Trading-up: taking the high road out of trade doldrums

As we enter 2023, with the World Economic Forum’s Annual Meeting in Davos taking place under the banner of “Cooperation in a Fragmented World”, the future of global trade and investment is murky. Geopolitical tensions and industrial policy have cast a long shadow on economic openness.

Teetering on the brink of a painful downturn, the global economy and broader society need evidence that we can work better together. The importance of trade and investment in delivering growth, development and sustainable outcomes must be re-established to avoid deglobalisation policies that will erode past gains.

The cracks in the trade system show even in the disconnect between data and narrative. Both global merchandise and services trade volumes are at record highs. Both exports and imports between the US and China, between the US and Europe and between China and Europe, are at their highest ever. But the rhetoric is of fracture and disengagement. And that narrative is clearly influencing investors, with investment flows continuing to trend down.

No doubt, dealing with new national security, technological and environmental crises will require change. But fragmentation and decoupling from the global trading system will be costly, both economically and in our ability to respond to the challenges of the global commons. We saw, during the COVID-19 pandemic, that though global supply chains had their challenges, they were an essential motor of innovation and production for protective equipment and, later, vaccines and therapeutics.

In this environment, the ability to pull together to avert recession seems sorely lacking. To avoid being held prisoner to geopolitics, policy-makers could consider two strategies. The first is to look past the politics, the second to rise above.

For the first strategy, the focus is on improving the day-to-day administrative practicalities of trade and investment, where it legitimately occurs. It has been well documented that removing frictional barriers of overly complex paperwork and the like can bring greater gains than eliminating all tariffs. Concerted efforts have been underway since 2013’s Bali Trade Facilitation Agreement, yet are accelerating with the introduction of new forms of TradeTech to digitize and automate trade processes.

With little fanfare, a 2021 agreement on Services Domestic Regulation opens the way to similar reforms in international services – an area where trade costs are at least twice as high. And the Forum’s Annual Meeting this year may see the announcement of the conclusion of substantive negotiations on Investment Facilitation for Development. This would mark the decision by over 100 nations to radically simplify international investment procedures, a step change for the majority of the world’s businesses which are small or medium sized. The benefits of trade and investment streamlining, proportionately go to developing nations, but it is worth remembering that trade has cut the cost of shopping baskets by two-thirds for low-income families even in advanced economies.

Avoiding the high politics of great power tensions, there is much to do for trade to improve environmental and social outcomes. Easing the growth of cross-border circular economies requires careful steps to maintain defences against waste dumping while unlocking the scale needed for successful recycling and re-use strategies from plastics to electronics. Improving outcomes for workers must involve a combination of private sector supply chain due-diligence and regulatory standards enforcement.

The second strategy of rising above current geopolitics means looking to the economic, philosophical and humanistic underpinnings of international trade and investment. Taking a long-term perspective, what set of trade frameworks would likely deliver the most effective environmental and developmental outcomes? What does this mean for industrial policies specifically? And could we grow global resilience by diversifying production of essential goods to all corners of the world, including Africa, Latin America and South Asia, rather than concentrating risks through reshoring?

Of course, these questions are vast, but tackling them in a transparent, deliberative process would be a step forward from the interests-based negotiations on rules, or squabbles over failure to adhere to them, which have too often characterised trade debate. IPCC reports have brought at least a sense of direction and common destiny to climate policy. The equivalent does not exist for trade.

Under its forceful Director General, the World Trade Organization remains the best hub to bring together global thinking and practice on international trade and investment. Experience has shown that some progress will likely be best made regionally, or in other modular fashion. But a centre of gravity remains vital to maintain a shared system of norms.

The Forum’s Annual Meeting in Davos offers a multi-stakeholder to-do list for trade and investment. There is no magic wand, but by addressing the daily impediments and looking to the far horizon, we can improve trade’s contribution to sustainable and inclusive growth and development.

This article originally appeared in JoonAng.