Trade flows

Trade is changing – time for the WTO to catch up

To continue to boost trade, the World Trade Organization needs to broaden its scope

Global trade isn’t what it used to be, and neither is the World Trade Organization (WTO). As the WTO marks its 20th anniversary this year, it has to adapt if it wants to stay relevant.

We’re all familiar with goods labelled ‘Made in China’ or ‘Made in the US’, but today supply chains overwhelmingly cross borders. Goods are now ‘Made in the world’, so trade is no longer about one country manufacturing a product and exporting it to another. Instead we have complex, global supply chains, with many different markets collaborating together, and emerging markets in particular are at the forefront of driving world trade.

Tariffs, the traditional preoccupation of the WTO, are hardly the only barriers to trade that need to be identified and eliminated

Multilateralism and bilateralism are making way for plurilateralism, where small groups of nations set up mutually beneficial trade policy based on their shared interests.

The world’s regional agreements – like the Association of South East Asian Nations (ASEAN) – are already driving new patterns of trade. Other agreements are likely to continue that trend, with groups like the East African Community demonstrating how the potential of intra-Africa trade could be greater than that between Africa and the rest of world.

Corporate supply chains are also changing, with small and medium-sized enterprises (SMEs) collectively playing a far bigger role in global value chains previously only associated with multinational companies. One result: tariffs, the traditional preoccupation of the WTO, are hardly the only barriers to trade that need to be identified and eliminated.

Private standards are an issue

Smaller companies can’t typically deal with the complexity created by local regulations such as consumer-protection laws. The emergence of ‘private standards’ – market requirements set by the private sector targeting issues like food safety or environmental impact – are also an issue.

Financing is equally critical: small and mid-sized firms need working capital but they also rely on banks to provide trade finance in cases where exporters and importers don’t know each other, yet require timely payments, risk mitigation or seamless transfer of information. Trade finance, where banks confirm or discount letters of credit or finance trade receivables also requires linking such financial institutions in emerging markets to the global financial system.

However, as well-intended anti-money laundering and know-your-customer regulations are implemented across the banking industry, we’re seeing an increasing number of trade and correspondent banks exit emerging markets (recent surveys by the Asian Development Bank (ADB) and the Banker’s Association for Finance and Trade suggest a correlation between compliance requirements and such retrenchment).

This leads to higher costs of financing for small and mid-sized firms and could even cause financial exclusion in certain markets – the opposite of what is needed for global trade to flourish.

A drastic drop in trade and activity would have enormous implications for global growth

Even more worrying is the strong correlation between a squeeze on the availability of trade financing and a drop in output and job creation.

ADB studies indicate that a 25 per cent increase in trade finance would result in a 33 per cent increase in production and a 22 per cent increase in jobs, whilst a 25 per cent reduction in trade finance would result in reductions of 12 per cent and 9 per cent in production and jobs, respectively.

Such a drastic drop in trade and activity would have enormous implications for global growth. Trade agreements can play a crucial part in making sure that doesn’t happen.

While it’s difficult to predict the feasibility of broad multilateral agreements, more countries could join plurilateral agreements. The pending Transatlantic Trade and Investment Partnership, between the US and the European Union, could be extended to more countries, such as parts of Africa.

WTO needs to address all barriers to trade

China, the central player in many global supply chains, has expressed interest in joining negotiations for the 12-nation Trans-Pacific Partnership. Such accords, once settled, could become starting points for global trade deals.

Advocacy is also part of the job. At first glance, world trade has made much progress, and most people now understand and accept the benefits of free trade. As old barriers have come down, however, new local regulations have appeared.

For the WTO to continue to boost trade, it needs to broaden its scope to address not only tariffs and trade facilitation – as remains the focus in the Bali package – but other areas that impede trade.

From advising emerging regional trade blocs to prevent the formation of ‘trade islands’, to harmonising regulations to reduce trade costs and turnaround times, the WTO can play a vital role in supporting emerging countries’ integration into the global trade system. As for the advocacy realm, it needs to gather the broad political support necessary for preventing new barriers from emerging.

Trade is changing. It’s time for the WTO to catch up.

 

A version of this article appeared in the Wall Street Journal on 21 April 2015