World Trade Can Still Drive Prosperity
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Bibliographic details
- Authors: KRISTALINA GEORGIEVA, NGOZI OKONJO-IWEALA
- Published: June 1, 2023
Main thesis
- Despite recent pressures toward deglobalization, trade continues to be a powerful driver of global prosperity and stability.
- The international architecture must adapt to a fast-changing world to preserve and expand the benefits of trade.
Historical impact and recent trends
- On balance, the post–World War II record has been impressive:
- fewer than 1 in 10 of the world’s people are poor, a fourfold reduction since 1990.
- low- and middle-income countries have doubled their share of global trade.
- international trade increased twentyfold since 1960.
- Recent reversals and policy shifts:
- Trade restrictions and subsidies increased after the global financial crisis.
- Pandemic and Russia’s war in Ukraine prompted policies to secure strategic supply chains and trade-distorting measures.
- Foreign direct investment is increasingly concentrated among geopolitically aligned countries.
Why trade remains crucial (three reasons)
- Trade increases productivity by expanding the international division of labor.
- Trade enables export-led economic growth by providing access to foreign markets.
- Trade bolsters economic security by giving firms and households outside options when negative shocks hit.
Evidence of resilience and recent examples
- During the pandemic, trade and supply chains were vital for medical supplies and vaccine distribution.
- During the war in Ukraine, deep and diversified international markets for grain allowed importer economies to replace lost supplies:
- Ethiopia lost all its wheat imports from Ukraine but now sources 20 percent of its wheat shipments from Argentina—a country from which it had not imported any wheat before.
Costs of fragmentation
- WTO research: a scenario in which the world divides into two separate trading blocs could lead to a 5 percent drop in global GDP.
- IMF estimate: global losses from trade fragmentation could range from 0.2 to 7 percent of GDP.
- Costs may be higher when accounting for technological decoupling.
- Emerging market economies and low-income countries would be most at risk due to loss of knowledge transfer.
Forward-looking trade agenda and opportunities
- Trade of the future is envisioned to be inclusive, green, and increasingly digitally and services driven.
- Re-globalization (bringing more countries into production networks) can improve supply resilience, growth, and development.
- Trade is essential to address the climate crisis and to achieve net zero greenhouse gas emissions by enabling global diffusion of low-carbon technology and services.
- Example on solar:
- The price of solar power has fallen by almost 90 percent since 2010.
- Forty percent of this decline has come from scale economies made possible partly by trade and cross-border value chains (WTO estimate).
Digital trade and services
- Even as goods trade stalls, trade in services continues to expand rapidly.
- Global exports of digital services such as consulting delivered by video calls reached $3.8 trillion in 2022, or 54 percent of total services exports.
- A group of nearly 90 WTO members, including China, the EU, and the US, are negotiating basic rules on digital trade to make trade more predictable and reduce compliance costs, especially for the smallest businesses.
Policy prescriptions and cooperation
- Domestic policies to expand the benefits of trade:
- Well-designed social safety nets.
- Greater investment in training.
- Policies in credit, housing, and infrastructure that facilitate worker mobility across industries, occupations, and companies.
- Multilateral cooperation and common standards can:
- Speed the green transition while preventing market fragmentation and minimizing negative policy spillovers.
- Bring more small and women-owned businesses into global production networks.
- Recent multilateral successes to build on:
- Agreements by all WTO members on curbing harmful fisheries subsidies, removing barriers to food aid, and enhancing access to intellectual property behind COVID vaccines (June prior to February 2024 ministerial).
- The WTO’s next ministerial meeting is scheduled for February 2024.
- Data, analysis, and common perspectives on policy design can help defuse tensions in sensitive areas such as subsidies.
Role of international institutions
- The IMF has a mandate to support the balanced growth of international trade.
- The WTO remains the only forum that brings all economies together to advance trade reform.
- The IMF, WTO, and other leading international institutions have a critical role in strengthening the multilateral trading system and adapting to a fast-changing world.
KRISTALINA GEORGIEVA is the Managing Director of the International Monetary Fund (IMF). NGOZI OKONJO-IWEALA is director-general of the World Trade Organization.
Content in this bundle
- World Trade Can Still Drive Prosperity
- 041017joint-wto-wb-imf-trade-paper
- sdnea2023001 — Geoeconomic Fragmentation and the Future of Multilateralism