Three Questions for Policymakers on the Future of Trade

From the Ishiyama-gire, Ki no Tsurayuki ~945, Image courtesy of Smithsonian National Museum of Asian Art.

International trade is taking a big hit during the COVID 19 pandemic, but what will happen to global trade and trade governance in the coming years is anyone’s guess. Fallout from the virus is likely to accelerate some trends that were already underway, including on global value chains, and services and intangibles trade. What can and should policymakers do to address the immediate threats of the pandemic while preparing for the looming threat of climate change following closely on its heels?

Three questions should be on the minds of policymakers everywhere. First, how will trade change, not just overall, but in the details? This matters to exporters but also to firms and consumers in importing countries who will depend on those goods and services to adapt. Second, what trade policies will be needed to deliver both growth and equity for producers and consumers, particularly in areas that are likely to reflect increasing demand for trade. Are current policies adequate in terms of competition, consumer protection, and universal service, for example? Third, where can our structures in governance adapt in this process? What must the global trade architecture deliver and where are innovations taking place that help these emerging trends take wing.

One trend already underway is the decline of global value chains. The globally expansive network of value chains once envisioned by trade boosters everywhere is quickly consolidating in response to geopolitical and market risk concerns. (For example, see Erik Berglof, The Decline of Global Value Chains, Project Syndicate, 2 January 2020).

Another trend is the shift in value addition from “things” to “knowledge” a phenomenon some call “dematerialization.” The proportion of value-added in all production has increasingly been attributable to services and intangible assets. This shift demands appropriate regulatory frameworks and adaptive trade policies if we expect them to flow across borders to meet emerging needs.

Dematerialization should be a high priority in addressing climate change, which is an existential threat that even outweighs COVID-19. Headline numbers from the UN IPBES report (https://ipbes.net/global-assessment) cite the potential extinction of over 1 million species. The report demands fundamental transformative change across “technological, economic, and social factors, including goals, paradigms, and values.” In this context, “global commons” issues demand upgraded transnational frameworks for promoting development of less material-intensive production and consumption.

Where, how, and by whom can these demands be met? Our go-to institution for the past decades, the World Trade Organization (WTO) is ill suited to these forthcoming tasks. Suffering geopolitical pressures and energy sapping incremental deals WTO members have shown an unfortunate inability to adapt to the changing nature of trade. In the context of the climate challenges noted above, one of the bedrock principles of “like products” will become increasingly untenable as a basis for tariffs. The erosion of the WTO’s dispute settlement function and its apparent inability to blunt protectionist actions on goods augurs against hope for leadership from its members.

The WTO General Agreement on Trade in Services (GATS) was originally designed as a highly flexible instrument but it has remained static in terms of freeing services flows: a flexible instrument in the hands of inflexible negotiators. The WTO TRIPs agreement on intellectual property rights, advanced a framework for cooperation, but ultimately has proven to be divisive.

The emergency over-ride mechanism of choice, the G20, also seems not up to the task. In successive meetings, it has been an effective forum for idea generation, but has done little for advancing global security around the COVID-19 challenge. Don’t hold your breathe for action on climate change.

The emerging patchwork of mega-regional agreements, including RCEP and the CPTPP are integration agreements poised to perform differently. With the extensive integration of goods, services, and digital provisions in a comprehensive framework, the CPTPP looks better positioned to advance dematerialization and interoperability by harmonizing goods and services flows among members.

But viewed from the perspective of the global need, it is not enough simply to observe that China and India along with many developing countries remain outside such agreements. Are there innovations that could be brought to countries that are not ready for deep integration, but who nonetheless must be engaged in climate-friendlier development?

Countries seeking global competitiveness in this context must move toward frameworks that will accommodate such concerns. The withdrawal of the United States from the world stage could not have been more poorly timed. China’s focus on global influence would be a hopeful sign were it not the influence already on record, including on treatment of investment debt in a number of countries and human rights abuses, that if extended, would leave the world’s poor, poorer, and democracies more at risk than they already are.

New Zealand and Singapore are among those countries exploring agreements that incorporate the nexus of complex demands in both trade and climate policies. Don’t dismiss them for their size. These are countries that helped launch the CPTPP agreement which, for the lack of last-minute US resolve, might have had global market-shaping influence.

Of course, much of the work that needs to be done must be driven by a sense of urgency and need, nothing else will move negotiators. The interoperability of services and intangible assets across borders inevitably involves behind border regulation, a domain where domestic actors from regulators to advocacy groups have a tight grip. This is not necessarily a bad thing, but perhaps indicates where new impetus for global rules will find resistance as well as innovation in smaller political entities such as cities.

An opportunity for those wanting to push ahead the kinds of global cooperation that will be necessary will be to cultivate knowledge and cooperation between major urban areas around the globe. Such mega conglomerations often drive the policies of nations and may be nimble enough to experiment and adapt in a way that is inclusive, if they have the tools to do so, such as the ability to raise finance and broader freedom to regulate.

Expect a patchwork — perhaps not so different in many respects from our existing system — where groups of like-minded countries and entities focus more on aligning with others around their common values and objectives.

This doesn’t mean that today’s diplomats are out of a job, but the job may well need to change from advocating for the next incremental global or plurilateral agreement to one that is much more about generating systemic coherence. The WTO’s Trade Facilitation Agreement is an excellent example of the kinds of agreements that could be very useful in fulfilling this role.

What becomes of the WTO and its agreements? It seems likely that they will remain part of the bedrock of most trade agreements. But perhaps its role as a global rule-setter will be eclipsed by events that are beyond its members’ control.

The future of trade and the imperatives for human development call for greater collaboration that deepens regulatory cooperation and trade of services and intangible assets. Are meta-agreements between nations or cities needed that help to bind diverse agreements to additional principles? Is it possible to advance trade through the much more granular approach advocated by many, empowered by advanced data and analytics?

The urgent work and innovation to be done, and without irony, is all heavily knowledge intensive. Pursuing such transformation agendas demands the investment of nations, but also of philanthropy and think tanks that can advance credible nonpartisan analysis and venues for collaboration. This is not a time to divest but rather one to redouble efforts in innovative governance.

Andrew Crosby is a fellow at the Asian Trade Centre and leads the consultancy Impact Advisors and the Economic Governance Group based in Geneva, Switzerland. Originally published in Talking Trade blog of the Asian Trade Centre, Singapore.

Working with pioneering firms, policymakers, and civil society actors to cultivate social, environmental, and economic synergy toward a 3rd Horizon world.

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