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The fast changing nature of world trade poses new policy challenges

By World Trade Organisation

The future of world trade, and the global trading system, will be shaped by a range of economic, political and social factors, including technological innovation, shifts in production and consumption patterns, and demographic change, according to the 2013 World Trade Report published by the WTO on 18 July 2013. Director-General Pascal Lamy said: ‘One element clearly stands out in the Report, and that is the importance of trade for development’.


“The transformation of trade has been underway for some time,” said WTO Director-General Pascal Lamy. “It is manifested most clearly in wider geographical participation in trade and the rise of international supply chain production. One element clearly stands out in the Report, and that is the importance of trade for development. The forecasts and reflections contained in this report do not foresee a reverse of globalisation. But we should remember that the gains it brings could be nullified or at least mitigated if short-term pressures are allowed to override long-term interests, and if its social consequences in terms of the unevenness of its benefits are neglected. This is why renewed efforts are needed to revive the vibrancy of the global trading system.”

One of the most significant drivers of change is technology. Not only have revolutions in transport and communications transformed our world but new developments, such as 3D printing, and the continuing spread of information technology will continue to do so. Trade and foreign direct investment, together with a greater geographical spread of income growth and opportunity, will integrate a growing number of countries into more extensive international exchange. Higher incomes and larger populations will put new strains on both renewable and non-renewable resources, generating even greater need for careful resource management. More effort must also be devoted to addressing environmental issues, the report says.
Economic and political institutions will continue to have a significant role to play in shaping international co-operation, including in trade, as will the interplay of cultural customs among countries. Non-tariff measures will gain in prominence and regulatory convergence will likely constitute the greatest challenge to the trading system of the future. The future of trade will also be affected by the extent to which politics and policies successfully address issues of growing social concern, such as the availability of jobs and persistent income inequality, as well as environmental concerns, say the authors of the World Trade Report 2013.

trade-wto-1Main points of the Report:

Trends in international trade

• Dramatic decreases in transport and communication costs have been the driving forces behind today’s global trading system. Geopolitics has also played a decisive role in advancing and reinforcing these structural trends.

• In the last 30 years, trade in merchandise and commercial services have increased by about 7% per year on average, reaching a peak of $18 trillion and $4 trillion respectively in 2011. When trade is measured in value-added terms, services play a larger role.

• Between 1980 and 2011, developing economies raised their share in world exports from 34% to 47% and their share in world imports from 29% to 42%. Asia is playing an increasing role in world trade.

• For a number of decades, world trade has grown on average nearly twice as fast as world production. This reflects the increasing prominence of international supply chains and hence the importance of measuring trade in value-added terms.

• Simulations show that in a dynamic economic and open trade environment, developing countries are likely to outpace developed countries in terms of both export and GDP growth by a factor of two to three in future decades. By contrast, their GDP would grow by less than half this rate in a pessimistic economic and protectionist scenario, and export growth would be lower than in developed countries.

Fundamental economic factors affecting international trade

• Demographic change affects trade through its impact on countries’ comparative advantage and on import demand. An ageing population, migration, educational improvements and women’s participation in the labour force will all play a role in years to come, as will the continuing emergence of a global middle class.

• Investment in physical infrastructure can facilitate the integration of new players into international supply chains. The accumulation of capital and the build-up of knowledge and technology associated with investment, particularly foreign direct investment, can also enable countries to move up the value chain by altering their comparative advantage.

• New players have emerged among the countries driving technological progress. Countries representing 20% of the world’s total population accounted for about 70% of research and development (R&D) expenditure in 1999, but only about 40% in 2010. Technology spill-overs are largely regional and stronger among countries connected by production networks. In addition to the traditionally R&D intensive manufacturing sectors, knowledge-intensive business services are emerging as key drivers of knowledge accumulation.

• The shale gas revolution portends dramatic shifts in the future pattern of energy production and trade as North America becomes energy sufficient. Increasing water scarcity in the future in large swathes of the developing world may mean that the long-term decline in the share of food and agricultural products in international trade might be arrested or even reversed.

• Ample opportunities exist for policy actions, at the national and multilateral level, to reduce transportation costs and offset the effect of higher fuel costs in the future – improving the quantity and quality of transportation infrastructure, successfully concluding the Doha Round negotiations on trade facilitation, introducing more competition on transport routes, and supporting innovation.

• Improvements in institutional quality, notably in relation to contract enforcement, can reduce the costs of trade. Institutions are also a source of comparative advantage, and trade and institutions strongly influence each other.

Trade openness and the broader socio-economic context

• Successful integration into global markets requires the constant need for individuals and societies to cope with changes in the competitive environment. These adjustments can put labour markets under strain and can shape attitudes towards trade openness. Job losses in the short-run can exert pressure on governments to use barriers to trade. In the end, it is open economies with a well-trained workforce and a business-friendly environment as well as an effective social protection system that tend to be better placed to adjust successfully.

• Societies’ transition to a sustainable development path requires careful management of the multi-faceted relationship between trade and the environment in order to maximise the environmental benefits that open trade can bring. Competitiveness concerns may result in governments incorporating trade-restrictive non-tariff measures into environmental policies as a means of compensating affected firms and sectors. Such green incentive packages may undermine their environmental effectiveness and exacerbate their potentially adverse trade effects.

• The expansion of trade needs to be supported by a stable financial and monetary system – delivering a sufficient volume of trade finance at an affordable cost, particularly for developing countries, and macroeconomic policies that promote exchange rate stability.

Prospects for multilateral trade co-operation

• Some of the main trends which will affect world trade in the coming decades are the emergence of international value chains, the rise of new forms of regionalism, the growth of trade in services, the greater incidence of non-tariff measures, higher and more volatile commodity prices, the rise of emerging economies, and evolving perceptions about the link between trade, jobs and the environment.

• These trends will raise a number of challenges for the WTO. Trade opening, especially in the context of non-tariff measures beyond WTO disciplines, is taking place outside of the WTO. A greater focus on regulatory convergence will therefore be required. Interdependence between trade in goods and trade in services is increasing. Frictions in natural resource markets expose some regulatory gaps. The emergence of new players affects global trade governance in ways that need to be better understood. Coherence between WTO rules and non-trade regulations in other multilateral fora needs to be maintained.

• Addressing these challenges will involve reviewing and possibly expanding the WTO agenda. Traditional market access issues will not disappear but new issues, particularly with regard to non-tariff measures, are emerging. Internal governance matters as well as the role of the WTO in global governance may need to be addressed. An important issue will be how to ‘multilateralise’ the gains made in preferential trade agreements and to secure regulatory convergence.

This article was taken from the press release by the WTO on 18 July 2013.

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