Global trade
Ngozi Okonjo-Iweala on the need to rejuvenate multilateral trade deals
Trade is flourishing despite the pandemic, but global rules are needed to ensure predictability and growth, says the head of the WTO
THE IDEA that global trade is waning has become widely accepted. On the surface, it seems plausible amid a pandemic and talk of decoupling among the leading economies. And the sense of slippage has undeniably been helped by the World Trade Organisation’s struggles to reach multilateral agreements, as a bevy of bilateral and regional deals proliferate to compensate for the gridlock in Geneva.
Yet the perception is far from reality. Fears of de-globalisation are not matched by evidence of companies abandoning foreign suppliers for domestic ones, or less trade in intermediate goods. On the contrary, global trade for merchandise is at a record high. And the overwhelming majority is conducted on the basic tariff terms that governments extend on a non-discriminatory basis to all WTO members, in line with the organisation’s “most-favoured nation” principle.
The “most-favoured” label is easy to tease. But despite the growing number of bilateral trade deals, preferential tariffs have a smaller footprint in global commerce than might be expected. If we count the European Union’s single market as one economy, more than 75% of global merchandise trade happens on an MFN basis. All other regional trade arrangements account for about 20%. (The remainder is subject to tariffs levied on a non-MFN basis, including unilateral measures.)
Why the large share of trade on a multilateral basis? First, the world’s biggest economies mostly do not have free-trade agreements with each other. America, China and the European Union trade with each other under WTO terms. Second, decades of trade liberalisation have seen governments bring tariffs to zero on around half of global merchandise trade. This extends to all WTO members, not just to bilateral and regional trading partners.
The rebound in trade is astounding. When the global economy shut down starting in March 2020, the fall of trade was the sharpest on record: 15% year-on-year in the second quarter in volume terms. Few would have guessed at the time that trade would bounce back like a bungee cord by the first quarter of 2021. It recovered with the help of massive fiscal and monetary support in advanced economies, containment of covid-19 in several Asian countries and governments mostly resisting protectionism.
The current supply-chain disruptions are caused by the unexpectedly strong recovery in demand, in concert with many firms initially cutting orders expecting a prolonged downturn and covid-19 and climate related shutdowns slowing a return to normal production levels. Firms and logistics providers are adapting, although changing historically finely-tuned supply chains takes time. The disruptions have caused price increases and delivery delays, but these should be transitory as real-time indicators already suggest that demand is slowing and that efforts to modify supply chains are taking hold.
As during the global financial crisis of 2007-09, the WTO’s multilateral system helped keep markets open. This happened despite much hand-wringing over import dependence and the subsequent introduction of export restrictions when medical products ran short. As lockdowns were relaxed and demand picked up, cross-border supply chains were able to restart. Had businesses and households been compelled to look for domestic alternatives, the economic fallout would have been far worse. And after covid-19 vaccines were developed, supply chains crossing some dozen countries were stitched together to enable manufacturing at scale.
The resiliency of trade has been a lifeline for millions of people to access food and other essential supplies. Even as the value of global merchandise trade fell by 7.6% in 2020, the value of trade in medical products rose by 16%, and trade in agricultural products held stable. Many (though not all) of the initial export restrictions were lifted, and members introduced various measures to facilitate trade.
Trade will be central to solving the current inequities in access to covid-19 vaccines, and the WTO has been working with vaccine manufacturers to identify granular supply-chain bottlenecks and to encourage increased investment, particularly in developing countries.
New rules needed
However, the good news on trade does not mean that WTO members can afford to sit on their hands as the world around them changes. Although trade in physical goods held up well, WTO rules offer less precision about emerging areas of international business activity, such as e-commerce and digital services, which had been growing faster than the trade in goods before the pandemic. Without agreement on new rules, the security and predictability provided by the WTO would cover a diminishing share of international economic activity. Uncertainty would increase, adding costs for businesses and households, and weighing on investment, production and jobs.
Even more pressing are problems of the global commons, from public health to the oceans and climate. They loom large in people’s daily lives and economic prospects, and need multilateral co-operation: no country can tackle them on its own. Trade policy is an instrument to address these problems but we are not making full use of it. Nor are we making full use of trade as a vehicle for socioeconomic inclusion.
In the quarter-century leading up to the pandemic, open, global markets enabled rapid growth and an unprecedented reduction in poverty in many developing countries. Open markets, thanks to global rules, will remain necessary in order to have a world in which poor countries—many fragile and in conflict—may grow by tapping external demand, ideas, inputs and investment. Integrating these economies into global trade and supply chains—what I like to call “re-globalisation”—could yield substantial dividends in terms of growth, development and future market demand. It seems wiser than throwing aid at people fleeing humanitarian crises.
Although regional trade agreements can be building blocks (and even useful laboratories) for global rules, some issues—such as subsidies or global-commons challenges—can only be handled multilaterally.
Global trade agreements are not only necessary, they are possible. We have struck deals on reducing customs red tape and on the elimination of direct export subsidies for farmers. But to reach a multilateral agreement requires a healthy dose of political will, which in recent years has been in short supply.
WTO members agree the organisation needs reform, but diverge on what precisely such reforms should look like: is it new rules for e-commerce, or agriculture trade? Does it mean stricter disciplines on industrial subsidies or bringing environmental issues more to the fore of the WTO’s agenda? What is the way forward on the flexibilities that WTO rules accord to developing countries? The devil is in the negotiating details.
This autumn is an opportune moment to break the stalemate: a common WTO response to the pandemic is of vital interest to all. Moreover, WTO members can finally conclude an agreement to curb harmful fisheries subsidies that encourage overfishing. This would help preserve fish stocks and livelihoods in coastal communities—and signal that WTO members can work together on global-commons problems. Finding a way forward on reforming our dispute settlement system is also in the interest of all members. A moment to act is the WTO’s ministerial conference beginning in November.
Seizing the moment
Looking ahead, getting to net-zero carbon emissions will require action on trade to complement the Paris Agreement. Lowering trade barriers to environmental goods and services would reduce the cost of decarbonisation. International organisations can foster shared approaches to carbon pricing, to avoid fragmentation and uncertainty that would be costly for businesses, a source of tension in trade relations and potentially ineffective for the environment.
Global challenges present global opportunities. We need a multilateral trading system to seize them. But we can pursue multilateralism through different instruments and flexible formats.
An example is the WTO’s information-technology agreement, which in the 1990s eliminated tariffs on 97% of trade in computers, chips and telecoms equipment. This lowered costs through greater scale, specialisation and competition. In 2015 countries updated it to include 201 new products (including, fortuitously, pulse oximeters to measure blood-oxygen levels). The value of trade covered by that modest update was about $1.2trn in 2020—nearly 12% of all global merchandise trade.
There is a lesson for governments contemplating future deals at the WTO: negotiations are never easy but the agreements matter. Free trade on a multilateral basis is essential. If there were no WTO, the world would have to invent something like it. So let’s reform the WTO we have and make it work better for people everywhere.
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Ngozi Okonjo-Iweala is the director-general of the World Trade Organisation. She was Nigeria’s finance minister in 2003-06 and 2011-15 and its foreign minister in 2006. Dr Okonjo-Iweala was a development economist for 25 years at the World Bank. She has served on numerous boards, including those of Standard Chartered, Twitter, the Carnegie Endowment for International Peace and GAVI.