tralac’s Daily News Selection
Rethinking the International Trade Architecture: address by WTO’s DDG Alan Wolff at the Institute for International Trade, Adelaide
The topic of our conference is “Rethinking the International Trade Architecture”. I can report to you at the outset that there is no re-thinking of the architecture for international trade that is currently in evidence in Geneva, not at the WTO. There is of course much activity outside of the WTO that has an architectural aspect. Increasing nationalism is prevalent in many countries. Perceived self-interest is not resulting in building new multilateral institutions. Regional and bilateral agreements are much in vogue. These more limited arrangements are more in keeping with the temper of these times. These arrangements alter the appearance of the basic global trade architecture. All rest on the foundation of the multilateral system. They connect various national nodes but are, I believe, transitory. Like the Victorian additions of porticos to Greek revival buildings, I believe that a future generation will sweep them away, in the interests of purity of design and improved functionality.
In the near future, it is more likely than not that the forces of global disintegration (not meaning collapse, but an emphasis on regional and bilateral arrangements, and unilateral measures) will be greater than those of global integration. There will likely be hard economic times ahead, especially as automation due to artificial intelligence causes disruptions. This is not a context in which trade liberalization is likely to be a dominant policy. But the long-term trend line, extending from British mid-19th century policy to the present and into the future, is and will be toward global openness. Just as the Enlightenment did not govern all succeeding human activity that followed but has ultimately been the driving intellectual force of human progress, the multilateral approach will ultimately prevail. That time, come what may in the intervening years, will arrive. This is what my remarks today are about.
This does not mean that we cannot here and now address the question the sponsors of this conference have chosen and examine what the future holds for the international trade architecture. To do this, I propose that we try it is best to visualize what the world trading system will be in the year 2050. Once that vision is defined, we can think about what, if any, changes will be necessary in the existing institutional structures on the way. Although the pace of technological and other changes is continuing to accelerate, in the field of trade we can be reasonably sure about some of the basic conditions that will shape trade three decades from now:
Rules of origin in trade arrangements: Largely unnecessary, simply protectionist (Vox)
Rules of origin exist to avoid trade deflection, but they distort global value chains and are costly to abide by. This column shows empirically that in preferential trade agreements, trade deflection is unlikely to be profitable because tariffs are generally low, that countries in a common free trade agreement tend to have similar external tariff levels, and that when tariff levels differ, deflection is profitable at most for one country in the pair. Moreover, transportation costs create a natural counterforce. It appears that rules of origin are primarily used to limit trade, and hence represent an instrument for trade protection. [The authors: Gabriel Felbermayr, Feodora Teti, Erdal Yalcin]
The Ministry of Trade, the Ministry of Economy and Planning and UNCTAD discussed reforms to boost FDI for economic diversification during the presentation of the Investment Policy Review. The national workshop was organized in the context of the presentation of UNCTAD’s Investment Policy Review of Angola. After reaching significant volumes in the years following the end of the civil conflict, FDI inflows have been low in recent years, volatile and concentrated in the extractive sector. A more diversified FDI portfolio and the targeting of the FDI projects better aligned with Angola’s needs could go a long way in supporting the achievement of the national development objectives. The Government has put in place an ambitious programme to reform the business and investment environment. The IPR identified remaining gaps and bottlenecks, including the complex system for FDI entry and establishment, burdensome operational regulations, the persistence of restrictive business practices and a lack of institutional capacity and coordination. These gaps and bottlenecks affect the country’s ability to fully take advantage of its strategic location, abundant natural resources and preferential access to external markets. The IPR also devoted special attention to investment in agribusiness and its contribution to sustainable development.
Sierra Leone’s economic growth in the past two years point to its resilience in the face of significant shocks. Real GDP growth that had peaked in 2013 was disrupted and contracted by 20.5% in 2015 mainly due to the twin-shocks: decline in international iron-ore prices starting in late 2013; and the outbreak of Ebola Virus Disease in 2014. The country was declared Ebola free on March 17, 2016, prompting economic activity to start normalizing gradually towards its pre-crisis level. The recovery started earlier in the primary sector that showed some signs of resilience followed by the service sector which benefited from fewer restrictions on mobility. The external sector is weighed down by low commodity prices and the scaling down of Ebola-related aid. The current account deficit is estimated to have widened to 19.9 % in 2016, up from 17.5 % in 2015. The decline in current transfers, including Ebola related foreign aid, offset the gains from restarted iron ore exports, and lower factor income payments in the mining sector. The resumption of iron ore exports to China is expected to boost foreign exchange earnings, though persisting low world prices could keep the value of shipments below 2013 levels. The widening current account deficit will be financed mainly by increasing FDI inflows to agriculture and food processing sectors and portfolio investment to cover incurred losses in the mining sector. Remittances, which are becoming increasingly important, will also help in reducing the widening deficit.
A set of reports on the interface between commodity dependence, climate change, adaption options and trade policy issues
(i) Commodity prices plunge in August: World Bank’s Pink Sheet
Energy commodity prices plunged 6% in August, led by Australian coal prices (-9%), the World Bank’s Pink Sheet (pdf) reported. Crude oil and US natural gas prices each declined 6%. Non-energy prices dropped almost 4%, led by beverages and metals. Agricultural prices declined nearly 3%, with losses in beverages (-6.4%), food (-2.3%), and raw materials (-2.9%). Fertilizer prices declined nearly 2%, led by phosphate rock (-20%). Metals prices plunged 6%, led by iron ore (-22%); tin and zinc fell around 7%. Precious metals prices gained 6.5%, led by a 9% increase in silver.
(ii) Commodities and Development Report 2019: Commodity dependence, climate change and the Paris Agreement (UNCTAD)
Although commodity-dependent developing countries (CDDCs) have contributed only modestly to greenhouse gas emissions, they will be strongly affected by the implementation of the Paris Agreement. Moreover, for most of these countries, rising to the challenge of climate change will be difficult as they lack the financial and technical capacities to design and implement adaptation measures, which highlights their need for assistance. While climate change and the implementation of the Paris Agreement pose many challenges to CDDCs, they also create localized opportunities in some countries. In particular, the global push towards renewable energy creates opportunities in countries with large reserves of materials used in clean technologies, such as solar photovoltaic cells, wind turbines and electric vehicle batteries. Extract (pdf):
CDDCs are a group of 88 developing countries where the commodity sector accounted for at least 60% of their total merchandise exports, on average and in value terms, over the period 2013–2017. Most CDDCs depend on one or more commodities within three major commodity groups: agriculture; forestry; minerals, ores and metals; and fossil fuel-based energy. The focus on these economies stems from their vulnerability to climate change. Most of them are also among the world’s poorest, with limited capacity to adapt to climate change. And because of their dependence on commodities, climate change mitigation and adaptation add to the challenges they already face. However, there is heterogeneity within the group of CDDCs
Mitigation and adaptation measures by other economies are likely to have negative implications for CDDCs, especially through the expected reduction in global demand for carbon-intensive commodities. Therefore, unless attenuating solutions are found, some CDDCs may be worse off economically with the implementation of the Paris Agreement. For example, China, the world’s largest importer of commodities, has pledged to increase the share of non-fossil fuels in its primary energy consumption. As a result, exporters of traditional energy products to China may lose an important share of their export markets. Angola, for instance, the largest African exporter of oil to China, might be hit hard following the implementation of China’s decarbonization policies: its oil exports to China alone accounted for 47% of total merchandise export revenues in 2017. Mongolia would also likely come under pressure, as its coal exports to China accounted for 20% of total merchandise export revenues in 2017. Other CDDCs could be similarly affected by other trading partners. For example, Algeria’s oil and natural gas exports to the European Union accounted for 56% of its total merchandise export revenues in 2017, while the Bolivarian Republic of Venezuela’s oil and natural gas exports to the United States accounted for 32% of its total merchandise export revenues.
Now more than ever before, CDDCs need to assess their diversification potential and depart from their high degree of dependence on one or a narrow range of commodities, which for decades has kept them exposed to the vagaries of international markets and climate change. Horizontal diversification – venturing into new export-oriented goods and sectors – may be pursued by some CDDCs. Others may pursue vertical diversification – moving up the commodity value chain – to enable them not only to increase the value of the goods they export, but also to produce goods that are less vulnerable to climate change (e.g. cocoa production is vulnerable to climate change, but chocolate is less so). This form of diversification will generate benefits such as better employment opportunities and higher incomes. An optimal diversification strategy is likely to combine both horizontal and vertical diversification. [Mitigating climate change in Asia-Pacific could give region an economic boost]
(iii) Global Commission on Adaptation: World must invest $1.8 trillion to take on climate change
The report puts forward a bold vision for how to transform key systems to be more resilient and productive. The Commission finds that adaptation can produce significant economic returns. The overall rate of return on investments in improved resilience is high, with benefit-cost ratios ranging from 2:1 to 10:1, and in some cases even higher. Specifically, the analysis finds that investing $1.8 trillion globally in five areas from 2020 to 2030 could generate $7.1 trillion in total net benefits. The five areas the report considers are early warning systems, climate-resilient infrastructure, improved dryland agriculture, mangrove protection, and investments in making water resources more resilient. These areas represent only a portion of the total investments needed and total benefits available.
(iv) UN Trade Forum: No exit plan for small islands on climate crisis frontlines (UNCTAD)
The situation is a matter of survival. “For a long time, we’ve been talking about climate change mitigation and resilience. We’re now at a point where we’re talking about survival,” UNCTAD Secretary-General, Mukhisa Kituyi, told the over 200 attendees gathered to discuss how trade can play a greater role as part of the climate solution. Part of this solution is to introduce trade more prominently into the climate discussion. But the role of trade, which does not feature the Paris Agreement, is still not central despite its impacts on carbon emissions and mitigation. “To face the climate crisis, we need all of us, all our tools and means. Trade cannot be a bystander,” said Pamela Coke-Hamilton, director of UNCTAD’s division on international trade and commodities. “The omnipresence of trade means that it cannot be left out of any climate policy. And it also means that sustainability cannot be an afterthought of trade policy but must be an inherent part of it,” she added.