Trade and Investment

Here are 4 building blocks for the new era of trade which will benefit everyone

Cars from China arrive at the Valparaiso port 85 miles (137km) northwest of Santiago, Chile August 31, 2006. Chile and China signed a free trade agreement in November 2005 making it the first free agreement China signed with a Latin American country.    REUTERS/Eliseo Fernandez(CHILE)

A shift away from physical towards data-driven trade will allow the global economy to become more productive. Image: REUTERS/Eliseo Fernandez

Christine Lagarde
President, European Central Bank
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Trade and Investment

Recent news on global trade has tended to focus on protectionist measures and diplomatic tensions. These challenges have raised concerns over growth and jobs across the world.

Yet what is often lost in the current discussions is that we are entering a new era of trade—an era in which data flows are becoming more important than physical trade.

The new era

Think about it: between 1986-2008, global trade in goods and services grew at more than twice the rate of the global economy. In recent years, however, growth in this more traditional type of trade has barely exceeded global GDP growth.

Traditional trade may soon be surpassed by digital exchanges. Image: WTO

At the same time, digital flows have been booming. According to Cisco, the amount of cross-border bandwidth used grew 90-fold between 2005 and 2016, and is expected to grow an additional 13-fold by 2023.

This is not just about video streaming, Skype calls, and social media posts. It is about the role of data in boosting other flows, especially by making services more tradable—from engineering, to communications, to transportation.

So in many ways, the future of trade is the future of data.

Image: McKinsey Global Institute

This is a huge opportunity for policymakers to build new economic bridges between countries, and to create a better global trade system.

Let me highlight 4 building blocks of better trade:

1. More trade in services

The good news is that global trade in services has been growing relatively fast. It now accounts for one-fifth of global exports. And according to some estimates, half of the global trade in services is already driven by digital technology.

But this is an area where trade barriers are still extremely high, equivalent to tariffs of some 30 to 50 percent.

I believe that by reducing these barriers and making trade more digital, services could become the main driver of global trade. Who would benefit most?

Advanced economies, because they are globally competitive in many service sectors, especially financial, legal, and consulting. Developing economies such as Colombia, Ghana, and the Philippines, because they are promoting growth in tradable services, such as communications and business services. Millions of small businesses and individuals who can use digital tools to leverage their expertise in the global marketplace.

But that is just the beginning. I believe that we can build the Wealth of Nations in the 21st-century on trade in services.

2. More productive

We can achieve this goal by making trade more productive. How? By encouraging a further shift in the composition of trade flows—from “physical” to more data-driven trade.

For example, increasing automation is making it easier for companies to repatriate, or “reshore”, some of their operations—effectively, reversing some of the “outsourcing” of the past two decades.

This could help rejuvenate manufacturing industries in many advanced economies, holding out the promise of more domestically-based factories with higher-paying jobs.

3-D printing could also prompt companies to move production closer to their customers. One large shoe brand, for instance, is bringing bespoke shoemaking to the mass-market by printing customized soles in their high-street shops.

If these trends were to continue, many supply chains would become shorter, more productive, and less carbon-intensive.

At the same time, digitalization will intensify competition in global trade, pushing companies to boost their investment in new technologies and more efficient business practices.

New IMF analysis shows that greater competition accelerates the diffusion of technology across countries and even the rate of innovation itself.

This, in turn, helps lower prices for companies and consumers. It is estimated that the poorest 10 percent of consumers gain almost two-thirds of their purchasing power from trade.

3. More inclusive

Gains like that show the enormous benefits of building economic bridges between countries. And yet, too many people have continued to live in the shadow of these bridges.

The digital revolution in trade will bring its own challenges, putting further pressure on those workers who are less well-equipped to compete.

That is why we need greater inclusiveness. Consider the benefits of scaling up investment in training and social safety nets, so that workers can upgrade their skills and transition to higher-quality jobs.

For instance, experiences in Canada and Sweden show that on-the-job training is more effective than classroom learning.

In these and many other areas, the IMF is helping countries gear up for the new era of trade.

At the global level, we analyze exchange rates and monitor global economic imbalances.

At the country-level, we work with all our 189 members on policies to help remove trade and investment barriers, encouraging more open economies where the private sector can thrive and create jobs.

In short, we believe that for trade to improve, it needs to be more services-based, more productive, and more inclusive—so that everyone can benefit.

To achieve these objectives, trade also needs to be more internationally cooperative.

4. More international cooperation

Over the past 70 years, countries have worked together to create a multilateral trade system that has lifted hundreds of millions of people out of poverty, while boosting incomes and living standards in all countries.

But this system needs improvement as it adapts to the new era of trade.

For example, many governments are struggling with major issues that do not fall squarely within WTO rules. These include various state subsidies, restrictions on data flows, and the protection of intellectual property.

To address these issues, we could use “plurilateral” trade agreements—that is, deals among like-minded countries that agree to work within the WTO framework. There is also room to negotiate new WTO agreements on e-commerce and digital services.

On these issues, one can take encouragement from the new Trans-Pacific Partnership, or TPP-11. For the first time in a broader trade agreement, TPP-11 countries will guarantee the free flow of data across borders for service suppliers and investors.

Now is the time to push for further trade reforms in a multilateral setting where rules are respected, where countries work in partnership, and where everyone is committed to fairness.

I believe that by building new economic bridges, by shaping a new era of trade, we can foster more prosperous and more peaceful communities across the world.

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Related topics:
Trade and InvestmentInequalityEconomic Progress
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