Aaditya Mattoo in dialogue with CCG Vice President Mike Liu
Chief Economist of the East Asia and Pacific Region of the World Bank urges cooperation beyond trade and anticipates China's domestic reforms driven by engagement in deep trade agreements.
Hi, this is Yuxuan Jia from Bejing. Presented here is the dialogue between Aaditya Mattoo and CCG Vice President Mike Liu, along with Mr. Mattoo's Q&A session with journalists. This discussion took place at the Center for China & Globalization (CCG) on January 17, 2024, following Mr. Mattoo's lecture on "The New Protectionism: Origins, Implications, and Remedies." The lecture has been published by CCG Update in two parts, and this newsletter today marks the final installment of this event series.
Aaditya Mattoo is Chief Economist of the East Asia and Pacific Region of the World Bank. He is also Co-Director of the World Development Report 2020 on Global Value Chains. Prior to this, he was the Research Manager, Trade and Integration, at the World Bank. Before he joined the Bank, Mr. Mattoo was Economic Counsellor at the World Trade Organization and taught economics at the University of Sussex and Churchill College, Cambridge University. He holds a Ph.D. in Economics from the University of Cambridge and an M.Phil in Economics from the University of Oxford.
The event was covered by domestic news outlets including China Daily, Economic Daily under the Publicity Department of the Central Committee of the Communist Party of China (CPC), International Business Daily under the Ministry of Commerce of China, Beijing Daily, Phoenix TV, China Radio International (CRI) under China Media Group, and China’s Diplomacy in the New Era under China International Communications Group.
The full English and Chinese videos are available on CCG’s official WeChat blog. It is also accessible on YouTube.
Amid concerns about potential fragmentation, Mr. Mattoo underscored the imperative of fostering cooperation to uphold open trade. Efforts in areas like taxation and climate policy could help prevent trade protectionism. Also central to the dialogue was China's role in globalization. Mr. Mattoo advocated for China's sustained unilateral reforms and its participation in deep trade agreements like the CPTPP, which he likened to a transformative "Accession 2.0." Such actions not only have the potential to expedite domestic reforms but also serve as a testament to China's unwavering dedication to fostering transparent and secure trade practices.
***Following the publication of our article, Mr. Mattoo graciously reached out to us with suggested amendments for lexical accuracy, without altering the original perspectives. In response to this constructive feedback, we updated our publication with the revised content provided by Mr. Mattoo, ensuring the most scientific rigor and precision of the narrative.
— Yuxuan Jia, 11 March***
Mike Liu
Thank you so much, Dr. Mattoo. I think what you have said is really refreshing and insightful. You provide a holistic view and fundamentally try to tackle the issue of protectionism, about what are some implications and what are the root causes. I will look at this as a real master class of economics in a nutshell. Before we open the floor for the audience, I have two simple questions. The first one, if I take one step back, is that protectionism obviously occurs when a country enters a different stage of development economically as well as in trade. Right now, we are at the beginning of 2024. The world economy is going to slow down a bit to 2.7%. Logically, the world economy is going to slow down a bit. Does that trigger more intuitive protectionism from different states? And what’s the mechanism to tackle the issue to protect the majority of the countries?
Aaditya Mattoo
Thank you very much. I think it’s a very good and important question. I know that our recent projections for global growth are lower. But the good news is that for the first time, we have a reasonable chance that we will reduce inflation without creating a recession. In the past, the beast of inflation has only been conquered by paying the price of recession.
I think the second part of your question is right. After the Great Recession, we saw “the Great Protection.” I think there is a real worry about what forms these kinds of restrictions might take, and we have certainly seen an increase. But you see it is also true that one of the reasons that inflation during “the Great Moderation” was low was because of the power of globalization. It helped keep prices low directly and also by giving poor people in rich countries access to cheaper important products which made their cost of living much lower.
I would hope very much that there will be scope for more enlightened domestic policy which recognizes the huge benefits from trade, huge benefits from knowledge flows, especially at a juncture where the world has to deal with the big problem of climate change. That problem has to be dealt with through cooperation in knowledge, efficiency, and trade. And my hope is that countries like China, the U.S., and all others see that great mutual advantage in openness and cooperation. Because some of these problems we are confronting will either not be dealt with or not be dealt with efficiently unless there is openness and cooperation.
Mike Liu
Thank you very much. I understand the number one priority is how to get all the major stakeholders to focus on the issue and effectively echo those issues. Otherwise, you know, the time is running out, right? So the other question that intuitively came to my mind is that with all this – how we see the world economically and how we see the trade – in a much more fragmented world if we compare to a few years back, how do you see globalization will evolve from here? And what would you like to see in order to effectively or efficiently tackle global trade issues to minimize or mitigate trade imbalance or inequity among all countries? And when it comes to globalization or deglobalization that is frequently mentioned today, how do you envision the key role of globalization in this evolution?
Aaditya Mattoo
Again, I think you accurately extrapolate from the present to the future, and there is a real risk of fragmentation in the global economy. But as I argued in my presentation, we need cooperation beyond trade to keep trade open. We are beginning to see, for example, cooperation on taxation in most countries, first in the OECD, and I think this process is going to continue in the United Nations. I think that taxation empowers the state, whether it is the state in rich countries to compensate losers or the state in poor countries to generate the resources needed to build infrastructure. I think that one form of cooperation deals with a problem that trade has often been seen as regressive.
Second, we do need cooperation on climate. Otherwise, there is a risk that climate policy will become an excuse for trade protectionism. Taking a view of climate and trade, the WTO has very nicely demonstrated that climate goals are met much more effectively and efficiently by relying on the openness of trade. When you think of global value chains in electronic vehicles or car batteries, no one can produce everything. And if you impose restrictions, they often end up being self-destructive.
Similarly, the lifeblood of the modern economy is data. If each country develops its own standards and its own restrictions, that would fragment the world and impede the flows of data that are needed. There are examples of cooperation, like between the U.S. and the European Union, which could be generalized and multi-lateralized so that other countries can also be part of those regulatory reassurance arrangements which allow data to flow between countries while respecting national concerns about privacy and security.
And finally, I do feel that we do need to think of reviving trade cooperation in the appropriate fora. The World Trade Organization is in a limbo, but it is the best place. But there are other important fora. China is part of the RCEP, and also China has applied for the CPTPP membership. To see those as opportunities, not to gain privileged access to a market by excluding others, but to accelerate the process of domestic reform. China benefited enormously from accession to the WTO. The reforms that would need to be implemented by negotiating new deep trade agreements would be like “Accession 2.0.” It would have powerful benefits to China, but it would also have an additional benefit from China reassuring its trading partners that China is a reliable, open, stable trading partner, and therefore, they would become more open to China. I think these are the steps that I think would solve some of the real problems.
Mike Liu
Right, definitely. I look at China and all countries who have been part of the RCEP, and all countries have gained benefits. And also, despite all the challenges in the domestic market, the Chinese government has been determined to apply for membership of the CPTPP. But unfortunately, some members were saying China is not ready, so on and so forth. I look at one of the things: what kind of mechanism is more efficient, right? So with your background in the WTO, what are your thoughts on what kind of efficient system should be in place to minimize those different perspectives? In my view, if China’s application to CPTPP is accepted by all the members, the benefit will be twofold: 1) to accelerate reform in the domestic market; 2) can contribute to China's capability and capacity to help the world economy. But unfortunately, some people may have different or shallow views. What would be your thoughts on that?
Aaditya Mattoo
I think you’re absolutely right. You know, trade agreements also have an important political dimension. But I don’t think trade agreements are necessary. They help. I think a lot can be accomplished by China through its unilateral reform. The trade agreement provides a catalytic benefit. It also provides, as I said, access to other markets, but I think China has a huge and continued stake in globalization. China has grown thanks to trade and investment. The kind of technological advances China has made are remarkable. But it’s still uneven. There are many areas where China can give to the world, but there are also many areas where China can benefit from the world. And those also depend on free flows of trade, investment, and knowledge.
I think you are right in describing the potential benefits of a deep trade agreement like the CPTPP. But I think one should not underestimate how much enlightened policy China can accomplish unilaterally, like a down payment to the world. If China opens its market for goods and services and says “We are ready to do business with the world. If other countries want to retreat into themselves, that is their prerogative. We believe in openness and multilateralism.” So I do think the CPTPP will help, but I would not make these big reforms conditional on joining the agreement.
Mike Liu
Definitely, I agree with you. We should not make any challenges or obstacles without making further progress. Unilaterally, those trade agreements definitely help the world especially those like-minded states to be able to work together, right? This is my personal reading for today. Your featured presentation is really refreshing and gives some fundamental thoughts and ideas about how we should be able to look through the clouds and be able to find a path forward.
Aaditya Mattoo
If I can just add one thing about the benefits of China’s openness and unilateral reform. It will immediately appeal to the like-minded countries. But it will also affect the politics in the non-like-minded countries in a way that will make them more like-minded in the future.
Mike Liu
Exactly. I think by the end of the day, if we can realize more economic benefits, it will help mitigate the geopolitical tension to some degree without overstating some of the issues. Excellent. Let me open the floor for the audience. If any friend has any questions, feel free to raise your hand, our staff can pass the microphone to you.
Q1
Thank you so much, Dr. Mattoo. I’m a journalist from Phoenix TV. I really appreciate the definition of globalization and really agree with the term “cooperation beyond trade.” But today, like there’s a lot of data released about the economy of China for past years. So my question would be, what kind of risks and challenges do you think that Chinese economic development will face for this coming year, internally and externally? Thank you so much.
Aaditya Mattoo
Thank you very much. You know, the focus of this presentation was largely on the long-term structural and globalization trends. Internally, China is in an important process of transition. It has been on a growth path that relied a lot on investment in infrastructure and real estate, and it is transitioning to a growth path that relies more on innovation and consumption. I think the biggest question right now and the most interesting question about China is not how much precisely the growth this year or next year is, but how it manages this transition to a different growth model. And there I think my impression is that - I've spoken to you about it and you are more informed about some of these questions - that China is thinking hard about these questions. I think, globally, there are adverse developments. For example, the conflicts that have so far largely been contained and the kind of commodity price shocks we saw in the past have not yet materialized but there remains a big risk. I spoke about the beast of inflation having been tamed, but it is not clear that it is definitively so. The market seems to expect a bigger cut sooner than at least the language of the central banks which seems to suggest that the rates will stay "higher for longer." In the financial markets, there is a slight risk for indebted firms in all countries, an increase, bankruptcies, and financial vulnerability. But for the most part, the regulators in these large systemically important markets have anticipated those concerns and acted very quickly. This is the case in the U.S., China, and Europe.
Then I think, broadly, it’s true that the world will grow a little bit more slowly. But, relative to what we had expected, I think there is lots of good news. And I think finally thinking of these risks as given from outside or exogenous is not appropriate. China is a country that can define its own terms. It’s not a price taker; it’s a price maker. It’s not a policy taker; it’s a policy maker. And the same is true for the climate, for example, it doesn’t have to take the climate as given. It can mold both the domestic and the global environment in a way that we have spoken about. Even though there are geopolitical tensions that have been costly for everybody, for China and the U.S., the actions that we’re talking about now might alleviate those risks through making positive unilateral choices. I think China’s enlightened policy can shift the domestic transition and influence the global environment in a way that is conducive to its own development but also to global development.
Mike Liu
Thank you so much. Hopefully, that answered all the major concerns you have. Any more questions from the audience?
Q2
Thank you. You just mention the challenges and questions that China’s economy may face. And I want to know what do you think will be the highlights or driving force for China’s economic growth in this coming year? Thank you.
Mike Liu
Sure, thank you. This is a wonderful question. I learned the speech delivered by the Chinese Premier last night at Davos and I noticed the content concerning the Chinese economy. We’re changing the gears on a few things that definitely will be a key driver to boosting the economic growth this year. One of the things is when referring back to domestic consumption during the National Day holiday, I saw that public confidence is back. Actually, the revenue generated during the National Day break is 1.6% higher than that of 2019, right? That shows a clear signal that the economy is back and we are on the track of further boosting the economy. The second thing, let’s look at the Chinese economy. This year is the transition period and we are shifting away from a property-dependent growth model to a digital economic model. And in the longer term, that will give us much more healthy fundamentals to further grow the Chinese economy. Hope that answers your question.
Q3
Thank you. I want to thank Mr. Mattoo again for giving an insightful speech. And I would like to raise a few questions. First, I want to check if my takeaway from your speech Is correct. You used the example of Japan to try to say that the derisking policy from the government is usually not that necessary. I wonder if that is the point you wanted to make. And, but by showing the triangle line of the imports and exports between China and the U.S., are you saying that the derisking policy of the U.S., instead of diversifying this supply chain, is actually prolonging the supply chain, which might increase the risk of instability of the global supply chain? This is my first question to clarify my takeaway. And my second question, would you like to further explain your statement mentioned earlier saying that the U.S. is less attracted to commit to the rules? Thank you so much.
Aaditya Mattoo
I’m happy and concerned about your questions. I’m happy because it shows that you have understood the arguments more deeply than I said. And I’m concerned because you’re taking one step more than I will take in each case. So I think, for the first question, my big point is we are in a globalized, intertwined world. Cutting off relationships completely is very hard, especially when you have these very deep global value chains and China's share, especially in manufacturing inputs, is very large. I think that is what provokes concern, but it’s also what makes breaking up hard to do. So that is my broad point.
In terms of risks, my point is, individuals, firms, all sorts, already make choices on where to source from or what to do. Because if their supply chains are cut off, they will lose money. What is less obvious is that sometimes firms are over-diversified. Because if chains are cut off, and you have an outside source, you make a lot of money. So that’s why it's not obvious that when individuals are thinking only about themselves whether they over-diversify or under-diversify.
Secondly, it is very hard for governments to make that choice. The European Union, for example, developed a list of strategic industries which also looks at global concentration in those industries. But there is a third factor which is important. You know, sometimes there is limited scope for switching, for technological or contractual reasons. Companies like Apple have companies like Foxconn making specific parts for them. Soybeans can come from Argentina or Brazil but sometimes contracts make switching hard. So I think making the choice of about the optimal level of diversification is is hard.
Trade itself often offers the best insurance. When there was a drought in Ethiopia, [severe consequences were avoided] because they could import cereal. One challenge is when the natural shocks which everybody is reacting to are amplified by manmade shocks. I say “manmade” because I don’t think women would shut off supplies of food and medicines; only men would do that! I think the trading system has focused on countries opening their markets and promising to keep themselves open, but it hasn’t dealt with a big problem that countries do not definitively promise not to impose restrictions on export. The WTO rules on export restrictions are very weak. Because politically, when there is scarcity at home, the pressure to shut off the exports of rice or masks or vaccines is very strong. If we were all part of one integrated world, trade is the best. If in bad days, we retreat and shut off others, that’s a big problem. I think disciplines on export restrictions are a missing rule in the global trading system.
For the second question, let me give you an example just to show you what the situation is. Because, as I said, the puzzle is when the U.S. was super-dominant, it played by the rules. Now that the relative dominance is a little bit less because other countries have grown, it seems to say that we need not necessarily play by non-discrimination. Imagine a situation – it is the only way this complicated idea can be communicated – imagine a situation where there is a 16-year-old boy who goes to the park and there are seven-year-old children playing there. If the parents of the 7-year-old child see the 16-year-old child, they’ll be worried. They may think their kid is going to be bullied. So the only way the 16-year-old child can persuade the 7-year-old children to play is to promise to play by the rules because the age gap is so much and the scope for bullying is so much that other children can simply leave. They will not play. But when the age gap is 17 and 14, the risk of bullying is not so great that makes other children want to leave. They want to stay because they are happy to play. At that stage, the older boy can afford to be a little bit of a bully because there is no risk the other children will leave.
The idea is that when there are big gaps, for example, China in its relationship with smaller neighbors, one big advantage of the CPTPP would be to enable China to commit to playing by the rules so that those countries would choose to play, because it’s in everybody’s interest to play. When the dominance is great, people can exit, and that threat of exit forces the large country to play by the rules. I don’t know how much can be understood.
Mike Liu
Thank you. Very good question. We’re running out of time. So one more question from the audience.
Q4
Thank you, Doctor, and President Liu. I want to ask about data globalization because now different countries and parties have different strategies. The EU has GDPR (General Data Protection Regulation) and China has a personal PIPL (Personal Information Protection Law of the People’s Republic of China). And the U.S., especially for California state, at the hub of the data, they put forward CCPA (California Consumer Privacy Act). Is that, in your opinion, a kind of new protectionism in the data domain? What’s your take on that? Thank you.
Aaditya Mattoo
I think, again, it’s a very important question. I just want to clarify one thing to the previous person about the trading system. It’s about mutual liberalization, but it’s also a commitment to playing by the rules. And I’m saying that commitment to playing by the rules is not just valuable for small countries. It’s valuable for large countries because it’s a promise of not extracting excessive benefits by bullying. The point of my long story was that large countries have always had an interest, especially when they were very large, to reassure their trading partners, as Britain did and as the U.S. did. And that’s what China will want to do. And that’s why preserving those institutions which provide that reassurance is important. Because otherwise, there is this temptation that when you don’t like something that your trading partner does, you say, “I’m not going to buy from you, and I’m not going to sell you,” and that destroys trust. And that destruction of trust is costly not just for small countries. It’s also costly for large countries.
Your question on data is important. You see, protectionism is a bad word. If the Europeans care about their privacy and they say, “I’m not going to let my data go to a jurisdiction where that privacy is not protected,” I think it’s a little bit harsh to call it protectionism. The first-best is that another jurisdiction reassures the Europeans that their data will be treated with the same care that it would be treated [in Europe].
The problem is that there are big differences between countries in what level of data protection is nationally optimal. It is a big question that is going to arise in the context of artificial intelligence. Because supposing you say “I value privacy a lot,” privacy creates what is referred to as a data desert. The predictions from AI models will not be accurate for a specific context which does not have the relevant data. For example, having credit bureaus increases access to finance. For a poor country, at a certain stage of its development, access to finance might be more important than individual privacy. For rich countries like European countries, which might be at a higher stage of development, the additional benefits of access to finance are not as great as in a poor country.
So how do you ensure that data can flow between these two jurisdictions? It should not be by forcing poor countries to adopt the European standard, because that would lead to premature harmonization, which would hurt their development. Instead, the poor countries have to find a way, like the Americans did with the Europeans, of credibly promising to protect the data of the Europeans to European standards - not by changing their national law, but for example through what the Europeans called standard model contracts or within corporate entity disciplines. You know, sometimes you have Export Processing Zones which produce just for export. So maybe you can have data processing zones which have the same standards as designated partners without necessarily leading to undesirably high standards as possible.
Mike Liu
Thank you so much. We’re running out of time. Again, please join me in thanking Dr. Mattoo for his wonderful presentation, elaboration, and answers to those questions. Thank you so much for joining us today.
Aaditya Mattoo
Thank you for inviting me and thank you for asking me questions which made me feel that I was not completely off the mark.
