Creating a Better Global Trade System
IMF News, May 14, 2018
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- Authors: Christine Lagarde
- Published: May 14, 2018
Introduction: A New Era of Trade
- Global trade compared to bridges across the Willamette River: some old, some new, some creaking, but all connecting communities and encouraging the flow of products, capital, and ideas.
- Building economic bridges between countries has helped reduce by half the proportion of the global population living in extreme poverty (From 1990-2010. World Bank figures: World Development Indicators).
- Trade reduced the cost of living and created hundreds of millions of new jobs with higher wages.
- In the United States, one in five jobs today is supported by international trade in goods and services (Estimates by Business Roundtable).
- The stakes are high—e.g., in Oregon one in five jobs is supported by trade (Estimates by Business Roundtable).
- The rebound in trade has contributed to stronger global economic growth; rising protectionism could halt this momentum.
- The IMF’s mandate includes to “facilitate the expansion and balanced growth of international trade,” and the IMF is deeply engaged in promoting international cooperation and dialogue on trade.
The New Era
- Shift in modes of trade:
- Between 1986-2008, global trade in goods and services grew at more than twice the rate of the global economy; in recent years growth in this more traditional type of trade has barely exceeded global GDP growth.
- Digital flows have been booming: according to Cisco, the amount of cross-border bandwidth used grew 90-fold between 2005 and 2016, and is expected to grow an additional 13-fold by 2023.
- Importance of data:
- Data flows are becoming more important than physical trade.
- Digitalization makes services more tradable—examples include engineering, communications, transportation.
- McKinsey estimates companies can cut losses on goods in transit by about a third with tracking sensors on shipments.
- The future of trade is the future of data; policymakers can build new economic bridges to create a better global trade system.
- Two issues to address:
- What are the key building blocks of better trade?
- How can we adapt and improve the multilateral trade system?
1. Key Building Blocks of Better Trade
- High-level objective: trade needs to be more productive, more services-based, and more inclusive so everyone can benefit.
a) More Trade in Services
- Services trade has been growing relatively fast and now accounts for one-fifth of global exports.
- According to some estimates, half of the global trade in services is already driven by digital technology.
- Trade barriers in services remain extremely high—equivalent to tariffs of some 30 to 50 percent (Fontagné and others, “Estimations of Tariff Equivalents for the Services Sectors,” Paper, CEPII, December 2011).
- Reducing barriers and increasing digitalization could make services the main driver of global trade.
- Main beneficiaries:
- U.S. and other advanced economies, globally competitive in many service sectors (financial, legal, consulting).
- Developing economies such as Colombia, Ghana, and the Philippines, promoting growth in tradable services (communications and business services).
- Services trade can unlock the potential of “mini-multinationals”—millions of small businesses and individuals using digital tools to expand globally (examples: a Portland-based doctor remotely monitoring a patient in Panama City; a piano teacher in Moscow using Skype to teach students in Montreal).
- “The Wealth of Nations in the 21st-century could be built on trade in services.”
b) Higher Productivity
- Digitalization can boost productivity and living standards by making services more tradeable.
- Increasing automation and technologies (e.g., 3-D printing) can prompt repatriation of some operations, shorten supply chains, increase productivity, and reduce carbon intensity.
- Potential to rejuvenate manufacturing in advanced economies with more domestically-based factories and higher-paying jobs.
- Digitalization intensifies competition, accelerating diffusion of technology and innovation (2018 April World Economic Outlook, Chapter 4).
- Example of long-term gains: comparison of a 1971 Sears-Roebuck catalogue with modern items (after adjusting for inflation, products are significantly cheaper today—an air conditioner more than 80 percent cheaper than its 1971 counterpart).
c) Greater Inclusiveness
- U.S. manufacturing share of GDP (adjusted for inflation) has been fairly constant since the 1940s, but its share of employment has significantly declined—largely due to technological change and, to a lesser extent, overseas competition.
- The digital revolution in trade will put pressure on workers less well-equipped to compete across advanced, emerging, and developing economies.
- Policy options for governments:
- Offer temporary income assistance while workers upgrade skills (example: scope in the U.S. to combine unemployment insurance with other tools).
- Increase mobility through relocation assistance and portable pension benefits.
- Expand and improve worker training programs; on-the-job training has proven more effective than classroom learning in experiences in Canada and Sweden.
- Reinvent education systems for the digital age: foster critical thinking, independent problem-solving, and life-long learning; invest in human capital.
- IMF role:
- At the global level: analyze exchange rates and monitor global economic imbalances.
- At the country level: work with all 189 members on policies to remove trade and investment barriers—encouraging more open economies where the private sector can thrive and create jobs.
- Help members gear up for the new era of trade.
2. Adapting the Multilateral Trade System
- The multilateral system built over the past 70 years created rules and shared responsibility that transformed the world and helped lift hundreds of millions out of poverty over the past three decades.
- Governments have an opportunity to adapt the system for the new era of trade while sticking to basic principles: steer clear of protectionism, eliminate unfair trade practices, level the playing field, and trade by the rules (WTO rules agreed by all 164 members).
- Be open to fresh ideas:
- Recent expanded WTO agreements include government procurement, information technology, and trade facilitation.
- Major issues not squarely covered by current WTO rules: various state subsidies, restrictions on data flows, protection of intellectual property.
- “Plurilateral” trade agreements among like-minded countries within the WTO framework can help address these issues.
- Room to negotiate new WTO agreements on e-commerce and digital services.
- Example: TPP-11 (the comprehensive and progressive Trans-Pacific Partnership) will, for the first time in a broader trade agreement, guarantee the free flow of data across borders for service suppliers and investors.
- Principles for new 21st-century trade deals:
- Facilitate data flows while protecting data privacy.
- Promote cybersecurity.
- Ensure financial regulators can access data as needed without stifling innovation.
- Take account of labor and environmental concerns.
- Multilateral setting advantages: rules respected, countries work in partnership, accountability, and efficient dispute settlement.
Conclusion
- Quoting Montesquieu: “Trade is the best cure for prejudice... L’effet naturel du commerce est de porter à la paix.”
- Building new economic bridges, shaping a new era of trade, and removing barriers can foster more prosperous and more peaceful communities—locally and globally.
- Closing: “Thank you.”
By Christine Lagarde, IMF Managing Director, WorldOregon, Portland, May 14, 2018.