"Reinvigorate Trade to Boost Global Economic Growth," By Christine Lagarde, Managing Director, IMF
April 23, 2015By Christine Lagarde, Managing Director, IMF
Address at the U.S. Ex-Im Bank Conference
Washington, DC, April 23, 2015
As Prepared for Delivery
Good afternoon. I would like to thank Susan Axelrod for her kind introduction, and thank you to the U.S. Ex-Im Bank for giving me the opportunity to speak about the importance of expanding global trade – especially at this point in time.
Let me start by saying something that often gets lost in the nitty-gritty of trade discussions. If you care about growth and innovation; if you care about jobs and the real incomes of the middle-class; if you care about poverty reduction and greater economic fairness; if you do care about all these things, you need to be serious about fostering global trade.
The IMF cares deeply about these issues and has been committed to the idea of open trade that is – ideally – underpinned by multilateral agreements and institutions. More than 70 years ago, the founding fathers of the IMF created an institution that was designed to prevent a return to the self-defeating economic policies of the Great Depression – including trade protectionism and competitive currency devaluations.
Let me quote Article 1 of the IMF’s Articles of Agreement: “The purpose of the IMF is to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income.”
Fast-forward to the global financial crisis of 2008, which marked the latest turning point in global trade. When that crisis struck, trade protectionism became the dog that did not bark. Contrary to some expectations, the world did not see a rampant rise in old-style trade barriers. And trade volumes rebounded after a sharp initial drop. This was a reflection of the unprecedented level of international cooperation that prevented a global economic meltdown.
But the financial crisis has helped put a damper on growth in global trade. 2015 is likely to mark the fourth consecutive year of below-average trade growth, with at least one more year of disappointing growth to come, according to the latest WTO predictions.
In other words, one of the engines of global economic growth has slowed down, because of cyclical forces but also because of structural factors. This trend must be reversed.
Reinvigorating trade is not just a “nice-to-have”. It is an “essential-to-have” – to help prevent what I have called the “new mediocre” of low growth over a long period. This is why the international community, including the G-20, is pushing for trade reforms as part of a comprehensive policy package to lift growth and employment.
With this in mind, I would like to touch on three issues:
- Why do we need a better trade engine?
- How can we shift global trade into a higher gear?
- Which trade policies should economies pursue?
1. Why do we need a more powerful trade engine?
Let me start by briefly outlining the case for a better trade engine. This audience knows it well, but sometimes we get so involved in the details that the big picture gets lost. Trade is good for growth. How?
a. Reforms – including new trade agreements – encourage countries to further specialize in the goods and services in which they have a comparative advantage. By using their existing resources more efficiently, they can help lift world production and consumption.
In other words: specialize in what you do best, trade for the rest. The classic gains from this strategy include lower prices for consumers and companies – and therefore higher real incomes – and a greater variety of goods and services available for purchase.
b. Trade reforms can also have a powerful indirect effect on growth by igniting and amplifying other structural reforms. For example:
- Trade reforms can increase external competition in product and services markets.
- They can encourage key infrastructure investments – think of new ports and new roads.
- They can spur innovation through R&D and “learning by exporting”.
- And they can strengthen institutions by encouraging better governance and a better business environment.
c. All this would help policymakers to reverse the decline in productivity growth in advanced economies and boost productivity in emerging and developing economies. Recent IMF research shows that lower productivity is a key driver of declining potential growth rates in advanced economies and – perhaps even more so – in emerging market economies.
What this means is that we have reduced our estimate of the speed limit at which economies can currently drive. In advanced economies, for example, potential annual growth fell to 1.5 percent in the past two years, down from 2.2 percent in 2001-07. Reversing this trend is essential to lift global growth over the medium term.
d. In summary, open trade is an important contributor to job creation. As you, Fred [Hochberg] said yourself, “millions of American workers have jobs that depend on trade”. In 2014, for example, exports of goods and services directly and indirectly supported an estimated 11.7 million U.S. jobs. And by encouraging greater specialization, trade fosters industries that are more competitive and, therefore, more sustainable.
And let’s not forget the impact of trade on global poverty reduction. Hundreds of millions of people have been lifted out of poverty over the past three decades.
2. How can you shift global trade into a higher gear?
So, I think there is a compelling case for a better trade engine. But how can policymakers shift global trade into a higher gear – my second point.
For at least three decades before the 2008 financial crisis, global trade regularly grew at twice the rate of the global economy. It is now expanding at – or below – the rate of the global economy. This slowdown is largely because of two structural changes in global trade.
a. One is the maturing of existing global value chains – in North America, Europe, and Southeast Asia – while new value chains are not being formed.
To reverse this trend, policymakers need to unlock the trade potential of other regions. South America, South Asia, Sub-Saharan Africa, and the Middle East and North Africa: these are the regions that would greatly benefit from being better integrated into global value chains. It would be good for them and good for the world.
b. The second factor holding back trade growth is the slowdown in trade liberalization in recent years. For example, multilateral negotiations have stalled, and regional trade initiatives have not matched the transformative effect of, say, the North American Free Trade Agreement.
This is why policymakers need to press ahead with negotiations on the Trans-Pacific Partnership, the TPP, as well as on its transatlantic cousin, the TTIP.
Research by the Peterson Institute finds that the TPP could boost world income by $295 billion per year over the next decade. It also finds that the TTP would raise U.S. incomes by 0.4 percent, or $77 billion, per year. The U.S. could gain a comparable amount from TTIP, according to estimates by the European Union.
We all know there are considerable discussions over the models that are being used to generate these hard numbers. But I think we get the point:
- Recent developments in the U.S. Senate suggest that these important trade deals can be areas of cooperation between the Congress and the President.
- On the other side of the Atlantic, progress on trade would be immensely helpful in lifting growth and confidence in the European Union.
- The Japanese government is also keen to use the TPP to inject greater competition into its low-growth economy.
- And emerging and developing economies would benefit from better integration into the global economy.
So, on all sides, there are good incentives to cut deals. Political leadership is now needed to push these deals over the finish line.
c. The same goes for the WTO deal struck in Bali at the end of 2013. This agreement, if fully implemented, would cut trade costs and deliver an economic boost of US$1 trillion annually. The Bali deal is particularly important for developing economies because of its focus on trade facilitation, which involves reducing red tape and streamlining customs.
Let me be clear: there are signs of progress on trade. But the global community can – and should – be much more ambitious.
3. Which trade policies should economies pursue?
Which brings me to my third point – what are the trade policies that economies should pursue?
The IMF has recently reviewed its own policy advice to make sure that trade remains an essential element of our operational work. This includes our technical assistance and our annual assessments of our members’ economies.
Of course, policy advice has to be country-specific. But let me give you our view on three broad categories:
First, most advanced economies will be largely focusing on the “21st century trade issues” such as opening services markets and making regulatory systems more coherent. The TPP is a good example because it seeks to address crucial issues such as intellectual property protection and treatment of state-owned enterprises.
Second, many emerging market economies, especially in South Asia and Latin America, can still benefit greatly from integrating into the global economy through traditional trade liberalization. This may include unilateral efforts to open up trade and encourage foreign direct investment, especially in infrastructure. In Asia, in this decade alone, overall national infrastructure investment needs are estimated to be $8 trillion.
Third, for developing economies, trade and integration into global value chains should be a central plank of their development and growth strategies. Again, trade facilitation will be key. The IMF stands ready to support this transition to a less protected environment. Think of the fiscal implications of lower tariffs and the challenges of sequencing reforms. On all this, the Fund can provide hands-on advice and training.
Let me conclude by quoting one of the sharpest thinkers of his generation. Two hundred years ago, the French philosopher Montesquieu said – and I will give you the French version first:
“Le commerce guérit des préjugés destructeurs: & c’est presque une règle générale que, partout où il y a des mœurs douces, il y a du commerce; & que, partout où il y a du commerce, il y a des mœurs douces.”
“Trade is the best cure for prejudice. It is an almost general rule that, wherever there is good citizenship, there is trade, and that, wherever there is trade, there is good citizenship.”
The most destructive economic prejudice is trade protectionism. Policymakers must remain vigilant about the old-style, in-your-face protectionism and about the new protectionism that is based on non-tariff measures.
Smart efforts to reduce and dismantle these barriers should be strongly supported. This is why the IMF welcomes preferential trade deals such as the TTP – which we believe should eventually be open to other countries that meet its requirements.
The key question is how to make preferential deals more coherent with multilateral efforts. How can we achieve eventual multilateralization – preferably in the context of the World Trade Organization? How can we avoid trade fragmentation – the “spaghetti bowl” of competing regimes and preferences?
I strongly believe that global deals deliver far more than any other approach. Rather than simply bolstering existing trade connections, multilateral deals allow new trading relationships to be formed. They are a global solution to a global challenge.
The last major global trade agreement is now 20 years old. The world can do better than that. As I said at the beginning, if you care about growth, you need to be serious about global trade. It is now time to get serious about trade.