Thank you for the invitation to participate in this year’s Globsec 20 Forum. You have asked me to begin by reviewing where we stand with the world trading system in the midst of this pandemic, the first in a century.
We are grappling with some of the biggest declines in GDP and trade in decades.
- Estimates suggest global economic output will shrink by 4.8% this year – the worst drop since the Second World War.
- Earlier this week the WTO updated its forecast for trade in 2020. Our economists now predict that the volume of global merchandise trade will shrink by 9.2% compared to last year.
- This contraction would be the worst in years – on par with that seen during the 2008-09 global financial crisis. But put into context, it also represents relatively good news – it’s better than the 13% to 32% range of the initial estimate made in April. A 13% fall in trade would already have been the worst drop since the 1930s, had the outbreak and the policy responses had an even more adverse impact.
- Stronger-than-expected trade growth in June and July helped push the revision upwards.
- This does not mean that the picture for trade is rosy. Services trade has been badly hit, and while the data are not available yet, the recovery from the fall-off in travel and in-person services will be slow. Even the 7.2% rise in merchandise trade volume foreseen for 2021 would not bring us back to the pre-crisis trend. In addition, there are serious downside risks, particularly if there is resurgence of COVID-19 cases in the coming months.
- In the wider economy, beyond the initial rise in spending as lockdowns were relaxed, the road to recovery may be tortuous. Psychological factors, such as a lack of confidence or changed habits, could result in weak consumption and investment by households and businesses, not to mention spikes or just continuation in the course of the disease.
Fixing the global economy requires action at home, complemented by cooperation abroad (not least on trade).
- Unprecedented fiscal and monetary action has helped mitigate the pandemic’s economic impact by providing very substantial support to incomes and consumption and stabilizing financial markets. Without these steps, the contraction in output and trade would have been much worse.
- However, public authorities must be careful not to cut off the flow of funds too soon. The IMF has urged governments in a position to do so to ramp up public investment, funded by borrowing if necessary, to create jobs and lay the foundation for greener growth and higher productivity. By increasing confidence, such spending would catalyze increased private investment, spurring growth and reducing debt burdens.
- Keeping international markets broadly open to trade is an essential part of this recovery-oriented agenda. Trade enables the productivity gains that come from increased specialization and scale.
- An open, transparent and predictable trading system would reduce uncertainty for businesses, encouraging increased investment. This is good not just for the cross-border movement of goods and services, but of ideas and technology.
Trade and trade policy are also playing direct roles in countries’ responses to the pandemic.
- Our new trade data shows that trade in personal protective equipment (PPE) recorded explosive growth, up 92% in the second quarter compared to the year before – 122% if we compare May of this year to May 2019. Trade has contributed to meeting skyrocketing demand for essential goods.
- Early in the outbreak, a number of jurisdictions introduced export bans on medical products and even food. The WTO has been tracking COVID-related trade measures as part of our mandate to promote transparency in international trade.
- Our monitoring efforts showed that the trade restrictions were quickly joined by measures to facilitate imports of key supplies. These included lowering tariffs and other taxes on such as PPE, sanitizers, disinfectants, medical equipment and medicines, as well as simplifying customs procedures and documentation requirements; establishing priority channels; and cooperating on customs and regulatory approval.
- Of the several hundred COVID-specific measures compiled from February through the end of August, nearly two-thirds were trade facilitating.
- Many of the early export bans have been repealed, particularly with respect to food as global supplies of cereals are strong. About 22% of all of the pandemic-related trade-restrictive measures implemented by G20 economies have been removed.
A functioning trading system is in the interest of countries big and small.
- The pandemic has exposed some of the fragilities inherent to economic interdependence.
- It added further impetus to the debate over on-shoring and near-shoring supply chains.
- Some voices in this debate equate domestic production with supply resilience. This is erroneous. Concentrating industry at home might make it less vulnerable to disruptions elsewhere, but domestic supplies would become more vulnerable to localized disruptions, for example from a natural disaster, or an outbreak of human or animal disease. Particularly dangerous are zoonotic diseases, which transfer infection from animals to humans.
- If domestic production faces physical limits or is much more expensive than imports, countries will still be grappling with a constraint on meeting demand – except it will be about affordability instead of availability.
- Countries with the ability to do so may try to increase domestic manufacturing capacity for certain supplies. But there are constraints on their ability to do this. Profitability is one. Opportunity costs are another. Resources diverted to replicating what was previously done elsewhere will not be available for potentially more productive activities. Taken far enough, this would make for a poorer economy overall.
- Stockpiling is also far from a perfect option. There is not only the problem of cost, but of anticipating the needs that will have to be met in the future. We have seen in recent months that when governments turned to stockpiles, they often found them depleted, out of date, or in the case of medical devices, the equipment in the stock was all too often inoperable. Moreover, a serious enough crisis might overwhelm stockpiles, or consist of demands for products that were not foreseen.
- At the level of individual supply chains, it is likely that low-inventory just-in-time production networks will feel the need to build in more buffers, in the shape of bigger inventories. There will also be diversification of offshore sources of supplies
- While there will likely be a combination of these approaches – efforts to make existing supply networks more resilient, attempts to bolster domestic production of key products, and stockpiling, deep and diversified international markets offer a more promising path to supply resilience. Trade remains the economically optimal response, but countries need to be confident they can rely on imports.
The trading system can and must respond to these changes.
- A robust and timely response is needed both for the wider goal WTO reform for a broadly open, rules-based global economy, and for the narrower issue of access to essential products in a time of crisis.
- Several governments have put forward ideas for how agreements at the WTO could help keep supply lines for essential goods open and responsive. The WTO was created to facilitate international cooperation, transparency and rules-based frameworks for international trade.
- A number of members decided early in the pandemic to lead by example:
- Singapore and New Zealand agreed on measures to facilitate the trade of essential goods, namely by eliminating applied tariffs, refraining from export prohibitions or restrictions, and expediting the movement of crucial goods across borders.
- In a joint ministerial statement, Australia, Brunei Darussalam, Canada, Chile, Myanmar, New Zealand and Singapore declared their commitment to maintaining connected supply chains and ensuring that the transportation of essential goods remains open.
- On 15 May 2020, the G20 called on governments imposing COVID-related measures to refrain from creating unnecessary trade barriers and disrupting global supply chains, emphasizing that measures should be “targeted, proportionate, transparent, temporary and consistent with WTO rules.”
- In June, the Ottawa Group (which includes Canada, Australia, Brazil, Chile, European Union, Japan, Kenya, Republic of Korea, Mexico, New Zealand, Norway, Singapore and Switzerland) committed to ensuring transparency (calling on the WTO Secretariat to provide monitoring and to share best practices), withdrawing trade-restrictive measures as quickly as possible, fostering WTO e-commerce negotiations, and facilitating the trade of medical products.
- Also in June, a concept paper from the EU proposes a three-pronged approach: 1) permanent and reciprocal tariff elimination on pharmaceutical and medical goods, 2) disciplines relating to essential goods in crisis situations, and 3) other disciplines, such as regulated remanufactured goods for knowledge sharing. The concept paper:
- Notes a need to update the Pharmaceutical Agreement’s product coverage and add duty-free treatment to medical goods to existing disciplines.
- Proposes limitations on the duration and scope of export controls for medical goods in response to health emergencies. and,
- Recommends the creation of a permanent framework for collaboration and transparency.
What can be done?
At a minimum, Members can consider adopting for industrial goods the same commitment that exists in the WTO Agreement on Agriculture: require members contemplating export restrictions to “give due consideration” to the effects such measures could have on food security in importing countries, as well as providing advance notice to the WTO and agreement to consult promptly with affected members.
In addition, a close look can be had at the WTO rules that permit temporary export restrictions to prevent or relieve domestic shortages of critical supplies. This exception to the rules prohibiting export restrictions, also contains the following language: In this context, there is also a requirement that
such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. WTO GATT Art. XX(j).
Consideration can be given to operationalizing the right of WTO Members to have an “equitable share of international supply” of critical medical supplies.
The WTO’s contribution to post-COVID recovery would be substantially enhanced if members take forward the ongoing process of systemic reform.
- Currently, there are a variety of ongoing negotiations that each represent steps in the direction of reform:
- Multilateral talks on fisheries subsidies.
- Negotiations on digital trade among a group of Members accounting for over 90% of global trade including the European Union, China, and the United States.
Accomplishing these objectives would mark a return of the WTO to widely acknowledged relevance. But they are not enough.
The line must be held against a return to nations going their own way, resorting to protection rather than to international co-operation. A stand-still is needed on trade restrictive measures, and more: liberalization of trade wherever possible, full implementation of the Trade Facilitation Agreement, with a major increase in capacity building in the least-developed countries, hearing for the first time the pleas from land-locked countries, and generally lowering the cost of moving goods across borders.
The WTO has great convening power. During the financial crisis it brought together international financial institutions and major banks to restore trade finance. That job was still unfinished when the pandemic descended upon us.
Increased efforts are needed by the public and private sectors to ensure that trade finance is available at reasonable cost and in the quantities needed. For many developing countries and smaller businesses, the credit, guarantees and insurance that finance a significant share of global trade were far from abundant even before COVID-19. When trade-related credit is insufficient, it prevents businesses from trading and limits the ability of trade to contribute to the wider economic recovery. By one estimate, financing capacity ranging from $2 to $5 trillion will be needed to meet demand for trade finance.(1)
As important as these measures are, the WTO needs to be restored to its intended purpose, its role as a venue:
- where agreements are successfully negotiated to address pressing problems;
- where disputes are settled within a binding and universally accepted structure; and
- where members are actively served by a strong, dedicated, professional Secretariat.
We need also to be better prepared for future crises. While the present will not take care of itself, neither will the future. Concerted efforts at forward planning are needed to provide fresh thinking in order to:
- Prepare for a world of more simultaneous and system-wide crises; and
- Consider what kind of trade rules would best support people’s well-being, under changing and challenging circumstances.
There are no good excuses for inaction. While the WTO is not isolated from geopolitics, all leading powers have shared interests in the basic framework for international trade that the WTO represents.
In 1934, an answer to the depression was the negotiation of trade liberalizing agreements; in 1948, an answer to the devastation of two world wars was the creation of the multilateral trading system; in1973 an answer to a world divided by nontariff barriers was the launching of the Tokyo Round; and in 1995, the answer to broad areas of international commerce still being devoid of adequate rules, was the creation of the WTO.
This is yet another time of great challenges, of a resurgence of nationalism, of centrifugal forces. The policy response must consist of strong new initiatives to open markets, to provide greater fairness, and to re-kindle a spirit of international co-operation.
We have a strong foundation on which to build. It is now necessary to answer the call for WTO reform. The times demand action.
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