Mauritius faces a structural challenge to grow both its exports of goods and services. But the problem is not only related to internal fixes
Mauritius’ international trade in goods has been shrinking. From around 75-85% of GDP a decade ago, the sum of our exports and imports has steadily declined. It stands at around 56% of GDP currently. Spurred on by export manufacturing, trade in goods has been our strong point in terms of economic progress. Its slowed-down pace should have given rise to redress action. Efforts have been made, such as by importing foreign labour to man our enterprises. But, as data show, investment hasn’t kept pace and we have still not been able to reverse the decline.
In 2016, we imported goods amounting to Rs 156 billion and exported for Rs 84 billion, with a goods trade deficit of Rs 72 billion; in the first three quarters of 2017, data show that we imported goods for Rs 122 billion and exported for Rs 61 billion so that the goods trade deficit was Rs 61 billion. We have bridged the goods gap to an extent by exporting services, e.g., international financial services. Exports of services fetched Rs 28 billion in our favour in 2016 and Rs 18 billion in the first three quarters of 2017, not enough to bridge the gap. Although capital inflows and investment income have helped us bridge the gap on the external front, these are volatile and not fully dependable.
Mauritius thus faces a structural challenge to grow both its exports of goods and services for sustaining growth. But the problem is not only related to internal fixes we can make to give back dynamism to exports of both goods and services. Yes, we’ll need to overcome our classic top-down approach to development and let more initiatives be taken by operators dealing with external markets and taking informed decisions on which innovations, which capital/technology transformation, which business relationships, which scale of operations are called for to overcome present constraints. There are global threats to international trade as well.
Multilateral rules-based trade
The new American administration began last year denouncing the several “bad deals” the US had entered into regarding its international trade, vowing to take corrective action. Early January this year, it imposed stiff tariffs on imports of washing machines and solar panels.
In interviews given on the sidelines of Davos World Economic Forum which he addressed last Friday, American President Donald Trump stated, amongst others, that the US intended to retaliate against “the very unfair” EU’s trade policies. The US threat is therefore not solely directed against China or Canada/Britain as it looked like when the Brigadier matter was raised. It also challenges the long-standing trans-Atlantic US-EU alliance.
Mauritius doesn’t produce washing machines or solar panels for exports. So, we’ll not take a hit, directly. But nearly half (47%) of our exports of goods go to Europe. Should Europe be affected by US trade policies, that can have repercussions on our exports, directly or indirectly. The problem is not limited to Europe: an international trade war will affect almost everybody, creating numerous economic uncertainties around the world the more the existing multilateral rules-based WTO international trading system is called into question.
We have a Trump-bashing fashion these days because of the numerous occasions on which he said something only to gainsay himself subsequently. This time however he seems to have a point. We need to look at the background a little in order to understand the current reality of a global trade war which seems to be triggered by the US administration rather recurrently in the recent past.
The current rules-based international trade system was conceived some 60 years ago. At that time, the US was the global dominant force; its manufacturing set global standards and it was unrivalled as a global power. It agreed therefore to play the role of a benevolent global hegemon, conceding advantages to others who were lagging behind in the global league of nations. In 1995, that same spirit prevailed and the US agreed to setting up formally the international rules-based trading system known as the WTO, successor to the GATT.
Countries like Japan and Germany which had been wrecked by wars came out from their ashes as emerging new economic powers. The liberal trading system took some more decades to shift altogether the global balance of economic – and, hence, military – power.
America was no longer the globally unassailable economic power; it had been joined there in the meantime by China and Europe posing as serious rivals. Today, there are three dominant trading blocs in the world: China, the EU and the US, the new G3. Each one has almost very similar trade volumes of $4trillion each, altogether accounting for 40% of world trade and 45% of global GDP. In this new setup, America’s annual exports of manufactures – which singled it out in the beginning at the head of the global table – is barely $1 trillion while each of China and the EU have almost double this amount of manufactured exports. We no longer have a world of smaller countries competing against each other with the American giant in a dominant position.
This situation explains President Trump (and America) targeting criticism at the “very unfair” trading system to the disadvantage of the US. Not only this, China is posing as a serious challenger for global power, linking itself up in trade with Europe as far as possible given the current international trade disarray in the offing. The concentration of power among the G3 is such that the EU, for example, will not take the risk of reinforcing the multilateral rules-based WTO being challenged by the US, in the circumstances, for that might anger the US and end up undermining the EU’s interests to China’s advantage. China might also not push its global ambitions too far as that might undermine the trading system which has launched it to global prominence. It’s a serious global game of chess where the first mover risks receiving a serious backlash.
It is easy to see that we have no locus in this fight, although we stand to become its victim were our traditional export markets to face difficulties in the event of a global trade war coming on stage. The American assault on the rules-based international trading system may just be the beginning.
Our safety would have resided in closer regional trade ties. We have built up these ties. Africa accounts for 12% of our international trade. The problem however is that even Africa would face the same backlash because it hasn’t consolidated over decades the intra-African trade. It has in fact continued to rely, as we’ve done, on market access in the West. It might face similar repercussions in the event of such a trade war.
Mauritius is attending this week the 28th African Union (AU) summit in Addis Ababa. The agenda includes discussion of conflicts on the Continent and the issue of corruption affecting the Continent’s progress. It is also intended to rebuff President Trump’s recent derogatory qualification of the countries of the Continent. The AU receives 73% of its budget from external donors. It wants to become more self-reliant by raising a levy of 0.2% tax on each member country’s imports, already strongly resisted by its leading economies. It would be highly risky for a Continent suffering from so much mis-governance to invite a trade backlash although one reckons our collective dignity is not for denigrating by the powerful of the world.
* Published in print edition on 2 February 2018