(Re-)making the case for inclusive trade
The importance of trade as a determinant of growth and the importance of growth for poverty reduction is well documented.1 Trade allows countries to specialize; enables technologies, know-how and ideas to spread; and promotes competition and yields economies of scale. All of these factors contribute to boosting innovation and productivity, which fosters economic growth. Trade has contributed to the halving of global extreme poverty between 1990 and 2015, which was one of the Millennium Development Goals. Adopted in 2015 to succeed the MDGs, the Sustainable Development Goals include trade as a means to “finish the job” of eradicating extreme poverty by 2030.
Yet, it has become clear that “growing the pie” cannot be the only objective of globalization. Crucially important is the capacity to contribute to shared prosperity. International trade has to be more inclusive, both within and across countries. In advanced economies, the benefits of three decades of rapid—sometimes unbridled—globalization have been partly offset by a lack of measures and policies to mitigate the adverse effects, which have often been underestimated. It has become evident that, in many advanced economies, globalization has contributed to deepening societal cleavages, exacerbating distributional problems, and to undermining social contracts. At the same time, in the developing world many have yet to benefit from globalization. More must be done to lower trade costs, which hinder integration of the least developed economies into the global economic system and limit the ability of the poorest to participate in global value chains.2 Indeed, this Report, among other studies, shows how closely trade costs and income levels are correlated (see Figure 1).
International trade has exhibited lacklustre growth in recent years. Merchandise trade volume, for example, grew by only 2.7 percent in 2015, the fourth consecutive year of growth below 3 percent. Further, the World Trade Organization (WTO) predicts that growth in world merchandise trade for 2016 will be a mere 1.7 percent.3 If this projection materializes, it will be the first time since 2001 that GDP growth outpaces trade growth. This follows decades of nearly uninterrupted, rapid trade growth (see Figure 2). As further evidence of weak momentum, trade openness—measured as the ratio of trade in goods and services to GDP—declined in 2015 by 3.7 percent. It was the second-largest contraction in 20 years and the third consecutive year of decline, the longest period of decline since 1960.4
To explain the slowdown, the International Monetary Fund (IMF) posits that the prolonged episode of weak global economic activity, particularly investment, has accounted for about three-fourths of the sharp slowdown in trade volume since 2012.5 Indeed, a decade after the beginning of the global financial crisis, the world economy is still grappling with subdued growth; global growth is projected to slow to 3.1 percent in 2016, its lowest rate since the trough of the crisis in 2009.6
Slow global economic growth is not the only cause underpinning the slowdown. Another factor is that the rapid growth in trade during the 1990s and 2000s was, in fact, exceptionally high. It was driven by China’s integration into the global economy, linked with massive investments in China and many other emerging markets; falling trade costs due to policy cooperation and technological advances; and rapidly developing global value chains. The effects of these processes are now likely tapering off; therefore, the WTO believes that trade is unlikely to post growth rates similar to those achieved prior to the global financial crisis. The WTO also cites the increasing role of the digital economy as potentially contributing to the slowdown.
Another contributing factor is that the trade-enhancing effect of trade liberalization is likely decreasing, as globally tariffs have reached low levels. The IMF calculates that multilateral, regional and unilateral trade liberalization lowered the import-weighted average tariff rates for all economies by almost one percentage point a year between 1986 and 1995, then by half a percentage point a year until 2008. Since 2008, average tariffs have declined by just one percentage point in emerging and developing economies and actually increased by 0.2 percentage point in advanced economies.7 Yet, with average import-weighted tariffs for the world still at 8 percent, an elimination of tariffs would reduce trade costs by as much and generate signifcant productivity and welfare gains. However, further trade liberalization will be difficult to achieve in the current context.
Both the IMF and WTO cite creeping protectionism as an aggravating factor behind the slowdown. Figure 3 shows the steady rise in temporary non-tariff barriers. The World Economic Forum also finds evidence of “declining openness” in the deterioration observed since 2007 of several indicators of economic openness, such as non-tariff barriers, FDI rules and prevalence of foreign ownership.8 Societal unease with globalization has become evident in often very vigorous public debates on the power of corporations, employment, labour and environmental standards, and taxation that have taken place in countries with varying degrees of economic strength and from all regions of the world. More recently, the United Kingdom’s decision to leave the European Union has shattered the view that regional integration and openness is a one-way street.
There have, however, been some recent important achievements in reinvigorating growth in global trade. The WTO has found a way to navigate the political complexity of the Doha Round, notching up recent progress on seemingly intractable issues such as trade facilitation in 2013, information technology (2015), and agricultural export subsidies (2015). Negotiation efforts continue on the Regional Comprehensive Economic Partnership, the Continental Free Trade Area and other agreements of varying levels of ambition. G7 leaders have pledged to apply better labour, social and environmental standards across global supply chains, while G20 leaders have endorsed a set of principles for global investment policy-making. Given the symbiotic relationship between trade and growth, trade-enabling measures should remain a key objective for the majority of policy-makers at the national and international levels.
Implementing the provisions of the Trade Facilitation Agreement will remain front of mind for years to come. The practical and flexible structure of the agreement, however, provides a model for future efforts to address other pragmatic concerns of business. A TFA 2.0, more closely attuned to the opportunities and needs of e-commerce, is much discussed. So too, are investment facilitation and services facilitation agreements, designed to enable easier flows. Recognizing the crucial complementarity of investment and services to goods trade, governments and trade facilitation actors do not need to wait for an international agreement to advance the holistic reforms needed to enable trade.
In this context, the Global Alliance for Trade Facilitation has been set up as a public-private partnership to help implement these reforms, by leveraging the respective strengths and resources of all actors. In parallel, the Alliance’s work on metric development and benchmarking helps support policy dialogue, monitoring efforts and evidence-based decision making. The Enabling Trade Index, discussed in Chapter 2 is an attempt to fulfil these objectives.