Trade powers productivity.
- After the slump and surge of the pandemic, we must again harness trade’s capacity to support growth, employment and sustainable development.
- Since the 1990s, trade has been a critical engine of prosperity; retooled for the future, trade can serve society and revitalize the global economy.
- Among the 6 priorities that should guide us is the need to recognize the value of the world trading system and reaffirm a need for multilateralism.
Trade powers productivity. It is an engine of innovation, driving knowledge spill-over and technology upgrading. It can encourage improved governance and institutional reform. ‘Slowbalization’ has held back trade since the mid-2000s. After the slump and surge of the COVID-19 pandemic, we must again harness trade’s capacity to support growth, employment and sustainable development.
The alternative, trade deterioration, risks current prosperity. The World Trade Organization (WTO) and others have calculated that the direct cost to global output from trade fragmentation and technological decoupling could reach 8-12% in most-affected economies. US-China trade skirmishes have already led to significant trade diversion and income losses. A more uncertain environment depresses economic growth by reducing consumer confidence and spending, and removing firms’ reasons to invest.
The lower prices and consumer choice that come with trade help low and middle-income consumers. Trade is estimated to have reduced household consumption costs in advanced economies by two-thirds for low-income households, compared to one-quarter for high-income households. Deglobalization has potentially serious inflationary consequences.
Nonetheless, one lesson from the pandemic we must not ignore is the need for greater substitutability in inputs and increased diversification through trade. We must take “re-globalization” to heart.
Trade barriers and trade gains
Today, emerging markets play a far larger role in world trade than two decades ago. Trade in services has also seen healthy growth. Trade costs in services have traditionally been far higher than for goods, but thanks to technology are dropping more quickly. Still, the Organisation for Economic Co-operation and Development (OECD) reports average services trade barriers of over 170% in tariff equivalents in emerging markets and 80% in advanced economies. Services trade barriers are becoming ever more significant given structural shifts towards growing expenditure on services relative to goods.
Trade-war tariff increases aside, traditional tariff barriers to goods have become relatively minor direct impediments to trade, outside of some significant exceptions, particularly in agriculture and developing economies. However, the administrative burden of trade procedures and processes remains high – together with shipping and logistics costs, 50% higher in emerging markets compared to advanced economies.
Climate change and technological development are altering competitive advantage and with it the political economy of trade. Trade needs to support the imperative of climate change action yet at the same time resist unhelpful protectionism. As new policies are introduced, governments need to assess their cross-border impact and cooperate to keep trade open. Trade policies are currently biased against the environment through higher tariffs and other barriers on cleaner industries.
6 trade priorities
As we approach the 13th Ministerial Conference of the WTO, six priorities should guide us:
First, we need to recognize the value of the world trading system and reaffirm the need for multilateralism. This multilateralism must be pragmatic – enabling willing WTO members to move ahead in open plurilaterals and creating space for broader and deeper regional trade agreements – without dismantling the inclusive approach of broad non-discrimination.
Second, we need to find an equitable way through the industrial transformation needed to decarbonize the global economy and resulting from 4IR technology. The economic transition must be collaborative.
Third, we need to ease the day-to-day conduct of cross-border trade, services and investment, particularly through the deployment of technology.
Fourth, given the explosion in e-commerce and digital trade, we need to build trust through transparency and effective regulation.
Fifth, social and environmental outcomes must become a more acute priority in global value chains, with regulations, incentives and corporate behaviour aligned to ensure better results for workers, communities and nature.
Sixth, a larger role for developing nations, accelerated by foreign investment and domestic reform, will not only empower more of humanity but strengthen global resilience through diversity.
Meetings and initiatives
The World Economic Forum’s Annual Meeting in Davos provides an opportunity for trade ministers, business, unions and other stakeholders to agree on how to concretely advance these priorities. In preparation, trade, investment and geopolitics dialogues have helped executives and policymakers share insights and increase joint understanding of today’s realities. Cross-industry research is highlighting the value at risk from fragmentation. In the digital trade space, regional work is helping stakeholders improve policy design to improve the trade-offs between policy interventions and resulting costs.
The Global Alliance for Trade Facilitation has now delivered over 20 public-private trade reform projects in developing countries, with initial savings exceeding $65 million. Over 1,000 local micro-, small and medium-sized enterprises have been involved with over $10 million direct business contributions. Similar practical reform initiatives are progressing across investment and services facilitation in several African, South Asian and Latin American economies, including for digital foreign direct investment.
Overwhelmingly, effective solutions depend on the deployment of new technology. The TradeTech initiative is catalysing collaboration across the entrepreneurial, investor and supply chain technology ecosystem to accelerate the emergence of scalable trade innovations.
Trade, labour and Indigenous communities are proposing legislative and business model changes to better serve workers in global supply chains and to improve access to the benefits of trade for Indigenous Peoples and disadvantaged communities. The Coalition of Trade Ministers for Climate, launched last year in Davos, promises to help countries put in place green trade policies, spur green investment and responsible circular trade.
There can be no recovery without a trade recovery. Trade tensions threaten growth. Over the last 30 years, trade has been a critical engine of prosperity. Retooled for the future, trade can serve society and revitalize the global economy.
This article was published as part of the World Economic Forum Annual Meeting 2024 discussions.
By: Børge Brende (President, World Economic Forum)
Originally published at: World Economic Forum
