The Forum for Partners in Iran's Marketplace

October 2019, No. 92

Global Economy

The Future of Trade

Trade policy alone will not bring about progress in these areas; regulatory cooperation and coordination are needed as well.

By: Pinelopi Koujianou Goldberg

The 75th anniversary of the Bretton Woods multilateral institutions ironically comes at a time when the benefits of multilateralism are being challenged. Doubts about the functioning of our current trading system are particularly pronounced. What is the future of trade in this challenging environment? Does the recent rise of protectionism signify the end of the open, rules-based trading system that fostered globalization? Or can we rescue the system through judicious reform?

The postwar global economy saw unprecedented growth of global trade and income. Explanations for this growth abound: a sharp decline in information and communication costs, technological change allowing for increasing fragmentation of production, political developments such as the integration of eastern Europe and east Asia into world markets, and international cooperation. The nature of the beast is such that quantifying the relative contribution of each of these explanations to the growth of trade defies clean identification and robust econometric evidence. Yet based on first principles, strongly suggestive empirical evidence, and anecdotal accounts, there is little doubt that a rules-based, predictable trading system contributed significantly to trade and trade-induced growth in many parts of the world, especially in Europe and east Asia. Unfortunately, not everyone participated. Several countries, particularly in Africa and Latin America, were left behind, and there is increasing evidence that the gains from globalization were not shared equally among those living in the countries that benefited from trade.

Still, trade has always been seen as an important driver of growth. The benefits of an open, rules-based, multilateral system go beyond lower tariffs and other trade barriers. Any country, small or large, that meets the requirements can participate. Rules reduce uncertainty and encourage much-needed investment in developing economies. They help countries discipline domestic protectionist lobbies. And they allow powerful countries to credibly commit not to abuse their bargaining power over smaller countries, thereby providing incentives for the smaller nations to participate in trade negotiations. Against this backdrop, recent trade tensions are of concern, particularly for developing economies that have not yet realized the benefits of globalization. Can such countries still count on a well-functioning multilateral trading system to help them integrate into world markets?  

Silver lining

How did we get here? Increasing inequality within advanced economies has certainly contributed to creating an environment that is receptive to protectionism if not actively demanding it. Furthermore, long-standing frustration with the functioning of the current multilateral trading system has led to requests for reform or even dismantlement. Some complain that not everyone has played by the rules and that the current trade system is not “fair.” Concerns about state subsidies, intellectual property rights, forced technology transfer, and exchange rate manipulation abound. The silver lining is that discontent may give way to constructive reform and a better-designed trading system in the future.

One source of dissatisfaction relates to processes and interpretations of rules. Views on the effectiveness of the present dispute settlement mechanism, the reach of subsidy disciplines, and the proper treatment of state-owned enterprises vary. Moreover, the World Trade Organization’s (WTO’s) traditional all-or-nothing approach, in which all WTO members must agree on all issues, has become a straightjacket. The Kennedy Round took four years to complete, but the Doha Round, which started in 2001, is considered all but dead. Ironically, the very success of the WTO, which resulted in near-global membership and reach, is proving its biggest challenge, because it makes it increasingly hard to reach consensus.

On the positive side, recognition of this challenge has led to a push for more flexible approaches, including plurilateral agreements among a set of like-minded countries (IMF-WB-WTO 2018). In multilateral deals all WTO members must participate, but plurilateral agreements involve only a subset of countries and allow members to adopt the new rules if they choose. The WTO still prefers multilateral agreements. But when these are not feasible, plurilateral agreements may offer a second-best alternative. Compared with bilateral or regional deals, they offer the advantage that they are in principle available to other WTO members if these members decide to join later. Hence, they overcome the potential inertia associated with fully multilateral negotiations, without undermining the basic principles of multilaterism. There are encouraging developments in this direction, among them the Information Technology Agreement, originally signed in 1996 and expanded in 2016, in which 53 members agreed to tariff cuts that they then applied to all WTO members. Alternatively, the WTO has sought to increase flexibility by pursuing multilateral agreements that unbundle specific issues from broader initiatives. The 2013 Trade Facilitation Agreement, aimed at improving customs practices, is a prime example. The adoption of these two agreements is testament to the effectiveness of a more flexible WTO.

A second source of dissatisfaction concerns the appropriate focus for international negotiations and new agreements. The digital revolution has changed the nature of trade. Many enterprises now operate as links in global value chains reaching multiple countries; several services, such as banking and insurance, can now be purchased from firms in other countries; and e-commerce plays an increasingly important role in cross-border transactions. Growth in these areas demands more than tariff reductions. It also requires addressing “behind the border” measures that stand in the way of cross-border trade (Mattoo 2019). These include harmonization of domestic regulations; agreement on intellectual property rights protection; and consensus on how to deal with data and delicate privacy issues. These issues have proved challenging so far, even among countries with past success in liberalizing their goods markets. Cross-national regulatory differences can reflect valid concerns about quality standards, exploitation of international market power, and data privacy. Policymakers must strike a balance between the legitimate use of domestic regulations to protect consumers and protectionist abuse. Trade policy alone will not bring about progress in these areas; regulatory cooperation and coordination are needed as well.

Contemplating the future, the kind of cooperation needed to spur growth in trade, especially in services, seems more likely to materialize if it involves economies at similar stages of development with similar objectives. Against this backdrop, regional trade agreements could serve as a useful starting point and complement to multilateral platforms. International trade is not doomed to a permanent slowdown. But it is at a critical juncture. Its future will crucially depend on the policy choices we make. 

Pinelopi Koujianou Goldberg is chief economist of the World Bank Group.


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  October 2019
No. 92