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International trade soared as the world recovered from the Covid-19 induced economic crisis. In 2022, the value of traded goods and services was 24 percent higher than in 2019, before the pandemic struck. But in 2023, trade hit a wall, barely eking out a 0.1 percent gain over the previous year, as underlined in the World Bank’s Trade Watch. It took strong growth in services trade to make up for the first decline in goods trade in 20 years outside of a recession.
Where do we go from here? The World Bank’s latest Global Economic Prospects report predicts that trade will recover slightly in 2024 and 2025 as pre-pandemic patterns reassert themselves. Trade is expected to mirror projected weak growth in global output and investment.
On the other hand, pessimists might say that 2023 marks the beginning of a new normal for trade in a world best by geopolitical tensions, climate-related shocks, and increased protectionism in advanced and large economies. That dark scenario spells trouble for developing countries, which need trade, foreign investment, and participation in global value chains to eliminate poverty and ensure their green transition.
Yet there are grounds for optimism. Three drivers suggest that international trade could resume its role as a powerful force for job creation and poverty reduction.
The first is the observed resilience of global and regional value chains, which played a key role in helping many developing countries leverage trade for development in recent decades. While sanctions imposed on Russia and US efforts to decouple from China reduced direct trade between these blocs, indirect and regional trade often compensated for the decline (Figure 1), and developing countries kept on trading with the various blocs. This resilience shows that it’s not easy to completely unroll global supply chains built over decades to best serve firms and customers across the globe amid various shocks.
Figure 1: Intra-regional and indirect trade has helped compensate for declines in direct trade between major blocs.
Graph A) Source: World Bank staff calculations based on BACI and WB Trade Watch database.
Notes: The latest available year for the Middle East and North Africa region is 2022, and 2023 for the other regions.
Graphi B) Source: World Bank staff calculations based on Haver Analytics.
Note: The chart reports the estimated additional growth in exports to the US associated with increased imports from China compared with the period from January 2015 to February 2018.
The second driver is robust growth of trade in services, especially those that are digitally delivered, despite high levels of restrictiveness (Figure 2). Trade in services brings immense opportunities for more and better jobs in developing countries and sharpens export competitiveness through imports of efficient business services that, in turn, serve as inputs to other goods and services.
Figure 2: Trade in services has been growing fast, despite restrictions.
Graph A) Source: IMF, OECD, UNCTAD, World Bank and WTO (2023), Digital Trade for Development, Geneva: World Trade Organization.
Notes: The figure illustrates the growth rates of exports of goods, digitally delivered services, and other services. The base year for these growth rates is 2005 (with 2005 set as 100)
Graph B) Source: World Bank staff calculations based on WB-WTO Services Trade Policy Database.
Notes: Digitally delivered services include professional, computer, communications, and financial services. Physically delivered services include construction, distribution, health, tourism, and transport services.
The third driver is growth in climate-related trade. Climate change, and policies to counter it, are already redistributing comparative advantages, and the induced specialization gains it may generate will significantly contribute to needed reduction in greenhouse-gas emissions. New trade flows could be created with investments rightly deployed in countries offering these new green comparative advantages. Moreover, the anticipated boom in demand for environmental goods such as solar panels will generate ample trade opportunities and potential to develop new global and regional green value chains, from the extraction of lithium to the assembly of electrical vehicles.
Figure 3: Climate change and mitigation policies are redistributing comparative advantages.
Source: Brenton P., V. Chemutai, M. Maliszewska and I. Sikora. forthcoming. Trade and the Climate Emergency: Policy Priorities for Developing Countries. Washington, D.C.: World Bank Group.
Notes: Scenario 2C—Regional-specific emission reduction targets for 2030 based on NDCs and a ramping up of mitigation ambitions post-2030 with a harmonization of global carbon prices consistent with limiting global warming at 2oC by 2050. Changes in the share of sectoral exports in total exports are measured relative to the baseline (no action) scenario and reported in percentage points using stacked bars on the left vertical axis. Changes in total trade are reported on the right vertical axis.
Yet these drivers shouldn’t make us complacent. Leveraging them will require decisive action from all trade players.
Developing countries will need to improve their trade infrastructure—highways, customs procedures, and the like—and logistics systems to meet the standards of reliability demanded in most export markets. And to maintain access to those markets, they will also have to meet strict new standards for environmental sustainability.
On the policy side, developing countries can improve competitiveness and join emerging green value chains by reducing barriers to imports of environmental technology and services. They should refrain from retaliating against protectionist measures of more advanced economies, which would only serve to discourage private investment, domestic and foreign. Instead, they could deepen regional integration by addressing behind-the-border issues related notably to competition and investment, while ensuring that preferential trade agreements are consistent with global rules of the road. They may also consider strengthening their enabling regulatory environment, e.g., personal data protection and rules on cross-border data flows, to foster digital trade as becoming more secure.
For their part, advanced economies should ensure that increasingly ambitious measures to reduce greenhouse gas-emissions throughout entire value chains—such as charges on imports of goods with relatively high carbon content or anti deforestation policies—do not unduly restrict market access for firms in developing countries. Crucially, advanced economies must ensure that environmental standards and compliance mechanisms are harmonized to avoid creating a spaghetti bowl of complex and contradictory regulations. Otherwise, risks are high that trade will be polarized between a green bloc and a brown one, with uncertain consequences for the reduction of GhG emissions.
Together, developed and developing countries alike must embrace public goods in the global trade architecture, such as subsidies for green technologies and freer trade in environmental goods and services – while continuing to prevent the use of subsidies solely for competitiveness gains. Also needed will be stronger regulatory cooperation in services and accelerated Aid for Trade to address impediments to commerce in developing countries.
Finally, reinvigorating trade requires revamping the core functions of a rules-based trading system, while taking into consideration emerging concerns from both developed and developing economies. This will ensure a level playing field and allow developing countries to lock in their policy reform commitments into credible trade agreements and attract foreign direct investment.
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