own set of idiosyncrasies, both in practical terms, and for our nation at this moment in our history.
For starters, India is much, much larger than our Little Red Dot. This is not just in geographic size, which is a given. But it also dominates us in terms of economic size—India’s output, measured in a common currency, is almost 8 times larger than ours—and, even more evidently, in terms of population.
One important lesson that economists have learned from China’s 2001 WTO entry is that, unlike the trade liberalization experiences of the 1970s through 1990s, gaining access to a massive market also means accepting the entry of a massive labor force. When there is a flood of new, lower-wage workers joining an industry that is newly open to trade, higher-wage workers that have been displaced are not easily absorbed into the rest of the economy.[8]
Moreover, we should recognize that India is also at a far earlier stage of development journey than we are. Another important consequence of trade opening is that, over time, the prices paid to inputs of production—wages, rents, or interest—will tend to meet somewhere in the middle.[9] Yet with wages so much lower in India compared to Singapore, this could lead to a sharp downward shift in our local workers’ earnings, before some sort of convergence is achieved.
Importantly, some adjustment of this nature will occur even if foreign workers do not relocate to local shores. The upshot of trade opening is that minimum salary floors for foreign employment pass holders will only offer limited succor, and the growth of local wages for those in the same sector will still be reduced, so long as we begin from a relatively higher staring point. Hence, even for Singaporeans that do not lose their jobs outright as a result of CECA (or any other FTA), there is still a chance that their salaries could face a significant hit, if they happen to work in sectors more exposed to trade liberalization. This is our very own version of the China Shock.
Making our FTAs work
All this is not to say that CECA is fundamentally flawed, nor that it is the main factor driving our workers’ anxieties which, as my other Workers’ Party colleagues will elaborate, is more because of our labor market and social protection policies. Still, there is little reason why we shouldn’t seek to refine the deal, especially in light of the ongoing third review of the pact. Doing so will bring us back to the standard remedy I mentioned earlier: that gainers compensate losers. Do we have just cause to believe that this has been the case for CECA, or for that matter, all our FTAs?
It is unclear if companies that have enjoyed enhanced access to the foreign market as a result of our trade agreements necessarily pay higher taxes as a consequence. Nor is it clear that professionals recruited from foreign nations to work in Singapore systematically do, either. When all is said and done, it appears, from my vantage point, that the government has been the one picking up the slack, via WSG and other adjustment schemes. While this is important, unless the winners from trade are definitively contributing a share consistent with their boosted incomes, this will end up shifting the burden of supporting displaced workers back to the Singaporean taxpayer.
Let me also take one step away from the economics and touch on the impact of FTAs from an institutional and sociocultural perspective. As this House is well aware, Singapore is a small island bereft of natural resources, which has meant that our success has always been because of our people. As a developing country after independence, we invested heavily in educating our workforce, producing hardworking, well-trained workers that could hold their own in competition against the rest of the world. At the same time, we refined and adapted the legal institutions and civil services that we inherited as a British colony. We imbued our people with a sense of national pride, identity, and common purpose. These did not spring from nowhere. We had to inculcate such values, slowly, over decades, via national education, patriotic songs, a shared history, and yes, our common love for food and shopping.
Do our FTAs and labor market policies that encourage large immigration flows compromise these key contributors to our past prosperity? While the jury is still out, there are concerns about the entry of workers with less-than-stellar educational qualifications, the presence of a sizable but temporary expatriate labor force with a limited understanding of our unique national identity, and the dilution of the cultural capital that has hitherto been so central to our success. In my view, these elements bear closer scrutiny, and PM Lee’s announcement during this year’s NDP rally—that the government will gradually tighten EP and S Pass criteria—is a heartening step in this direction.
Parting thoughts
The promise behind free trade agreements is that it will lead to increased economic opportunities—in both trade and investment, traditional strong suits for our economy—accompanied by the creation of more jobs for Singaporeans, on net, as a result. Such agreements also allow us to contribute positively (albeit indirectly) to advancing the development of our trading partners. These aspirations are all laudable.
Even so, we need clear-eyed evaluations of the benefits and costs of all our FTAs, CECA included. We need to know whether these agreements have been detrimental to the job prospects of some of our local PMETs, who are already anxious about automation-related retrenchment. We need to know whether local credentials and qualifications issued to our graduates may inadvertently become undervalued relative to foreign ones, because of mutual recognition clauses. We need to affirm our tenuously employed workers—those that have been involuntarily forced into food delivery and private car hire jobs—that FTAs do not open up loopholes to excessive labor inflows.
All such assertions should be based on evidence, obtained through careful analysis and deliberation. I call on this Government to institute a freedom of information initiative that will guarantee the full release of accurate and complete trade, production, and labor market data, insofar as they pertain to the study of our FTAs. This should be at any level of disaggregation requested, albeit suitably anonymized if necessary—a routine practice in countries worldwide, from advanced economies like Australia, the European Union, and the United States, to developing nations as diverse as Brazil, Moldova, and Sri Lanka. Such a move would permit our researchers and interested members of the public to come to their own conclusions, and correct misperceptions that this Government has routinely railed against. If we truly believe that FTAs have been good for our country, we have nothing to fear in releasing these data for further study and scrutiny.
I support the amended motion advanced by Leader of the Opposition Pritam Singh.
[1] Hansard, vol. 95, sit. 32, Jul 6, 2021. Most recently, he reiterated this point in a Facebook post, available online: https://www.facebook.com/916503765030893/posts/4877693008911929/.
[2] Adam Smith, in his treatise The Wealth of Nations, was the first to suggest that countries should specialize in goods that they can produce most cheaply, and trade the surplus for goods that were likewise produced cheaper elsewhere. This idea, of production according to absolute advantage, was further developed by David Ricardo, who demonstrated in his work On the Principles of Political Economy and Taxation that every country could specialize in the good for which it faced the lowest opportunity cost, even if it did not possess absolute advantage in any. This principle of specialization according to comparative advantage underpins most economic models of international trade.
[3] The simplest model that captures this distributional implication is the so-called Heckscher-Ohlin model, which encompasses two countries, two goods, and two factors of production (for example, labor and capital). With trade liberalization, increases in the relative price of the good exported by the capital-rich country will leads to a more-than-proportionate increase in returns paid to capital, and a decrease in wages paid to labor. This is known as the Stolper-Samuelson Theorem.
[4] Careful observers of international economic developments will undoubtedly also recognize that another important global trend—skill-biased technological change—likely accounts for more of the rising inequality observed over the past decades. However, while the evidence is indeed more in favor of this explanation, there is no denying that the redistributive effects of globalization have also played a role. See Moore, M.P. & P. Ranjan, “Globalisation vs Skill-Biased Technological Change: Implications for Unemployment and Wage Inequality,” Economic Journal 115(503): 391–422 and Feenstra, R.C. & G.H. Hanson (1999), “The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the United States, 1979–1990,” Quarterly Journal of Economics 114(3): 907–40.
[5] For the U.S., see Kletzer, L.G. (2001),Job Losses from Imports: Measuring the Costs, Washington, DC: Peterson Institute for International Economics. For the EU, see Claeys, G. & A. Sapir (2018), “The European Globalisation Adjustment Fund: Easing the Pain from Trade?” Policy Contribution 5, Brussels, Belgium: Bruegel.
[6] Details here: https://www.wp.sg/ministry-of-manpower-committee-of-supply-2021-cuts-by-wp-mps/.
[7] Autor, D.H., D. Dorn & G.H. Hanson (2016), “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” Annual Review of Economics 8(1): 205–40.
[8] In the case of CECA, India’s much larger population means that even if a tiny fraction of their population ends up acquiring superior skills in, say, computers, they could quickly establish a clear comparative advantage in the sector. If so, this could ultimately lead to the hollowing out of entire skill sets in our Singaporean core. And this is assuming that these foreign workers truly have richer sets of skills, rather than broadly comparable ones, but paired with a willingness to work for relatively lower wages.
[9] This result, known as the Factor Price Equalization Theorem, will occur so long as factors of production and produced outputs are identical; with free trade in goods and services, this leads to a convergence in these prices, which in turn implies factor price equalization.