Trade and Investment

5 reasons not to give up on global trade

Turn the tide ... the benefits of trade must be evenly spread Image: Axel Ahoi/Unsplash

Arancha González Laya
Executive Director, International Trade Centre
Peter Draper
Executive Director, Institute for International Trade, University of Adelaide
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Trade and Investment

As G20 leaders meet in Hamburg, many people feel the international trading system is unfair or unaccountable. Some blame it for the loss of jobs; others for pressurising local industries or eroding labour standards.

It is true that economic globalization has not lifted all boats. Income and wealth inequality is on the rise. Significantly, 42% of countries ranked on the World Economic Forum Inclusive Development Index saw their scores decline over the past five years even as GDP per capita increased, with wealth inequality a chief culprit. Small businesses can be buffeted hard by shocks in global markets. The world’s poorest countries’ share in global exports has barely budged above 1% over the past decade.

In the face of these challenges, there is a pressing need for efforts to ensure the benefits from trade are more widely spread. But governments should also recognise the core value of the global trade system as a foundation to build on. Here are five reasons why:

1. Growth and development

Trade expanded by more than 7% a year between 1990-2000, contributing to economic activity and helping to lift around a billion people out of poverty. Tariff cuts, services opening, cheaper transport and greater connectivity have lowered trade costs and fuelled an expansion of international production networks – where inputs to products are sourced from all across the globe.

For example, the bits and pieces in a Wimbledon tennis ball – from New Zealand wool, to US clay and Malaysian rubber – travel across 11 countries before arriving on centre court.

Cross-border value chains allow countries to specialise in what they are good at and sell outputs to more markets. This also makes it possible to produce goods and services without relying exclusively on inputs found within national borders.

2. Bottom line for consumers

For consumers, trade brings the choice of new products and services, at a lower price. This matters most for the poor, where every dollar counts. One estimate for 40 economies finds that open trade boosted the purchasing power of low income households by about two thirds, as the poor tend to spend more on products that are heavily traded, such as food and clothes. The study also suggests that this effect is felt most keenly in advanced economies, from which anti-globalisation voices are becoming stronger.

One country’s targeted protectionism is another’s blocked market and a compromised global growth engine more generally. Barring imports might keep a favoured few factories open in the short term, but that comes at the cost of higher domestic prices and weaker productivity growth, resulting from decreased specialisation, competition and scale – not to mention stifling the sharing of know-how.

3. Bottom line for business

When goods cross borders multiple times, even small trade frictions add up, whether tariffs or inefficient border procedures. Higher import costs can also mean less competitive exports, which can result in less revenue, and so fewer local jobs. In Germany, 50% of imports are inputs, in the US, the figure is around 40%.

Restrictions on foreign services providers, or opaque licensing requirements, create barriers for companies further down the supply chain wanting to use foreign services to compete internationally.

Trade rules, and particularly multilateral trade rules, minimise fragmentation, inefficiencies, and a lack of transparency that reduce profit for companies large and small. The WTO Trade Facilitation Agreement alone – designed to smooth customs procedures – could cut the costs of trading by up to 15% and create up to 20 million new jobs in the global economy. Imagine what the benefits of a similar approach for services or investment facilitation would be.

The trade rulebook also provides certainty for business that markets will not be slammed shut unexpectedly.

4. How do you like them apples?

A world with no or minimal international guidelines for the standards countries use for public health and safety would be chaos for exporters and importers. An apple-grower in Australia would have to make sure that her orchard’s fruit met different arbitrary, rather than science-based, criteria for pesticide residue levels for each and every market. We would all be eating fewer apples.

Inconsistent product standards and higher trade costs are typically more difficult for smaller firms to bear. As SMEs formally account for more than 50% of jobs worldwide, boosting their access to new customers abroad is time well spent.

5. Power in numbers

International collaboration on trade-related issues can also help deal with the tragedy of the commons. Many governments around the world subsidise the expansion of their domestic fishing fleets or fuel to power these, even though just under 70% of marine stocks are fished to the limit and 31% are overfished.

One or two governments acting alone to end these payments, while commendable, will not be enough to solve the problem since fish swim across oceans. Action is needed through the World Trade Organization (WTO), which has a general framework in place for collaboration on subsidies, and a mandate to tackle harmful fisheries subsidies.

Don’t ditch global trade, improve it

The global trading system is far from perfect. WTO rules written over two decades ago lag behind today’s business realities. Its monitoring and surveillance function could be more effective to ensure everyone sticks to the agreed rules and that unfair trade practices are curbed. Despite the fact that services comprise some two thirds of global GDP, substantial policy barriers on services trade remain.

But equally important, at home, much more attention needs to be paid to the types of policies that ensure the opportunities and benefits from trade are more widely spread and those that do lose jobs are not left behind – acknowledging there will be no one-size-fits all approach. Shortcomings in areas such as education, retraining, social safety nets, and infrastructure, hamstring people’s ability to benefit from open markets and leave displaced workers out in the cold.

Walking away from the current trade system will have deep consequences in a connected, fragile and rapidly evolving world. A world of walls and barriers would be poorer and duller. Done right, there is much for everyone to gain from global trade.

The World Economic Forum Global Future Council on International Trade and Investment has issued a call to action for G20 leaders to maintain and improve the legitimacy of the global trading system. A full list of Council members is available here.

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