Post-Brexit World Economy (Summary)

The withdrawal of the United Kingdom (UK) from the European Union (EU), known as Brexit, is expected to have a significant impact on the world economy. The effects of Brexit on the fast-changing global economy, as well as the implications of emerging technologies such as AI and robots, were among the topics presented at this symposium.

Presentations were conducted by three experts on international economy from the Centre for Economic Policy Research (CEPR): Richard BALDWIN from the Graduate Institute of Geneva, L. Alan WINTERS from the University of Sussex, and Dalia MARIN from the University of Munich. Following the presentations was a panel discussion which covered Japan's perspectives and responses, and further examined Brexit's effects on the international economy from a variety of angles.

CEPR is a prominent non-profit organization based in the UK, which aims to improve economic policy-making in Europe. Over 1,000 researchers from Europe conduct analysis, and discuss and form policy recommendations. RIETI has collaborated with CEPR for many years, through the exchange of research and the co-hosting of international workshops.

NAKAJIMA Atsushi (Chairman, RIETI)

The withdrawal of the UK from the EU is still ongoing and the full extent of Brexit on the European economy and the global economy is still uncertain. This symposium, titled the Post-Brexit World Economy, will cover what is likely to happen after Brexit. Despite not knowing how the withdrawal will continue, it is expected to have a massive impact on the world economy.

Currently, the world economy is changing rapidly and significantly, such as with U.S.-China trade relations. The advancement of AI, IoT, and robots, and their implications on industrialized countries and emerging economies in terms of competitiveness, further add to the challenges faced in today's economy.

We invited three professors of economics from universities in Europe, representing CEPR, to discuss and share their views with us on the world economy, specifically focusing on Brexit and technological innovations. Following this, we will have a panel discussion about Brexit and the views on the new economic responses to be made by Japan. Several experts on economics from Japan will join this discussion.

CEPR has a deep relationship with RIETI. It is one of the most prominent policy think tanks in Europe, based in the UK. Over 1,000 researchers work together and make policy recommendations, not only on European but also on global economic challenges. RIETI has been working on active research exchanges with CEPR, including the co-hosting of international workshops like this symposium.

Richard BALDWIN (Professor of International Economics, Graduate Institute, Geneva)

Deflating the de-globalization narrative

Many people think that Brexit is part of a move towards a de-globalizing world; however, I will explain why I think globalization is likely to accelerate quite sharply in the coming years. While millions of low-cost foreign workers in developing countries joined the manufacturing workforce globally in the 1990s, the prediction is that millions of low-cost foreign workers will join the service workforce globally from the 2020s.

Since the 1960s, trade in merchandise had been growing until recently, when it stagnated. This is one of the major sources of the narrative that the world is de-globalizing, and the United States (U.S.) trade war, Brexit, anti-immigration sentiment, and a failing World Trade Organization (WTO) are all contributing to this narrative. In particular, the U.S. trade war should not be thought of as de-globalization, but as reverse regionalism. High tariffs on its imports and exports actually accelerated trade policies and globalization.

Changes in the economy

India and China account for much of the reversal of global value chain trade intensity. They are seeing a shift away from exports due to domestic growth and a decrease in imports due to domestic production. Therefore, India and China are turning into "normal" large countries, where they are relatively self-sufficient and mainly sell for the domestic market.

Service trade is growing faster than the trade in goods, and the trade in intangibles is underestimated. Taking into consideration embedded services, intangibles provided to foreigners, and free cross-border digital services, the service trade contribution to international commerce is as large as the trade of goods. In other words, there is a massive underestimation of the importance of non-goods trade in globalization.

In recent years, investments in intangibles have been much larger than in tangibles. What this means is that the economies are evolving and things which were not so important in the past are becoming much more important now and will continue to do so in the future. Data flows are booming and growing at an exponential pace. All of this means that part of the de-globalization narrative is a failure to measure the change in the economy.

The future of globalization

Future globalization will focus on service and professional jobs, not just factory jobs. In the past, globalization had been mostly about manufacturing, but in the future, it will be mostly about services. Therefore, it is going to affect very different people. Digital technology is going to globalize and automate the service sector. It is important to remember that most people work in the service sector, especially in Japan.

Many jobs will be lost, but occupations will remain. As globalization proceeds, people in foreign countries will begin to undertake service tasks in other countries. Foreign workers will replace certain tasks through telecommuting, but it will not be very visible. Service globalization will also allow workers to accomplish the same tasks in a shorter amount of time. Therefore, some workers will be replaced, but not their occupations.

This globalization of services will come faster than expected. Services are mainly about information and communication and the rapid advance of digital technology is pushing it forward much faster than it did in the past. Unlike the globalization of manufacturing, change will not be so obvious. It will not be one big factory closure, but tasks being replaced one at a time.

The role of telemigration

A type of future globalization that will become very important is telemigration. You can think of it as international telecommuting. What this means is that people in one country will be working for offices in another. Wage gaps make this profitable and digital technology makes this feasible and accessible.

Domestic telecommuting is already very popular and widespread in the U.S. and Europe. Companies are reorganizing work to make it easier for people to work at home. At the same time, it is becoming easier for foreign workers to do so. Online freelancing platforms will promote telemigration and future globalization. These matchmaking websites allow companies in one country to find, pay, and manage specialists in another country. Machine translation will reduce the obstacle of language barriers, making telemigration much more viable. It is going to change the world in a very fast and serious way. The rapid advancement of telecommunications will also support this.

L. Alan WINTERS (Research Fellow, CEPR/Professor of Economics, University of Sussex)

The easiest trade agreement in history

Advocates for Brexit suggested that agreeing UK-EU trade relations after Brexit was going to be the easiest trade agreement in history; however, this has not been the case. It is ridiculous to think that 45 years of integration could be undone effortlessly. The views on Brexit were very diverse and yet ill-informed. There had been no national conversation to work out what form it should take nor what was wanted. In addition, Brexit was not only about trade policy but other things as well including national sovereignty. In fact, the role of economics has only been that of a constraint on some of the less informed wishful thinking and not a major consideration.

The economics discussion of Brexit to this point in time has been very simplistic and mercantilist. It focuses mainly on exports, and little on imports. It was designed without the support of economic experts, becoming an agreement of mostly wishful thinking by politicians. The politics of Brexit were not much better. There was no attempt to listen to differences. Basically the focus has been on short-term survival instead of long-term prosperity.

In general, the longer negotiations go on, the narrower the possible number of outcomes becomes. In the case of Brexit, on the other hand, as the negotiations go on, the outcomes become more and more uncertain. Brexit may be approved, or it may be canceled. As of now, it could go either way.

The economics and politics of Brexit

Since about 1870, British economic policy has been about managing relative decline. After 1950 UK GDP per capita declined from around 150% of that of the original members of the European Economic Community (EEC) to about parity in 1972 when the UK joined the EEC. Since then the decline has ceased and the UK has maintained its relative economic position. This can be attributed to the membership in the EU. By leaving the EU, the UK risks returning to a state of relative decline in GDP.

Almost all predictions of the long-term economic impact of Brexit see negative impacts. In other words, there is an almost universal agreement among economists that Brexit is going to result in relative economic decline. Since the vote to leave, while there has not been a recession, GDP is down by about 2.5% on what would have been expected, export earnings (in dollars) are down by about 12-15%, foreign direct investments are down by about 16-20%, financial assets are leaving for the EU, and net migration from the EU is also in the negative as more people are leaving the UK for the EU.

Politically, Brexit has only been treated ideologically. There has been a disregard for opposition opinions and for expertise. It was always going to be very complex and subtle, but decisions are being taken based on short-term political grounds. It is important to balance the economics and the politics, but due to the demands and conditions presented by Prime Minister, Theresa MAY, politics became the primary factor of the debate, leaving the economics neglected.

The agreement

Prime Minister MAY came up with a negotiated agreement that was announced in November 2018. It was essentially a legally binding Withdrawal Agreement. It concerned citizens' rights, budgets and debts, the border with Northern Ireland, cooperation on competition policies, and the maintenance of regulations on labor and environment. Despite having been agreed by the Government, it was rejected by the UK Parliament.

Trade was not included in the negotiated agreement, and instead was covered by a non-binding Political Declaration. It is to be negotiated after Brexit. The Political Declaration allows for almost any outcome on trade. So even if the Withdrawal Agreement passes, it would only lead to further uncertainty and potential division.

According to the Political Declaration, there is intended to be a possible free flow of goods with the EU, an ambitious customs arrangement, and UK consideration of aligning many regulations on goods with EU ones. The really critical shortcoming of the Political Declaration is that it deals very little with services. To highlight this shortcoming, 80% of UK GDP comes from services, and they account for about 45% of exports. The UK is a service economy.

The future of Brexit

The future of Brexit is full of uncertainty. Any solution is only the start of a negotiation, rather than the end of one. Only revoking Article 50 offers certainty but that will almost certainly require a further referendum. The deadline imposed by the EU is April 12th. Currently, there is very strong opposition to Brexit from many parties. If Brexit is passed, the UK will open up trade agreements with the EU and will, in principle, be able to negotiate agreements with the U.S. and other countries. One challenge will be creating a replacement for the Economic Partnership Agreement with Japan.

Dalia MARIN (Research Fellow, CEPR/Chair in International Economics, University of Munich)

A new era of world trade

We live in an era of hyper-globalization. There were three waves of trade liberalization: industrialized countries in 1950-1980, developing countries in 1980-2009, and the rise of global value chains since 1990. This third wave, characterized by a steep rise in the ratio of trade to production, is the era called hyper-globalization. Since 2011, however, the quantity and openness of world trade has been stagnating. There are three possible explanations for this stagnation: the end of global value chain growth, slow investment growth, and the switch from export to consumption in China. The question of why global value chains have stopped growing is important.

The following are my two hypotheses related to robot use in the economy.

The revival of manufacturing in developed countries

My first hypothesis is that use of robots will lead to a revival of manufacturing in rich countries. They replace workers to improve efficiency and also to complete tasks that are impossible otherwise, and since robots are themselves capital-biased, the cost of labor will lose importance, meaning that eventually labor cost advantages will lose relevance. The countries with the highest robot utilization are Korea, Japan, and Germany. Korea has more than six robots per 1000 workers. In contrast, Austria, Spain, the U.S., and France only have a little more than one robot per 1000 workers. The use of robots in manufacturing in advanced countries can be largely attributed to the automotive industry which accounts for 50-60% of the total capital invested in robots in most developed countries.

Returning to global value chains, we measure global value chains by the ratio of imported inputs to total inputs used in a sector. The production process becomes globalized and rich countries relocate production to low-wage countries. Offshoring increases the import of manufacturing inputs, and reshoring decreases the import of inputs. In Europe, some rich countries are offshoring to Eastern Europe, while for the UK, France, the Netherlands and Spain, China has become the most important destination for global value chains. But also, since 2011, reshoring has been taking place because global value chains are no longer expanding. Interestingly, in Japan, unlike other countries the expansion of global value chains is increasing rapidly as robotization contracts. China, India, and Indonesia have been reshoring their production process since the mid-2000s.

Before the financial crisis, why did rich countries continue to relocate production to low wage countries despite rapidly rising wages?

This points to the use of robots in these countries. Countries like Slovenia, the Czech Republic, and Slovakia have seen a significant expansion in the use of robots in the production process. They have more robots per worker than France, Spain, Austria, and the U.S. We find that some of these Eastern European countries which have invested heavily in robots have been very successful in escaping what the World Bank calls "the middle income trap." Even though their wages are rising, by investing in robots, they remain attractive as a location for global value chains. Before the financial crisis, there was no significant relationship between robots and offshoring, but since the financial crisis, this had changed. Since 2010, the more robots a country has, the less offshoring occurs. We can conclude that reshoring is taking place, and that manufacturing is moving back to the rich countries because of robots. Additionally, the higher the proportions of robots, the higher the chance of being a destination for global value chains.

So, will reshoring in this form improve employment in rich countries?

Machines replacing people

My second hypothesis is that intelligent machines will replace smart people, rather than increase the demand for skills. In other words, digital technology is a capital-biased technology and not skill-biased. For example, there is intelligent software which can produce articles in seconds, replacing journalists and potentially analysts; legal software that can replace lawyers; medical software that can replace medical doctors; and online courses that can replace professors.

Usually we say that technology is skill-biased, meaning that more skill is needed to utilize technology. Technology and skill complement each other. If this is the case, then it is predicted that the wage that can be earned rises with increased skill and higher education. We can expect a rise in the skill premium. This holds true in the U.S., but in many European countries, like France, Italy, and Spain, it is actually the opposite. High-skill workers have relatively lower hourly wages, and low-skill workers have relatively higher hourly wages. Therefore, in Europe, with the exception of Germany, the skill premium has been declining since 2005.

A variant of the idea of skill biased technology is the Polarization Hypothesis, which claims that information technology will replace the jobs of the middle class. It predicts that complex, non-repetitive jobs with both high incomes and low incomes will see an increase in demand, and the demand for middle income jobs will decrease. Is this found in the data? It does not seem so. Why are the skill premiums declining?

There are two possibilities to explain this decline in skill premium. One is that the demand for people with academic degrees has declined. This is the claim that technology is capital-biased, instead of skill-biased. Evidence for this claim is the global decline of the labor share of GDP since 1980. There is a paper that shows that 50% of this decline can be attributed to Information Technology. The other is that the supply of people with academic degrees has increased too much. The evidence for this is the fact that unemployment levels for tertiary-educated adults has increased significantly. The expansion of higher education has also been too rapid. Higher education rates are outpacing technological advances, minimizing the skill premium.

So perhaps the push for more higher education is not the right way to go. Perhaps this is a new issue of Capital vs. Labor as opposed to Human Capital vs. Labor which has dominated the last few decades.

TOMIURA Eiichi (Program Director and Faculty Fellow, RIETI/Professor, Faculty of Economics, Hitotsubashi University)

UK for Japanese economy

The share of the UK for the Japanese economy is minor, about 1-2%, if we measure it in terms of goods trade. However, its share exceeds 10%, if we measure it in the Japan's stock of foreign direct investment (FDI). When we discuss the economy, we need to consider FDI, not just the trade in goods. Japanese firms invest heavily in the UK and Mexico to serve EU and U.S. markets, but in the past several years due to Brexit and the Trump administration, these firms face a turning point in their globalization strategies.

The common concerns with Brexit for firms located in Europe are higher tariffs. For non-manufacturing affiliates, however, the second most frequently cited concern is data transmission between the UK and the EU, according to a JETRO's survey of Japanese affiliates in Europe. The focus on goods trade is again insufficient

Japan recently recorded a deficit in trade in goods, but taking into consideration intangible cross-border flows like FDI and technology, there was a surplus in current account, so there needs to be more attention paid to intangibles, although it is a difficult task.

Learning from Brexit

Previous studies found that education was the most important variable in the decision to vote for Brexit, while other variables including age, gender, and regional economic effects were also significant. These variables affected the vote in the U.S. presidential election and responses to trade policies in Japan. Our survey by RIETI shows that, in addition to these variables, the behavioral bias, such as the status-quo bias and risk aversion, is also related with the individuals' reaction to immigration and globalization.

We should recognize that our economies are deeply integrated, not just by trade in goods, but in services, technology, FDI, and digital trade. Governments need to conclude the deep agreements with other countries, including rules of behind-border issues. However, people or voters are influenced by behavioral bias and immobile within a country or even within their native regions. The design of choices given to voters are critical in the short-term, but education is important in the long-term. The issue is that we do not know exactly what to be done in the intermediate term.

TANABE Yasuo (Special Representative for External Relations, Hitachi, Ltd.)

Outline of Hitachi in Europe

Hitachi is an innovation partner for the IoT era. The consolidated revenue of the Global Hitachi Group is 72.1 billion euros and we have more than 300,000 employees. About 50% of our total revenue comes from Japan, with the rest coming from overseas. We conduct business in Asia, North America, Europe, and other areas. Our business model is that of a Social Innovation Business. We use our capabilities and strengths to deliver innovations to our customers and society.

Hitachi in Europe

In Europe, our revenue is 7.4 billion euros. Social Infrastructure & Industrial Systems, in particular railway systems, account for 37% of that revenue. We are currently expanding our presence through the growth of four strategic sectors: rail systems, power systems, IoT solutions, and construction machinery. Our group companies have headquarters throughout Europe in the UK, Italy, Germany, the Netherlands, and Switzerland.

Railway systems are a very important business for us in the UK focusing on rail maintenance. In Spain, we have supplied the Proton Beam Therapy Project, an advanced cancer treatment machine. It is currently under construction.

Request by the Japan Business Federation

Several requests have been already made by the Japan Business Federation regarding Brexit. Requests were made to extend the transition period if necessary, to seek a "soft" Brexit to allow tariffs and licensing to be the same as before, and to enter into multilateral and bilateral trade agreements immediately after the transition period.

KAZEKI Jun (Deputy Director-General, Economic and Industrial Policy Bureau, METI)

Abenomics

Prime Minister ABE implemented three policies in the last six years, with the goal of overcoming a deflationary economy and increasing economic factors for growth. This was done through an increase in capital, labor, and productivity. Looking at data, the results are positive. GDP is increased, corporate profits have increased, inbound tourists have increased, and the unemployment rate has decreased.

Global picture

Japan is currently facing changes in the global political and economic landscape. To ensure Japan's success in this changing landscape, the Ministry of Economy, Trade and Industry (METI) will promote three policy directions: rule-based trading strategies, an innovation ecosystem, and a new social system with redistribution for growth.

Growth strategy

The final goal of the growth strategy is "Society 5.0." This is an ultra-smart society integrating cyber space and physical space. The concept is to solve social issues through the use of technology. The priority areas are mobility, including driverless cars; healthcare, with a next-generation healthcare system; and fintech/cashless systems, focusing on the development of a cashless society.

Japan's population is decreasing. The working population is expected to decrease rapidly as well. The good news is that the elderly are healthier than before, with 80% wishing to continue working until 70 years old. Last year, Prime Minister ABE announced the realization of a "100-year lifespan society" as his top priority for the next three years. It is a big opportunity for Japan.

NAKAJIMA:
Which countries benefit from globalization and which do not?

BALDWIN:
I think it is clear that telemigration allows developing countries to exploit their comparative advantage directly. Until very recently, the only way they could exploit that advantage was to build a good and send it across the border. Digital technology is allowing wage differences to be exploited more directly through telecommuting.

I expect the emerging market miracle to continue and to spread. Until now, it has been in manufacturing. Countries like South Africa, Brazil, and Kenya have lots of talented people. In rich countries, this will be very disruptive. A whole new set of people will be exposed to direct wage competition for the first time.

The most competitive service providers in rich countries will also benefit. In addition, I think the middle class in middle-income countries will benefit the most directly. They already have connectivity and skills, so I think that is where it is going to start.

NAKAJIMA:
What kind of impact do you think this new type of globalization will have on the logistics industry?

BALDWIN:
Affected aspects of logistics will be telecommunications, AI, and computing. If you talk about transportation, automation will lower the cost of labor; however, when the labor cost gets low enough, manufacturing will not be traded anymore, because it will not be worthwhile to make things far away and transport them. Everything will be made locally. That suggests a decline in the need for shipping goods around the world.

NAKAJIMA:
What do you think about the UK remaining in the European Union?

WINTERS:
I think we will see strong political pressure towards a second referendum. The alternative view is that Prime Minister MAY persists with her proposed deal. In all likelihood it will continue to be rejected and then Parliament will be faced with the choice of exiting with no deal or revoking Article 50. If it does come to that, I think quite possible that Parliament would not choose to revoke. It is this possibility that may eventually encourage parties to agree a second referendum.

NAKAJIMA:
What are your thoughts on the system of higher education and vocational skills training in Germany? Also, how do you see humanities education in the framework of European education?

MARIN:
Germany's system is seen by many people as very successful. The question is if this system will be sustainable in the future. In a period of rapid technological change, a system that relies on general knowledge has an advantage. Knowledge becomes outdated very quickly. If you have general knowledge, and have learned to learn, you are better able to adapt. I think for the future, the German system may not be the ideal system.

Regarding STEM-type education, at the moment, there is a scarcity of people in Germany who are able to contribute STEM skills to startups. The biggest challenge is finding enough talent. What we have been seeing about digitalization is that for most industrialized countries, productivity growth has not been increasing, despite expectations. One possible reason for this is that not enough new jobs are being produced. Also, there are not enough people with skills to be employed in those new jobs.

NAKAJIMA:
A long time has passed since the referendum. Why are the people not in agreement yet?

WINTERS:
We had stagnant wages and the financial crisis, followed by austerity. So there was a group of people who felt that they had very little stake in what was going on. Together with weak leadership and a decline in standards relating to the post-truth era, everyone thought Brexit was an opportunity to kick the system, and no one expected that Brexit win.

You would think this would lead us to reassess everything, but no one really expected it to happen, so no one adjusted and now no one wants to relinquish their ground to people who have made such grave errors in judgement. It was a massive political failure not to institute a large national conversation based on fact and respect from the start. Now it is too late.

Regarding the Northern Ireland backstop border issue, the more conservative elements said that there is nothing to worry about because they can control all border issues simply by implementing new technology. However, even if you could devise a system that worked perfectly for large, honest companies, it is now clear that many large corporations are not honest operators and that people who are not interested in complying with an automatic system will have an easy time circumventing such a system. Moreover smaller business operators will find complying with any technological requirements expensive and so may decide not to trade at all.

NAKAJIMA:
If the UK decides to remain in the EU, what would be the impact on Japanese companies?

TANABE:
Most major companies in Japan have prepared for every possible outcome, by accumulating inventory, preparing changes in supply chains, and relocating their production lines. So, I think most large Japanese companies would not encounter any insurmountable problems. On the other hand, if there is a "hard" or "no-deal" Brexit, whose uncertainties make preparations difficult, then Japanese companies could be impacted quite significantly.

NAKAJIMA:
Do you think the Japan-EU Economic Partnership Agreement (EPA) will be affected by Brexit?

KAZEKI:
Both Prime Minister MAY and Prime Minister ABE shared the view in their joint declaration in January 2019 that a new economic partnership must be established. Anyway it is necessary for us to act as soon as possible, regardless of the outcome of Brexit. Our current strategy with UK is to respect free and fair trade.

NAKAJIMA:
If the UK and the EU are separated, how much would trade with Japan be affected?

TOMIURA:
Many Japanese firms have already established production networks inside the UK, so some short-term measures, such as changing supply sources, have to be implemented. In the long-term, however, we must recognize that, when there is serious uncertainty, then companies have to prepare contingencies, for example by dual sourcing, and the efficiency of the economy is affected negatively. Who should bear this additional costs due to uncertainty raised by Brexit?

NAKAJIMA:
From your perspective, what kind of impacts can we expect from a no-deal Brexit?

BALDWIN:
If a no-deal Brexit goes ahead, I think we will have to go into an emergency maneuver situation where the European Union can suspend things temporarily. That may violate some WTO rules, and it may have an effect on reducing populism. It may have the unfortunate effect of reducing the confidence in democracy as a whole, as some people believe that the current state of affairs in this case and the U.S. case is the fault of the electorate.

WINTERS:
If we look ahead three or five years, I think Europe will become weaker by losing one of its big players, but hopefully it will continue to create additional favorable trade deals with the world. The UK is going to lose immensely. We will become economically much less powerful and our presence in international affairs will be diminished.

Economically, the UK is only about 2.5% of world GDP, so I think the world economy would not feel a very significant impact. My prediction is that the world will move on. However, if Europe is indeed affected significantly, then there will be very serious changes and it will be in everyone's best interests to support Europe over the next few years in repairing any damage.

NAKAJIMA:
Germany has a lot of trade with the UK. So, what kind of impacts can we expect there?

MARIN:
The UK is a very important country in the European Union, and in many instances, it has served as a counterweight to France, whose policies are less focused on competitiveness. Germany has always made coalitions with the UK, so the dynamics within the EU are going to change. We regret this situation very much.

Moreover, Germany will be hit very hard by the disruption of global value chains. I do not think the consequences of Brexit will be that large, but because Germany has a large network of production chains with the UK, and in particular in the car sector, there will be a significant impact due to multiplying of tariffs with multiple border crossings etc.

NAKAJIMA:
What kind of impacts can we expect in Japan?

TOMIURA:
There will be short-term and the long-term effects. In the short-term, I believe there will be many changes required by Japanese companies, such as increasing inventories. In the long-term, however, I think the influence of the UK in the global economic policy making will decrease and many important rule makings, including rules for digital trade, will be delayed as a consequence.

TANABE:
A no-deal Brexit is not a desirable outcome for Japan. Currently, Japanese companies use the UK as a gateway into Europe. The open business environment has always been enjoyed. However, personally, I think it will be a good lesson, teaching the Japanese people, businesses and government that they need to constantly be prepared for unexpected changes in the uncertain world and improve their resilience.

KAZEKI:
We hope that a no-deal Brexit will be prevented. I think we have to make sure that businesses are properly informed of changes. There are many Japan-related companies and people in the UK, so therefore the impact will be significant. While a lot of focus has been placed on trade in goods, tariffs and customs procedures, equally important sectors like trade in services and technical regulations also need to be taken into account. In the meantime, on a more forward looking basis, a new and ambitious UK-Japan agreement can be made in the future.

NAKAJIMA:
In what ways will technology and robotics have an impact on world trade?

BALDWIN:
I think machine translation will have the most impact. I think it will change trade and accelerate it quite significantly. Trade is usually 50% higher between countries who speak the same language than between countries who do not. With machine translation, we could easily see comparable increases.

WINTERS:
I think the policy management of technology is going to be very important, especially in China and India.

MARIN:
I think that trade openness has reached its peak. What we have seen in the past is not going to continue in the future, and therefore, it is not going to contribute in the same way.

Artificial intelligence is very different from other revolutions in the past. It is not leading to an increase in productivity in terms of employment, due to the different paces of job creation and redundancy. I think the government has a big role to play, because as long as artificial intelligence is in the hands of private entities, they will not have an incentive to move into job creating areas. They should create significant incentives for the private sector to create jobs replaced by AI.

TOMIURA:
In Japan, a massive number of robots have been introduced in manufacturing plants. However, there are recently AI-assisted robots that can do service tasks in non-manufacturing sectors. I think it will be important to understand this difference.

TANABE:
With the advancement of technology, especially digital technology, there is so much potential for Japanese businesses. Currently, we have an abundance of data on manufacturing and healthcare. If we make use of them, we could potentially increase the productivity of the Japanese economy. This is something that the government is promoting. In terms of human resources, have to be able to use digital technology effectively so data access and education is essential.

KAZEKI:
I think digital technology will have a big impact on the Japanese economy and on world economy. We are recently discussing the move of AI and machine learning to general purpose technology, which is technology that everyone has access to and the effect of the gig economy. These new technologies may cause some differences in high-income people and low-income people, but it depends on the adaptability to these technologies so flexible work and education systems and especially recurrent education will be important for Japan in taking full advantage of these technologies.

NAKAJIMA:
Are regional linkages like Free Trade Agreements (FTA) going to grow or shrink?

BALDWIN:
The regionalization of the world economy was driven by global value chain development which necessitate comparable operating environments in partner countries. Since nothing was happening in the WTO and most countries do not participate in global value chains, agreements on these topics were initially covered in bilateral trade agreements, which became quite comprehensive in dealing with all the necessary issues. Eventually these agreements were knit together into mega-regional agreements.

I do not think that global value chains are going away anytime soon, so regional integration will continue. With the e-commerce agreement, what you see is a very different coalition of countries around the world, because in a sense the whole world is one region, so all partners must be at the negotiating table. This is a new type of agreement, but traditional global value chains are still developing and will continue to accelerate.

WINTERS:
I do not think we are going to suddenly have a unified integrated world economy. The big problems with many new technologies are things like legal liability. What happens when an Indian doctor makes a mistake with a patient in Australia? That requires a huge amount of trust and formal recognition. There are many technicalities that will take a significant effort to advance, and in addition there will be issues that imply encroachments on national sovereignty. Recent political trends have been a response against such issues, and I fear that some additional fragmentation will come first, so the idea of a single, harmonious economy is a little too optimistic.

MARIN:
I think the big issue is going to be which countries are attractive for global value chains. Tariffs and trade restrictions will make a country lose in that respect.

TOMIURA:
The location of global value chains were mainly based on geographic proximity to both parent companies and target markets, but this is not necessarily the case for digital trade. Past FTAs reflected regional integrations often among neighboring countries, but I think there has to be new rules to accommodate digital trade.

NAKAJIMA:
Robotics is enhancing the competitiveness of developing countries. How should Japanese companies take steps forward?

TANABE:
Japan is strong in artificial intelligence, so there is more potential for Japan to introduce high-end robots than other countries. We believe that we will be able to increase our share in that segment. Asia is the center of growth in the world economy, so it is a good opportunity for Japanese companies. Regional agreements are being made with Japan at the center, and this is the way that Japan can lead the world economy.

NAKAJIMA:
With the increasing capacity in all respects of developing countries, how should Japan maintain a competitive edge?

KAZEKI:
In terms of global value chains, our role is to maintain leadership in the global rule-making and to emphasize on the domestic structural reform including corporate changes and human resource development to ensure that Japan stays at the cutting edge.

Also, the importance of the WTO must be emphasized. In Davos, 76 like-minded countries began to advance a discussion on an e-commerce agreement, so it should be emphasized that regardless of recent trends, the WTO is still moving forward and more efforts are necessary on the part of the international community including the G20 that will be in Japan in June 2019.