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IMF Annual Report 2019

Our Connected World
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Making The Case For Trade

The global trade engine has worked well; now it needs to be updated.

Illustration showing a map of the world with continents connected by lines to each other


Making The Case For Trade

The global trade engine has worked well; now it needs to be updated.

How the IMF Monitors the Global Economy

Behind The Scenes

Modernizing the international trade rules-based system

Did you know that when the WTO was established in 1994, e-commerce barely existed? Today, global business-to-business e-commerce sales amount to $23.9 trillion. Advancing negotiations in emerging areas where international rules have lagged is therefore imperative. These include e-commerce and investment facilitation, including by using flexible approaches such as “coalitions of the willing.” Progress in these areas would go far in demonstrating that the multilateral trading system can adapt and remain relevant. The announcement by a group of 76 countries in January 2019 to begin negotiations on e-commerce attests to the great promise of using new modalities.

Trade has been a huge driver of growth but lately has been questioned. The benefits of trade, which are often taken for granted, can come at a cost, which is often overlooked. At the same time, the system of global trade rules that has nurtured unprecedented economic growth across multiple generations is now facing tensions. These tensions are rooted in issues that have been left unresolved for too long. The IMF’s research has sought to shed light on these issues.

Building on earlier research that showed how trade can boost incomes and living standards by enabling the flow of technology across countries, the October 2018 World Economic Outlook (WEO) provided illustrative scenarios of the potential impact of escalating trade tensions between the United States and China. The analysis shows that the world as a whole would be worse off: global GDP losses would be 0.4 percent over the long term (equivalent to a $340 billion drop in 2018 dollars), rising to nearly 1 percent in the United States and 1.6 percent in China in 2019. A large part of that decline would come from the negative impact of tariffs on confidence (lower investment) and tighter financial conditions (higher spreads).

The April 2019 WEO further showed that bilateral trade balances—the difference in the value of exports and imports between two countries—are driven more by macroeconomic policies than by tariffs. These policies can take the form of overly stimulative fiscal policy, which would raise overall demand and increase a country’s trade deficit, or subsidies to state-owned enterprises, which would give them a competitive advantage vis-à-vis foreign firms and increase that country’s trade surplus. In addition, the report shows that bilateral tariffs are ineffective in addressing external imbalances—due to trade diversion. The report further argues that an open trade system is very important for sustaining investment and growth.

These findings are echoed in the 2018 External Sector Report. Global current account imbalances stood at about 3¼ of world GDP, of which 40–50 percent were deemed excessive and mostly concentrated in advanced economies. Left unresolved, a widening of these excess external imbalances could pose threats to global financial stability.

The system of trade rules established after World War II has delivered enormous benefits. Now it needs to be updated. As part of a larger discussion on trade, the Executive Board discussed ongoing staff analysis focused on modernizing World Trade Organization (WTO) negotiation, transparency, and dispute resolution functions. Updating WTO rules on industrial and agricultural subsidies provided by a range of entities, including state-owned enterprises, and on technology transfer are key elements toward a trade system that can work better for all countries

Figure 1.1
The costs of trade tensions

Escalating trade tensions would reduce world GDP, not only through the disruption of the flow of goods but—more important—through confidence and financial effects.

A chart showing that the global financial safety net tripled between 2008 and 2016, but has stagnated since

Source: October 2018 WEO, Chapter 1.

Trade integration in the Maghreb

Morocco at sunset

Regional trade integration can be a powerful driver of economic prosperity. This is particularly true in the Maghreb region—covering Algeria, Libya, Mauritania, Morocco, and Tunisia. At only 5 percent of overall trade, intraregional trade is among the lowest in the world. Geopolitical tensions and restrictive policies on trade and capital flows have stifled regional integration.

Greater regional integration would create a market of nearly 100 million people with an average annual income of $4,000 per capita in nominal terms and about $12,000 in purchasing-power-parity terms. This would make the region more attractive for foreign direct investment; reduce the cost of intraregional movement of goods, capital, and labor; and improve resource allocation. Intraregional integration could contribute to raising long-term growth in each Maghreb country by 1 percent on average.