The World Needs More Trade to Contain the Slowdown

The global economy is facing strong headwinds that have set back world trade and output growth. Despite the measures implemented in many countries to contain the slowdown, production and employment trends continue to be negative. In the light of these developments, the World Trade Organisation (WTO) recently revised its forecast for world trade growth in 2012 to 2.5 percent, down from the previous 3.7 percent forecast. We foresee a volume of trade growth of 4.5 percent in 2013, below the long-term annual average of five to six percent that we have enjoyed for the last 20 years.

Pascal Lamy. Credit: Couresy of WTO.

In times of hardship, governments are subject to protectionist pressures. But in the present economic situation, trade opening is not part of the problem. In fact, trade could be part of the solution for recovering economic growth, promoting competitiveness, and creating jobs. Although protectionist pressures still exist, the collective vigilance exercised by WTO members is an important asset to contain them.

Unfortunately, the WTO is not yet delivering in one crucial aspect and that is in its ability to update its rulebook in order to make it more responsive to current realities and to facilitate the way in which trade can promote development.

In November 2001 in Doha, Qatar, we launched multilateral trade negotiations under a broad agenda to modernise the WTO rules. More than 11 years later, this process remains deadlocked. The goal of achieving a Doha package encompassing all of its 20 topics among the WTOs 157 members remains elusive and will not be available in the short term.

Regrettable as it is, the present deadlock in the Doha Round does not mean that we cannot advance in smaller steps in some areas of trade negotiations.

For instance, WTO members are negotiating the expansion of the Information Technology Agreement, originally drafted in 1996 among 20 members and now encompassing 97 percent of trade in IT products. It has been a win-win deal and I am confident that we may see progress on this topic in the coming months.

Another obvious area that we could advance in is trade facilitation, the task of finding a more efficient and effective way to process trade, or in other words to reduce the thickness of borders. This area of policy has a profound impact on competitiveness. The longer a producer has to wait for a needed imported component, the less competitive it becomes.

At its core, trade facilitation is about making trade easier and less costly. In a world increasingly focused on value chains and trade in intermediate products, effective trade facilitation is not just a choice – it is an essential element for any country.

The evidence is clear. The Organisation for Economic Cooperation and Development (OECD) estimates that for its members, customs procedures, paperwork and border delays constitute roughly 10 percent of the value of any trade transaction. Globally, these costs are close to two trillion dollars. A WTO deal on trade facilitation to curtail fees and paperwork, create greater transparency and reduce obstacles to goods in transit would cut those transaction costs in half.

Trade today is unlike what it was a few decades ago. World growth has become more dependent on trade: as a share of gross global product, trade has risen from 38 percent in 1980 to around 55 percent now.

The evolution of technology and transportation has greatly reduced the costs and uncertainty of distance. The rapid growth of global value chains, the preponderance of new regulatory-based, non-tariff measures and the shift in trade patterns as South-South trade grows rapidly are all elements that have accelerated since the turn of this century and which, if current trends are maintained, will continue to expand in the years ahead.

China has become the worlds second-largest economic power and the biggest exporter of goods. Many other trading powers have emerged Brazil, India, Mexico and Malaysia are all now at the table of the top 25 leading exporters, and all posted export growth of 15 percent or better in 2011. Developing countries share of trade is 47 percent today compared with a global share of around one-third in 2008.

The nature of trade has also changed. High-tech products used to be made in the U.S., Japan or Germany. Today, they are made in the world, with components and parts fabricated in many countries. The country where the final assembly takes place may contribute only a small fraction of the final value of the product. Currently, roughly 60 percent of the volume of world merchandise trade is trade in components. In Asia, the figure is closer to two-thirds. The import content of the average export is 40 percent, up from 20 percent two decades ago, and will keep growing in the future as multi-location supply chains keep extending.

These value chains have not only changed the way companies trade, they are also changing the nature of the trade debate. When products were made in a single country, the argument that exports were good and imports bad was more easily defended. This mercantilist approach was, for centuries, a driving force behind trade policy.

Value chains have turned all of this on its head. Companies that wish to be competitive in the global marketplace need access to the best possible inputs goods and services at the lowest possible prices.

To hinder companies seeking such imports is to render them less competitive globally. It is self-defeating. This factor, together with strict monitoring by the WTO, may explain why countries have by and large avoided taking massive trade-restrictive measures during the crisis.

(END/COPYRIGHT IPS)