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WTO-IMF-World Bank report: greater trade integration will boost shared prosperity

WTO-IMF-World Bank report: greater trade integration will boost shared prosperity
Photo credit: Dominic Chavez | World Bank

01 Oct 2018

A new report issued on 30 September argues that trade integration can play a larger role in boosting shared prosperity. The report, by economists from the World Trade Organization, the International Monetary Fund and the World Bank, concludes that global trade policy can help to unlock opportunities provided by fundamental changes in the global economy.

In the report, entitled Reinvigorating Trade and Inclusive Growth, the economists find that the opening of trade has played a key role in lifting living standards and reducing poverty since World War II, but that this work remains incomplete. Trade reform has not sufficiently kept pace with the changing landscape of services trade, digital technologies, and foreign direct investment. Much also remains to be done in areas such as market access for goods and regulatory cooperation. Greater openness in such areas, the report claims, would promote competition, lift productivity, and raise living standards.

In many other domains, such as the rural economy, gender and smaller enterprises, trade-related reforms are important to foster more inclusive growth and increase productivity. Moreover, the report notes that the current trade tensions may in part be rooted in issues that have been left unresolved on the negotiating table for too long. Cooperative action to secure greater, more durable openness could help to resolve these issues.

Director General Roberto Azevêdo said: “Trade has been vital in lifting living standards and reducing poverty over the years but much more remains to be done. Many WTO members recognize that improvements are necessary in many areas of trade policy to keep up with the evolving needs of their economies and their people. This report is a welcome contribution to ongoing discussions on reinvigorating the trading system to the benefit of all.”

Introduction

Despite a recent rebound in trade, a prolonged slowdown in the pace of trade reform is leaving in place widespread trade distortions and putting at risk the strength and durability of the global economic recovery. A global economic upswing that began around mid-2016 grew into a synchronized expansion underpinned by trade-intensive investment growth. But this largely cyclical development, and a more recent period of unusually high trade tensions – which itself poses serious concerns – risk masking the need for substantial and durable trade opening on a global basis. Remaining trade distortions are a key factor behind the trade tensions, making the need to reinvigorate trade reform all the more urgent.

As new trade reform initiatives lagged and the benefits of past reforms levelled off, trade growth slowed. Global trade volumes grew at some 7 percent annually during the 1990s – double the rate of global GDP growth – but decelerated markedly as the ratio of trade growth to GDP growth fell to 1.5 during 2001-07 and to unity in the period after 2008.2 While several factors lie behind the slowdown, a substantial part represents a slower pace of trade reform following the remarkable progress made from the 1980s to the early 2000s.

It is time to reinvest in open, rules-based global trade. Since World War II a system of global trade rules has brought more openness, stability, and transparency to trade, nurturing unprecedented world economic growth. It is time to reinvest in that system to serve the modern economy. To think that the work of trade reform is essentially complete is a fallacy that neglects both the significant remaining obstacles to traditional trade and the opportunities presented by the rise in services and technology for greater trade-driven prosperity.

Extending rules-based trade openness poses new challenges and could require fresh thinking and exploring all available approaches. At the domestic level, trade policy and trade negotiations increasingly reach “behind the border” and interact with domestic regulatory agencies, sectoral ministries, and sub-national entities. Unlike a classical tariff-cutting exercise, for example, successfully opening to services trade brings additional complexities: policy coherence becomes critical in designing and implementing reform. For any particular trade policy areas it follows that some countries may be prepared to move more quickly than others. So internationally, it’s important to channel that desire in ways that are most constructive for the countries concerned, while also contributing to a healthy global system.

This paper complements earlier joint work. Along with the broad benefits of trade, the IMF-WB-WTO (2017) policy paper Making Trade an Engine of Growth for All emphasized policy tools that can be used to help workers and communities to adjust to adjustment pressures associated with trade and technological change. The current paper digs more deeply into the benefits that trade and trade reform can provide for economic growth and inclusiveness and how such reform could be achieved at the global level.

Trade areas with high growth potential

Reinvigorating trade integration should be a key component of the global policy agenda to boost economic growth. Despite the upswing that began in 2016, a longer-term trade slowdown has coincided with weaker productivity growth. This has occurred because the benefits of past major trade policy reforms have played out and new initiatives have lagged. The pace of new trade policy reforms at the global level has slowed since 2001; this has not only left an unfinished agenda in traditional areas, but has also meant that the trading system has not kept pace with modern economic developments. At the same time, new trade restrictions imposed since the global financial crisis have begun to weigh on global trade; this trend has only grown recently.

Certain “frontier” areas of trade policy have high potential to lift global productivity and durably increase medium-term growth. The digital economy revolution is opening new opportunities for cross-border trade and investment. This is changing the nature of trade, elevating the roles of policies relating to electronic commerce (“e-commerce”), investment, and services trade. This reflects the international nature of supply chains and complementarity of foreign direct investment (FDI) with trade in goods and services – the ‘trade-investment-services’ nexus. The effectiveness of this nexus, and of international supply chains, is also grounded in secure property rights, including for intellectual property. The growing overlap between trade regimes and domestic policy puts extra emphasis on effective regulatory cooperation.

While the benefits are high in these areas, so too are the risks. International rules in these areas are less developed than those in the more traditional areas of trade. Moreover, broadly speaking the existing international obligations – whether in the WTO or in other trade and investment agreements – provide limited protection against backsliding from existing policies. This is also an important consideration, particularly in an environment of rising trade tensions.

A trade policy agenda to promote global growth should also encompass market access issues and other conventional areas of trade policy. Much remains to be done to promote open and secure market access in the goods sector. The work of reducing tariffs is incomplete, while greater transparency and openness in government procurement markets can promote competition and increase expenditure quality and efficiency, particularly important when budgets are tight.

Trade-related policies for inclusiveness

Gender

Trade helps to drive female employment. Trade generates jobs for women, including through employment in the formal sector among those previously employed in the informal sector. MSMEs account for 52 percent of employment in developing economies (ILO, 2017) and employ women disproportionately (WTO, 2017). Exports now represent just 8 percent of total sales of developing country MSME manufacturers, but raising MSME participation in trade seems likely to promote female employment.

Exporters in developing countries employ more women than non-exporters and jobs in export sectors tend to have better pay and conditions than those in the informal sector. In many developing economies women comprise up to 90 percent of the workforce in export processing zones, bringing jobs that provide higher income and greater job stability. The growth of global and regional supply chain trade, such as in apparel and assembled goods, has been a strong source of employment for women in developing countries.

Many governments are now acting to support the participation of women in trade. The Buenos Aires Declaration on Trade and Women’s Economic Empowerment, signed by 121 WTO Members and Observers representing three-quarters of global trade, seeks to ensure that the WTO works to make trade more inclusive and increases the participation of women in trade.

The impact of trade and trade policy on women is complex. Women can be affected by trade as consumers, as producers of traded goods and services, and as entrepreneurs with dominant ownership of exporting companies. The trade impact on female producers or exporters also depends on the role in the economy of the sector or industry where they are specializing and on whether they are employed in large or small firms. While the export sector is an important source of employment for women, the services sector is the largest employer of women. Further services trade reform, coupled with domestic regulatory reform, could thus help to drive further job creation for women in service sectors such as health, finance, and tourism, and in areas such as communications, distribution, and logistics that are becoming increasingly tradable.

In many countries, women are constrained from fully participating in or benefiting from trade. Specific constraints include access to credit, land and other resources, asymmetric household responsibilities, gendered social norms, labor market segregation and lower skills and lack of training. Women are often heavily involved in cross-border trade – in the Great Lakes region of Africa, about three-quarters of small-scale cross-border traders are women – but are less likely than men to be aware of their rights and of legal conditions governing trade at the border. In a 2010 survey of those traders, more than 80 percent reported having to pay bribes to cross the border, while more than half had suffered physical harassment and abuse.

Farming often presents specific issues. In many poor countries, seeds, fertilizers and pesticides are predominantly imported; however, women often find it more difficult to interact with markets as they are bypassed by traditional male-dominated distribution networks, are less likely to receive technical information, and farm support programs may exclude crops grown primarily by women. Improved access to markets for women farmers would increase use of modern inputs and enable them to sell more of what they produce –helping to close the gender productivity gap in agriculture, raising agricultural output, and improving the welfare of households of female farmers.

Through its impact on job creation, trade can enhance the status of women in society and empower women within the household. Employment of women has been shown to have positive long-term development outcomes through the greater influence of women on household decisions on education, food, and health expenditures, and on the status of girls. Decisions that improve the caloric intake of children and reduce stunting improve educational attainment and adult productivity. By creating jobs for women, trade can also increase incentives for girls to attend school and training, and greater job opportunities through trade bring an increased focus and expenditure on education for all children in the household. Finally, job creation through trade can empower women in social and political spheres, making institutions more representative and changing policies that lead to increases in the provision of public goods (education, health, sanitation, water) which contribute to long-term development.

Role of the international trading system

Multilateral trade cooperation is increasingly important in today's hyper-integrated, multipolar global economy. Many key trade issues, such as e-commerce, are largely global in nature and can only be tackled globally in the WTO. Yet one of the WTO’s core strengths – its global scope and membership – also makes it more challenging to advance and 'upgrade’. The last major reform of the system, the Uruguay Round, was concluded almost a quarter century ago and addressed the agenda of the 1980s. The WTO Agreement does not tie negotiators to predetermined negotiating approaches, but allows for a variety of approaches. The urgent challenge today is to harness the unique strength of the WTO – an institutional, legal, and enforcement character that cannot be matched in bilateral and regional trade agreements – to tackle the key trade issues of today, using the most effective approaches available.

In these times of fast-moving change in the global economy there is a need now more than ever to ensure that the rules, policies, and practices governing global trade evolve and are modernized. Since its creation immediately after the Second World War, the system has evolved and adapted in response to new economic activities, new trade participants, and new 'integrating' technologies. Although this evolution has not always been smooth – often advancing in fits and starts – two long-term trends are striking.

  • First, multilateral trade cooperation has grown wider and deeper with more countries, more issues, and more rules being consolidated in the increasingly global architecture.

  • Second, WTO negotiations have included all members, but members have had varied ambitions and undertaken varied commitments, especially as the system has grown more diverse. Every negotiation has been multi-speed, with some members going further and faster than others. The resulting agreements have been ‘variable geometry,’ with outcomes that accommodated different obligations on issues such as tariff schedules and services commitments, anchored in common principles and general rules.

The slower pace of multilateral negotiations has encouraged countries to turn to bilateral and regional strategies. This has had positive aspects, but also presents a risk of complicating or fragmenting the trading system. These efforts have been motivated, in part, by a sense that smaller like-minded groups could address the complex challenges of deeper integration easier and more quickly than the broader WTO. The number of RTAs in force and notified to the WTO increased from about 54 in 1995 to over 250 today, yet less than half of global merchandise trade takes place between countries that share an RTA. The most ambitious RTAs go beyond liberalizing trade in goods and services to address deeper integration by devising common regulations and standards governing goods, services, investment, and public procurement markets.

Regional trade agreements can help to advance trade integration, but are not enough on their own. The more ambitious regional agreements have helped to demonstrate the potential of further integration in new areas. While the growth of more, broader and deeper RTAs clearly demonstrates countries' desire to expand and strengthen international trade cooperation, even the most far-reaching mega-regional deals cannot address all modern trade challenges. Because RTAs by definition have limited membership and coverage, their ability to address the policy coordination challenges posed by increasingly 'borderless' global issues like services, investment, or e-commerce is also limited. In addition, proliferating RTAs can create overlapping, inconsistent and fragmented trade regimes – 'spaghetti bowl' effects – raising transaction costs and complicating sourcing for businesses that operate in global markets. By design, RTAs are also preferential and exclusionary, with tariff and some other discriminatory provisions potentially trade-diverting.

These shortcomings are amplified by the fact RTAs tend to define or 'lock-in' trade partnerships by region, while key trade relationships today often transcend geography and are specific to issues or industries, rather than regions. The complex China-EU-US relationship, to take an obvious example, cannot helpfully or even feasibly be addressed by multiple RTAs, regardless of how comprehensive or well-designed. As the only global trade system, the WTO provides the only forum where all countries, including the most powerful, can cooperate on the growing number of global trade issues that impact them collectively. In today's increasingly open, integrated, and multipolar global economy, there is no obvious alternative to the global system of trade rules, policy coordination, and institutional support – especially regarding transparency and dispute settlement – that the WTO now provides.