2023-09-12 18:19:09
What is the role of international trade in building a safer, more inclusive and sustainable world? This is the question posed by the World Trade Report 2023 published by the WTO.
This issue is at the center of a contentious debate about the future of globalization, which has potentially far-reaching consequences for the future of the WTO.
While it is widely recognized that international trade produces substantial efficiency gains, it is increasingly argued that some of these gains must be sacrificed in favor of more important political objectives, in particular maintaining peace and security, reducing poverty and inequality and achieving a sustainable economy. This is a fundamental departure from the trade-affirming discourse that has guided trade policymaking since the founding of the multilateral trading system in 1947.
New narratives
This new narrative has gained traction amid a series of crises and tectonic shifts in the balance of economic power. Intensifying geopolitical tensions have raised concerns about the militarization of international trade. The COVID-19 pandemic has highlighted the importance of having resilient supply chains. China’s rise has put pressure on workers in some industrialized countries and slowed export growth in certain emerging economies. And the climate crisis has fueled doubts about whether international trade is compatible with the need to decarbonize the economy.
The Report begins by showing that this change in narrative is important. While trade continues to prosper in many ways, trade tensions are rising and the first signs of fragmentation are emerging.
Perhaps the most surprising conclusion from this part of the Report is that trade is gradually being reoriented along geopolitical lines.
Trade within and between hypothetical geopolitical “blocs” has grown 4% to 6% more slowly than within these blocs since the start of the war in Ukraine, indicating a shift toward “proping up cronies.”
Far from deglobalization
However, rumors about deglobalization are still far from being supported by data:
Bilateral trade between China and the United States reached a record level in 2022. Trade was remarkably resilient during the COVID-19 pandemic and recovered to pre-pandemic levels less than a year after the first wave of lockdowns. And trade of digitally delivered services has remained strong, growing at an average annual rate of 8.1% between 2005 and 2022, outpacing goods (5.6%) and other services (4.2%).
The main conclusion of the report is that we must embrace trade rather than reject it if we are to overcome the most pressing challenges of our time. In particular, the Report makes the case for expanding trade integration to more economies, people and issues, a process we call “re-globalization.”
A key conclusion is that a strong multilateral trading system is the best guarantor of economic security because it provides the options we need when we face supply shortages. An example of this is the business response to the COVID-19 pandemic. In 2020, international supply chains became vital to boosting the production and distribution of medical supplies: trade in medical products increased by 16%, trade in personal protective equipment increased by almost 50%, and trade in face masks increased by 80%
Economic integration
At the same time, the need to expand economic integration to more economies is highlighted, a first example of re-globalization. As illustrated in Figure B.10 of the Report, the proportion of “bottleneck products,” defined as products that have few suppliers and large market shares, has more than doubled, from 9 to 19 percent of all goods marketed between 2000 and 2021.
Regarding the relationship between trade and inclusion, trade integration is a powerful tool for improving living standards, which has helped lift hundreds of millions of people out of poverty. From 1981 to 2019, low- and middle-income economies increased their share of global exports from 19 to 29 percent and reduced the proportion of their population subsisting on less than US$2.15 a day from 55 to 10 percent. .
It also acknowledges that import competition contributed to the loss of manufacturing jobs in countries like the United States. However, trade openness can go hand in hand with economic inclusion, suggesting that complementary domestic policies are key. For example, some of the most open economies, including Germany, Latvia, and the Netherlands, are also some of the most egalitarian.
Sustainability
The Report finally analyzes the relationship between trade and sustainability.
While acknowledging that the relationship is complex, it also makes clear that there is substantial scope for trade to be part of the solution to climate change. For example, trade provides access to technologies that are vital for the green transition. The import of high-quality wind turbines is a good example, as they allow wind-rich countries to increase their renewable energy generation even if they do not have the know-how to produce such turbines domestically.
This also illustrates well the need to expand trade integration to more issues and is therefore a third example of re-globalization.
Trade is a powerful force multiplier for climate policies. Simulations show that more than a third of the emissions reductions achieved through a global carbon tax would be due to environmental gains from trade. Just as there are economic gains from trade by countries that specialize in what they are relatively good at, there are also environmental gains from trade by countries that specialize in what they are relatively green at. But this requires open trade along with coordinated climate action and, in that sense, an expansion of trade integration to more issues.
Re-globalization
The Report also analyzes the role of the WTO in promoting re-globalization. He underlines that WTO members have already made progress towards this goal in recent years. Examples include multilateral agreements such as the Trade Facilitation Agreement and the Fisheries Subsidies Agreement, as well as plurilateral outcomes on domestic regulation of services and investment facilitation for development.
To cite just one figure, WTO estimates show that the Trade Facilitation Agreement has led to an increase in trade of $321 billion. Trade benefits have fallen particularly heavily on the least developed countries, whose exports increased by 2.4%, with a 17% increase in the agricultural sector.
But to achieve a safe, inclusive and sustainable future, more needs to be done.
The WTO Trade Cost Index shows that trade costs in low- and middle-income countries are 27% higher than in high-income countries. Trade costs in services are 34% higher than in the manufacturing sector. And trade costs in agriculture are 46% higher than in manufacturing. This suggests that trade cost reductions for developing countries in agriculture and services – including services delivered digitally – are natural priorities for the future.
The author is Chief Economist and Director of the Economic Research and Statistics Division of the World Trade Organization (WTO).
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