Driving global trade for development

No doubt it’s a tough time for global trade, battered by supply chain issues and geopolitical concerns. But there’s a useful metaphor to help navigate our way through these challenges: Keep the bicycle moving. Made famous by Fred Bergsten, founder of the Peterson Institute for International Economics (PIIE), it’s a reminder that continuous sets of actions and initiatives – no matter how big or small - will matter in driving global trade for development.   

There is good reason to find ways to keep “moving,” even as protectionism rises in the face of uncertainties and progress remains slow in global trading system reforms. A recent conference hosted by the World Bank and PIIE reinforced our views on the continued importance of global trade for sustainable growth and poverty reduction.

Let’s start by reviewing the evidence to date and the new reality going forward. The evidence to date shows that trade is still contributing to recovery and growth. Countries and firms integrated into global value chains have been more resilient to shocks and have recovered faster , and trade in services based on digital technologies has also rebounded quickly. At the same time, complementary policies are needed to address the unequal distribution of the benefits of trade.

The new reality is one where trade and investment decisions need to balance efficiency considerations with two additional concerns. The first concern is resilience. This has become more prevalent as shocks become more frequent, and it is being shaped by security considerations and geopolitics. Until now, firms responded to shocks like the Fukushima disaster in Japan and the outbreak of Severe Acute Respiratory Syndrome in Asia by diversifying supply chains. Now, policy makers are supporting them with trade restrictions, firms are reshoring, near shoring, and friend shoring, and advanced economies are using a combination of industrial policy and subsidies to attract “shorings.” 

The second concern is sustainability. Companies are increasingly pursuing sustainable supply chains to meet their net-zero targets and thus balancing efficiency considerations with sustainability considerations. This is redefining the trade and investment competitiveness of developing countries. Driven by sustainability concerns, countries like the United States are subsidizing green industries, and the European Union is applying a Carbon Border Adjustment Mechanism. These measures have the potential to distort trade and investment decisions and further affect developing countries.

Faced with this new reality, how should countries position trade and development? Let me propose four key messages on the way forward.
 

1. We must avoid beggar-thy-neighbor policies in strategic sectors. While countries may be justified in acting on national security, climate, and income-inequality grounds, the design of any action must account for its impact on developing countries and achieve its goals in the least trade-disruptive and costly way. While actions are at present confined to sectors such as semiconductors, renewable energy, electric vehicles, and food and medical supplies, there is a risk that they may soon encompass a larger number of sectors.

Our research shows that trade tensions that lead to fragmentation, higher barriers to imports, and increased subsidies in advanced countries and China would cause the global economy to contract by as much as $1.4 trillion.  That would hurt everyone, but developing countries would bear the brunt as 52 million more people would be thrown into extreme poverty. The impact is likely to be greatest in small economies and land locked countries, which depend more heavily on trade.

To limit the damage to other economies and prevent  potentially trade-distorting actions from expanding to other sectors, restrictions undertaken in the name of an emergency, national security, or resilience must follow the following principles. First, they must be managed in a transparent and accountable way. Second, they should be targeted, limited and temporary. Third, they should minimize disruptions to trade. Ideally, agreement on such principles should be reached at the multilateral level. In the absence of an agreement for now, the World Bank will continue to play an important role in raising awareness of these global trends from a development perspective.
 

2. We should continue to facilitate trade to harvest its untapped benefits. It should be noted that a large part of trade remains unaffected for now by protectionist measures, and that massive nearshoring or reshoring is unlikely in the short term, with the possible exception of a small number of sectors. This leaves plenty of room to harvest the untapped benefits of open trade in goods and to harness the potential for trade in services. Diversifying supply sources through trade should remain the best solution to reducing exposure to shocks.  

This implies that what is important for developing countries is to design national policies that ensure a stable business environment that can attract investment and trade-led growth. When I served as Indonesia’s trade minister, we introduced many policy reforms to attract investment, such as best practice in investment laws and a “one stop shop” offering multiple services. We implemented trade reforms to reduce the costs of trade driven by our commitments to the World Trade Organization and the Association of Southeast Asian Nations. Improving roads and other infrastructure is also critical, as is reducing “thick borders” by streamlining cumbersome border procedures and providing efficient logistics services and trade finance.

The need for complementary policies to ensure that the benefits of trade are inclusive and widely distributed will also need to be part of a national strategy.  That includes reducing rigidities in the labor market, better integrating the domestic market, and retraining and reskilling workers for the new realities.
 

3. An overall strategy for integrating climate into development is needed. New global trends in technology, climate, supply-chain resilience, and industrial policy are creating challenges and opportunities for developing countries, which require monitoring to ensure transparency and fairness.  It is therefore key that measures linked to climate change–like taxes or subsidies that are beginning to be introduced by advanced countries–are transparent, not based on unilaterally determined or fragmented standards  but on common standards, and do not distort trade with protectionist intentions. It is important that developing countries be included in any standard setting and in the use of instruments related to trade and climate change, and that capacity building measures be undertaken.

The World Bank is expanding its efforts to fill gaps in our understanding of trade patterns and developments and to improve our capacity to monitor and anticipate them. For instance, we are working on boosting transparency on subsidies and advocating for the principles of well targeted and timebound measures; supporting data collection efforts on the nature and magnitude of trade in services; better understanding the types of smart as opposed to costly industrial policies; and measuring trade costs.
 

4. Safeguarding the multilateral trading system is critical and may require new solutions.  It should be emphasized that it is the open and rules-based trading system that has underpinned trade and development, created predictability for the private sector, and framed national policy design and regional economic integration. However, the lack of leadership by major economies has weakened the WTO and the multilateral trading system. Continuing to move the “bicycle” forward in such a context – and in an increasingly fragmented world– requires that we support cooperation initiatives. There are three potential ways of doing so:

     i) Open clubs of clubs. These plurilateral agreements are open to new members and help move the trade agenda forward or create greater certainty for trade. One example is the Joint Statement Initiatives on Services (JIS) and E-commerce, which like-minded countries initiated to advance discussions on specific issues. Another is the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), a transitional dispute-settlement process created in response to gridlock in the WTO appellate body caused by the United States blocking nominations. 

It will be important for these clubs of clubs to be open to new members and observers, transparent processes, and the sharing of information. The intention will eventually be to bring such approaches back to the multilateral trading system once there is critical mass; meanwhile, the process continues “moving” to address new or critical issues even without the whole WTO membership and consensus.

     ii) Making use of open regional agreements to support multilateralism. Regional agreements can be building blocks for cooperation and reform. They can deepen economic integration and further open countries to trade when they go beyond tariffs to improve trade facilitation and address new issues such as digital trade, and when their membership is broadened. Such agreements include the African Continental Free Trade Area (AfCFTA) adopted in 2020 to create a continent-wide market embracing 54 countries with 1.3 billion people and a combined GDP of US$3.4 trillion. A World Bank Group study shows that the agreement has the potential to raise incomes by 9 percent by 2035 and lift 50 million people out of extreme poverty. In East Asia, the 15-nation Regional and Comprehensive Economic Partnership is likely to deliver the biggest benefits to Cambodia, Vietnam, and other low middle-income countries.

     iii) Developing countries, which benefit from certainty provided by the multilateral trading system, can play a stronger collective role in strengthening the system and pushing for progress on WTO reforms. This includes addressing capacity building and ensuring they can be better informed about the new issues being addressed in the clubs of clubs.
 

The case for sustaining a commitment to open trade remains compelling. Developing countries can still reap gains from cross-border trade and investment.  Considerable scope exists to further liberalize their own economies and to lower trade costs through stepped-up efforts at across-the-border and behind-the-border trade facilitation. The global trading system matters more than ever. We must keep the bicycle moving, in any way we can.

Watch the replay of Driving Global Trade for Development.