## _072216

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---

### Overview and urgency
- Reinvigorating trade integration should be a key component of the global policy agenda to boost growth.
- A long interregnum without a path forward risks fragmenting the global trade system and undermining its governance.
- Tackling trade policy issues important to the global economy may require flexible approaches to multilateral negotiations, including modalities such as plurilaterals.
- Enhanced coherence efforts are needed to ensure that regional trade agreements and multilateralism coexist productively.

### Context and macroeconomic implications
- Six years after the world economy emerged from a deep recession, a return to broad-based, robust global economic growth remains elusive.
- The long-term slowdown in trade has coincided with weaker productivity growth and is an important factor behind disappointing economic performance.
- Trade volumes growth history:
  - Grew at some 7 percent annually during the 1990s.
  - Ratio of trade growth to GDP growth fell to 1.5 during 2001-07.
  - Ratio of trade growth to GDP growth fell to unity since 2008.
- Major trade-policy milestones that strengthened the global trade policy landscape: EU expansions, conclusion of the Uruguay Round (1994) and creation of the WTO, and China’s WTO accession (2001).
- Pace of new trade policy initiatives at the global level has slowed notably since 2001; new trade restrictions since the global financial crisis have begun to weigh on global trade.

### Regional trade agreements (RTAs) and risks
- RTAs that open trade and advance policy cooperation can be helpful when multilateral progress is slow, but:
  - Narrow country coverage and discriminatory application of tariff reductions limit benefits.
  - Proliferation of RTAs risks diverging rules and a two-pole system: traditional trade matters in the MTS, frontier matters negotiated bilaterally/regionally with potential incoherence.

### Recent multilateral and alternative advances (examples)
- Multilateral agreement:
  - Trade Facilitation Agreement (2013) — enhances customs practices; binding on all WTO members; allows multi-speed implementation by developing countries; provides for implementation assistance; takes effect when two-thirds of members complete approval processes.
- Plurilateral agreement:
  - revised Agreement on Government Procurement (GPA) — took effect in 2014; opened procurement markets of its 45 members to suppliers from other GPA parties, but not necessarily to all WTO members.
- Critical mass agreement:
  - expanded Information Technology Agreement (2015) — 53 participants (accounting for 90 percent of world trade in the covered products) commit to eliminate all tariffs on a further 201 products; did not move to a ‘negative list’ agreement.
- Ministerial decision:
  - Members agreed to eliminate farm export subsidies (2015).

### New frontier areas with high potential
- These areas can bolster efficiency, productivity, investment, technology transfer, and integration into GVCs.
- Key focus areas include:
  - Reduction of trade costs associated with NTBs, including regulatory cooperation.
  - Exploiting complementarities between investment and trade, including common minimum standards for protecting physical and intellectual investment.
  - Promoting competition practices, including a commercial orientation in government activities (SOE, procurement).
  - Addressing services, new production modalities, and digital trade.

### A. Lowering trade costs: regulatory cooperation
- Regulatory diversity creates large trade frictions; negotiators are beginning to include regulatory cooperation in trade agreements.
- Scope to improve provisions and bring them into the multilateral system on a multilateral or plurilateral basis.
- Regulatory cooperation is often non-reciprocal and difficult because it involves multiple domestic agencies, procedures rooted in domestic legal systems, and legitimate differences in domestic policy priorities.
- Global priorities could include:
  - (i) strengthened transparency of national regulatory mechanisms,
  - (ii) involving affected parties early in the regulatory process and using that input to fine-tune regulation,
  - (iii) encouraging countries to use international standards and justify deviations from them,
  - (iv) building capacity among LIDCs to meet standards in their potential export markets and to participate in standard-setting.

### B. Complementarities between investment and trade
- Sales by FDI affiliates are roughly equal to recorded exports of goods and services, indicating the importance of FDI in international commerce.
- With the rise of GVCs, trade and investment decisions are increasingly complements, rather than substitutes.
- Policy barriers obstruct much FDI and governance is fragmented with over 3000 bilateral investment treaties (BITs) and other international investment agreements without a common template.
- GATS has important, if incomplete, obligations pertaining to some investments in services.
- A universal approach to international investment could:
  - Establish core standards for investor protection,
  - Provide for non-discriminatory treatment of established foreign investments,
  - Establish a framework under which governments can commit to opening to new investments.
- The WTO’s dispute settlement and institutional features could provide a strong foundation for such an agreement.

### C. Unleashing services, new production modalities and digital trade
- Services comprise some two thirds of global GDP and employment, and a quarter of global trade (nearly half of global trade measured on a value-added basis).
- Policy barriers to services trade remain large; reforms have tremendous potential to promote global trade and growth.
- Low attention to services in the Doha Round encouraged negotiations outside the MTS, including ongoing work by 52 countries (accounting for 70 percent of world trade) toward a Trade in Services Agreement (TiSA).
- Recommended government agenda elements:
  - Deepen and expand specific commitments under the WTO General Agreement on Trade in Services (GATS), including by transitioning to a “negative list” approach.
  - Address gaps between GATS commitments and actual policy with standstill and “roll back” provisions.
  - Clarify the application of existing GATS commitments to cross-border data flows; develop provisions to discourage local data storage requirements while recognizing legitimate public interests such as privacy and financial regulation.
  - Raise de minimis customs levels (below which import duties are waived), facilitating cross-border flows of small packages often supplied by internet-enabled retailers.
  - Strengthen cooperation in managing the entry and stay of natural persons for the purpose of supplying a service (Low, 2016).
- Some elements may at first be more conducive to “best endeavors” than binding “hard” law.

### D. Challenges and opportunities: development and climate interfaces
- Lowering barriers for low income developing countries (LIDCs):
  - Fragmentation of production offers major opportunities for LIDCs but they require stable macroeconomic policies and a strong business environment, including access to inputs and trade-related services at competitive prices.
  - Other countries can help by promoting a rules-based, open, and equitable MTS and through targeted capacity building.
  - Actions that can help LIDCs:
    - Bring into effect the Trade Facilitation Agreement and follow through on commitments to assist the poorer countries as they implement its commitments.
    - Further open markets for goods and services of particular interest to LIDCs.
    - In trade preference schemes for poor countries, promote trade among beneficiary countries by extending the rules of origin “cumulation” provisions, allowing poor countries to use more imported inputs while remaining preference eligible.
    - As in the TFA, link LIDC implementation of future WTO agreements to capacity and create mechanisms for other countries to provide related capacity building.
- Trade/Climate interface:
  - WTO rule ambiguities relevant to climate policies (e.g., allocation of emissions trading permits, border tax adjustments) create legal uncertainty and operational challenges.
  - Uncertainty may discourage legitimate climate policies and risk protectionist measures disguised as climate policy.
  - Trade rules may promote well-designed climate mitigation policy; one suggestion is requiring notification to the WTO of fossil fuel subsidies, coupled with provisions to discipline and progressively reduce the subsidies (Bacchus, 2016), paralleling aspects of WTO agricultural subsidies approaches.

### Flexible negotiating architecture for the multilateral system
- Path forward must heed lessons from nearly 15 years of Doha negotiations and recognize a more complex trade policy landscape.
- The WTO’s institutional and legal framework and near-global membership carry unique benefits that RTAs cannot replicate.
- Alternatives to large-scale “single undertaking” endeavors may be worthwhile; WTO was envisaged as facilitating a constant flow of agreements of all kinds.
- Negotiating formats can vary by:
  - Participation (universal or subset),
  - Whether benefits extend to non-participating WTO members,
  - Degree of commitment (legally binding and enforceable or not).
- Examples of format evolution: Tokyo Round customs valuation agreement initially accepted by part of membership later accepted by all upon Uruguay Round conclusion.
- Important that agreements attract a broad range of members, including different income levels, even if not all WTO members initially participate.

### Plurilateral agreements: advantages and obstacles
- Plurilateral agreements (PAs) reached inside the WTO by a subset of members can be superior to FTAs outside the WTO: more transparent, legally and institutionally linked to the WTO, clear path for expanded membership and possible evolution to full multilateral agreements.
- Depending on topic and whether benefits are limited to participants, initial approval of a PA may require consensus of all WTO members.
- The consensus requirement can ensure a proposed PA is beneficial to the overall trading system, but non-participants could misuse the requirement to seek leverage on unrelated topics.
- Outsiders’ support may be achieved through clear ex-ante rules for subsequent accession and by ensuring protection of small and poor countries’ interests.
- There is a risk that the consensus requirement is misused to obstruct progress; a change or new rules governing consensus use may ultimately be necessary.
- Ongoing TiSA negotiations would be a prime opportunity to demonstrate how such negotiations and agreements could be brought into the WTO.

### Ensuring coherence in a complex trade policy world
- A protracted lack of a path forward would risk continued proliferation of RTAs, fragmenting the global trade system and undermining governance.
- Bringing past trade deals inside the WTO would increase transparency and coherence and underpin the WTO’s central role.
- Strengthening the global trading system is important to global prosperity; regional agreements can bring benefits and help expand trade policy frontiers, but are not enough on their own.
- Governments should avoid a protracted interregnum at the WTO and move quickly to establish a way forward for the multilateral negotiating agenda, resolving longstanding issues and addressing new issues important to the global economy.
- Coexistence of RTAs and multilateralism requires active efforts to maintain coherence given RTAs’ rapid growth and limited multilateral achievements.

*Prepared by the Staff of the International Monetary Fund. Does not necessarily reflect the views of the IMF Executive Board.*

### Section 1

### REINVIGORATING TRADE TO SUPPORT GROWTH: A PATH FORWARD

### Overview and urgency
- Reinvigorating trade integration should be a key component of the global policy agenda to boost growth.
- A long interregnum without a path forward risks fragmenting the global trade system and undermining its governance.
- Tackling trade policy issues important to the global economy may require flexible approaches to multilateral negotiations, including modalities such as plurilaterals.
- Enhanced coherence efforts are needed to ensure that regional trade agreements and multilateralism coexist productively.

### Context and macroeconomic implications
- Six years after the world economy emerged from a deep recession, a return to broad-based, robust global economic growth remains elusive.
- The long-term slowdown in trade has coincided with weaker productivity growth and is an important factor behind disappointing economic performance.
- Trade volumes growth history:
  - Grew at some 7 percent annually during the 1990s.
  - Ratio of trade growth to GDP growth fell to 1.5 during 2001-07.
  - Ratio of trade growth to GDP growth fell to unity since 2008.
- Major trade-policy milestones that strengthened the global trade policy landscape: EU expansions, conclusion of the Uruguay Round (1994) and creation of the WTO, and China’s WTO accession (2001).
- Pace of new trade policy initiatives at the global level has slowed notably since 2001; new trade restrictions since the global financial crisis have begun to weigh on global trade.

### Regional trade agreements (RTAs) and risks
- RTAs that open trade and advance policy cooperation can be helpful when multilateral progress is slow, but:
  - Narrow country coverage and discriminatory application of tariff reductions limit benefits.
  - Proliferation of RTAs risks diverging rules and a two-pole system: traditional trade matters in the MTS, frontier matters negotiated bilaterally/regionally with potential incoherence.

### Recent multilateral and alternative advances (examples)
- Multilateral agreement: Trade Facilitation Agreement (2013) — enhances customs practices; binding on all WTO members; allows multi-speed implementation by developing countries; provides for implementation assistance; takes effect when two-thirds of members complete approval processes.
- Plurilateral agreement: revised Agreement on Government Procurement (GPA) — took effect in 2014; opened procurement markets of its 45 members to suppliers from other GPA parties, but not necessarily to all WTO members.
- Critical mass agreement: expanded Information Technology Agreement (2015) — 53 participants (accounting for 90 percent of world trade in the covered products) commit to eliminate all tariffs on a further 201 products; did not move to a ‘negative list’ agreement.
- Ministerial decision: Members agreed to eliminate farm export subsidies (2015).

### New frontier areas with high potential
- These areas can bolster efficiency, productivity, investment, technology transfer, and integration into GVCs.
- Key focus areas include:
  - Reduction of trade costs associated with NTBs, including regulatory cooperation.
  - Exploiting complementarities between investment and trade, including common minimum standards for protecting physical and intellectual investment.
  - Promoting competition practices, including a commercial orientation in government activities (SOE, procurement).
  - Addressing services, new production modalities, and digital trade.

### A. Lowering trade costs: regulatory cooperation
- Regulatory diversity creates large trade frictions; negotiators are beginning to include regulatory cooperation in trade agreements.
- Scope to improve provisions and bring them into the multilateral system on a multilateral or plurilateral basis.
- Regulatory cooperation is often non-reciprocal and difficult because it involves multiple domestic agencies, procedures rooted in domestic legal systems, and legitimate differences in domestic policy priorities.
- Global priorities could include:
  - (i) strengthened transparency of national regulatory mechanisms,
  - (ii) involving affected parties early in the regulatory process and using that input to fine-tune regulation,
  - (iii) encouraging countries to use international standards and justify deviations from them,
  - (iv) building capacity among LIDCs to meet standards in their potential export markets and to participate in standard-setting.

### B. Complementarities between investment and trade
- Sales by FDI affiliates are roughly equal to recorded exports of goods and services, indicating the importance of FDI in international commerce.
- With the rise of GVCs, trade and investment decisions are increasingly complements, rather than substitutes.
- Policy barriers obstruct much FDI and governance is fragmented with over 3000 bilateral investment treaties (BITs) and other international investment agreements without a common template.
- GATS has important, if incomplete, obligations pertaining to some investments in services.
- A universal approach to international investment could:
  - Establish core standards for investor protection,
  - Provide for non-discriminatory treatment of established foreign investments,
  - Establish a framework under which governments can commit to opening to new investments.
- The WTO’s dispute settlement and institutional features could provide a strong foundation for such an agreement.

### C. Unleashing services, new production modalities and digital trade
- Services comprise some two thirds of global GDP and employment, and a quarter of global trade (nearly half of global trade measured on a value-added basis).
- Policy barriers to services trade remain large; reforms have tremendous potential to promote global trade and growth.
- Low attention to services in the Doha Round encouraged negotiations outside the MTS, including ongoing work by 52 countries (accounting for 70 percent of world trade) toward a Trade in Services Agreement (TiSA).
- Recommended government agenda elements:
  - Deepen and expand specific commitments under the WTO General Agreement on Trade in Services (GATS), including by transitioning to a “negative list” approach.
  - Address gaps between GATS commitments and actual policy with standstill and “roll back” provisions.
  - Clarify the application of existing GATS commitments to cross-border data flows; develop provisions to discourage local data storage requirements while recognizing legitimate public interests such as privacy and financial regulation.
  - Raise de minimis customs levels (below which import duties are waived), facilitating cross-border flows of small packages often supplied by internet-enabled retailers.
  - Strengthen cooperation in managing the entry and stay of natural persons for the purpose of supplying a service (Low, 2016).
- Some elements may at first be more conducive to “best endeavors” than binding “hard” law.

### D. Challenges and opportunities: development and climate interfaces
- Lowering barriers for low income developing countries (LIDCs):
  - Fragmentation of production offers major opportunities for LIDCs but they require stable macroeconomic policies and a strong business environment, including access to inputs and trade-related services at competitive prices.
  - Other countries can help by promoting a rules-based, open, and equitable MTS and through targeted capacity building.
  - Actions that can help LIDCs:
    - Bring into effect the Trade Facilitation Agreement and follow through on commitments to assist the poorer countries as they implement its commitments.
    - Further open markets for goods and services of particular interest to LIDCs.
    - In trade preference schemes for poor countries, promote trade among beneficiary countries by extending the rules of origin “cumulation” provisions, allowing poor countries to use more imported inputs while remaining preference eligible.
    - As in the TFA, link LIDC implementation of future WTO agreements to capacity and create mechanisms for other countries to provide related capacity building.
- Trade/Climate interface:
  - WTO rule ambiguities relevant to climate policies (e.g., allocation of emissions trading permits, border tax adjustments) create legal uncertainty and operational challenges.
  - Uncertainty may discourage legitimate climate policies and risk protectionist measures disguised as climate policy.
  - Trade rules may promote well-designed climate mitigation policy; one suggestion is requiring notification to the WTO of fossil fuel subsidies, coupled with provisions to discipline and progressively reduce the subsidies (Bacchus, 2016), paralleling aspects of WTO agricultural subsidies approaches.

### Flexible negotiating architecture for the multilateral system
- Path forward must heed lessons from nearly 15 years of Doha negotiations and recognize a more complex trade policy landscape.
- The WTO’s institutional and legal framework and near-global membership carry unique benefits that RTAs cannot replicate.
- Alternatives to large-scale “single undertaking” endeavors may be worthwhile; WTO was envisaged as facilitating a constant flow of agreements of all kinds.
- Negotiating formats can vary by:
  - Participation (universal or subset),
  - Whether benefits extend to non-participating WTO members,
  - Degree of commitment (legally binding and enforceable or not).
- Examples of format evolution: Tokyo Round customs valuation agreement initially accepted by part of membership later accepted by all upon Uruguay Round conclusion.
- Important that agreements attract a broad range of members, including different income levels, even if not all WTO members initially participate.

### Plurilateral agreements: advantages and obstacles
- Plurilateral agreements (PAs) reached inside the WTO by a subset of members can be superior to FTAs outside the WTO: more transparent, legally and institutionally linked to the WTO, clear path for expanded membership and possible evolution to full multilateral agreements.
- Depending on topic and whether benefits are limited to participants, initial approval of a PA may require consensus of all WTO members.
- The consensus requirement can ensure a proposed PA is beneficial to the overall trading system, but non-participants could misuse the requirement to seek leverage on unrelated topics.
- Outsiders’ support may be achieved through clear ex-ante rules for subsequent accession and by ensuring protection of small and poor countries’ interests.
- There is a risk that the consensus requirement is misused to obstruct progress; a change or new rules governing consensus use may ultimately be necessary.
- Ongoing TiSA negotiations would be a prime opportunity to demonstrate how such negotiations and agreements could be brought into the WTO.

### Ensuring coherence in a complex trade policy world
- A protracted lack of a path forward would risk continued proliferation of RTAs, fragmenting the global trade system and undermining governance.
- Bringing past trade deals inside the WTO would increase transparency and coherence and underpin the WTO’s central role.
- Strengthening the global trading system is important to global prosperity; regional agreements can bring benefits and help expand trade policy frontiers, but are not enough on their own.
- Governments should avoid a protracted interregnum at the WTO and move quickly to establish a way forward for the multilateral negotiating agenda, resolving longstanding issues and addressing new issues important to the global economy.
- Coexistence of RTAs and multilateralism requires active efforts to maintain coherence given RTAs’ rapid growth and limited multilateral achievements.

*Prepared by the Staff of the International Monetary Fund. Does not necessarily reflect the views of the IMF Executive Board.*

### Section 2

### _072216 - Section 2

### Selected references
- Mavroidis, 2015, “Embracing Diversity: Plurilateral Agreements and the Trading System,” World Trade Review 14 (1).
- Low, P., 2016, “Rethinking Services in a Changing World,” Policy Options Paper for the E15 Initiative.
- Mavroidis, P., 2016, “Regulatory Cooperation,” Policy Options Paper for the E15 Initiative.
- WTO, 2016, “Advancing the Multilateral Trading System: Issues for Further Consideration,” Discussion Paper for the G-20.

*Source: _072216 - Section 2; https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2016/_072216.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2016/_072216.pdf_