WITA’s Friday Focus on Trade – June 9, 2023




World Trade Can Still Drive Prosperity

Rising from the ashes of three disastrous decades of deglobalization, extremism, and world war, our two institutions were built on the idea that thriving international trade goes hand in hand with global prosperity and stability. On balance, the post–World War II record has been impressive. Today fewer than 1 in 10 of the world’s people are poor, a fourfold reduction since 1990, as low- and middle-income countries have doubled their share of global trade. Pivotal to this leap in global income is a twentyfold increase in international trade since 1960.
Yet the tide is turning against economic interdependence and international trade. Trade restrictions and subsidies increased after the global financial crisis, and tensions escalated further as governments responded to the pandemic and Russia’s war in Ukraine by scrambling to secure strategic supply chains and rushing into trade-distorting policies. Taken too far, these measures may open the door to alliance-oriented policies that reduce economic efficiency and fragment the global trading system. They could backfire if short supply chains end up more vulnerable to localized shocks. Foreign direct investment is already increasingly concentrated among geopolitically aligned countries.
Should we abandon the idea of trade as a transformative force for good? Our answer is a resounding “No!” Despite all the talk, trade has continued to deliver even during recent crises. It has great potential to keep contributing to higher living standards and greater economic opportunities for decades to come.
There are at least three reasons international trade is crucial for global prosperity. First, it increases productivity by expanding the international division of labor. Second, it enables export-led economic growth by providing access to foreign markets. And third, it bolsters economic security by giving firms and households valuable outside options when negative shocks hit.
During the pandemic, trade and supply chains became vital to ramping up production and distribution of medical supplies, including vaccines. The power of international trade as a source of resilience has become evident again during the war in Ukraine. Deep and diversified international markets for grain enabled economies traditionally reliant on imports from Ukraine and Russia to make up shortfalls. Ethiopia, for example, lost all its wheat imports from Ukraine but now sources 20 percent of its wheat shipments from Argentina—a country from which it had not imported any wheat before.
…Despite geopolitical tensions, meaningful cooperation on trade remains possible. We saw this last June when all WTO members came together to deliver agreements on curbing harmful fisheries subsidies, removing barriers to food aid, and enhancing access to the intellectual property behind COVID vaccines. Governments can build on those successes at the WTO’s next ministerial meeting in February 2024. And recent work by our institutions points to a way to defuse tensions in sensitive areas such as subsidies through data, analysis, and common perspectives on policy design.
Navigating trade policies through the current turbulent period is challenging. But keeping trade open and looking for new opportunities for closer cooperation will be essential to build on existing gains and to help deliver solutions to climate change and other global challenges.
06/01/2023 | Kristalina Georgieva & Ngozi Okonjo-Iweala | International Monetary Fund & World Trade Organization

The Problem With Preferential Trade Agreements

Excerpts from Uri Dadush and Enzo Dominguez Prost’s analysis on the problem with preferential trade agreements.
The multilateral rules that govern world trade are eroding. The World Trade Organisation (WTO) is struggling to make substantial progress on reform and its Appellate Body, which adjudicates in trade disputes, is disabled. At least twenty unresolved WTO disputes remain in limbo. Meanwhile, the trade war between China and the United States is intensifying. In the US, national security considerations (real or imagined) dominate trade policy.
Preferential trade agreements (PTAs), however, continue to proliferate. Capitals react to the undermining of WTO rules by reassessing alternative arrangements to keep trade open and predictable, and to defend themselves against lawlessness.
This is the right response but it is not sufficient. The trend towards preferential trade agreements has dangerous systemic implications. If, in a fraught geopolitical environment, multilateral rules are allowed to fail, world trade will become increasingly regionalised and fragmented. This implies a substantial loss of efficiency and a greater risk of trade conflicts within and between regions.
Good, but also bad
In many ways, the proliferation of PTAs is a good thing. The trade coverage of PTAs is now so extensive that under any assumption about the future of the multilateral trade rules, they will play a key role in keeping large parts of world trade secure. In many instances PTAs now include more parties, have coverage that is both broader (eg market access in services, investment) and entail deeper reforms (‘behind the border’) than under the WTO. They are also increasingly enforceable. ‘Deep PTAs’ can benefit third parties by reducing concerns about trade diversion because of tariffs and complex rules of origin.
However, the world’s most important bilateral trade relationships – those between China, the EU and the US – remain uncovered by PTAs or even partial deals, as negotiations between them have failed or stalled. If WTO rules continue to erode, there will be a rules vacuum among the trade giants (and among the 27,000 bilateral trade relationships not covered by PTAs at all). Although the three big bilateral trade relationships (China-EU, China-US and EU-US) each account for only 3 percent to 4 percent of world exports (11 percent in total), it is in this arena that the possible fragmentation of the world trading system will be decided.
The giants are each part of PTAs/mega-regionals in their respective regions. In these, they play dominant roles, so — as multilateral rules erode — there is a strong temptation for the giants to push ‘friend- shoring’ or ‘near-shoring’. Firms faced with this uncertainty will be inclined to follow and partition their supply chains regionally, implying duplication and inefficiency but not necessarily withdrawal from global markets.
Avoiding the worst-case scenario
Looking forward, the most damaging scenario is the one to which the world is presently headed, in which the WTO rules become increasingly eroded and the regional hegemons eschew deals with each other. As stressed by those who early on saw PTAs as “stumbling blocks” of multilateralism, the dynamics inherent in the proliferation of PTAs are worrisome. Already some small and middle-sized countries, including Chile, Mexico and Morocco, and large economies, including Germany and France, are party to numerous PTAs covering 80 percent or more of their trade. In a sense, these nations have already hedged their geopolitical bets, which is a good thing. But do countries so reliant on PTAs still have a reason to engage in WTO negotiations? And is there a systemic tipping point beyond which reliance on PTAs makes impossible multilateral deals, which require consensus and sacrifice?
05/09/2023 | Uri Dadush & Enzo Dominguez Prost | Bruegel

Free Trade Agreements are Key to Economic Prosperity in Today’s World

Free trade is the cornerstone of a competitive economy as it contributes to the prosperity of any nation and creates socioeconomic benefits. It also drives job creation and fosters a more efficient and competitive industry. 
In the words of Benjamin Franklin: “No nation was ever ruined by trade, even seemingly the most disadvantageous.” 
Over the last decades, not only were nations not harmed by trade, but they have been reaping unimaginable benefits, which have transformed the standard of living and afforded them greater access to competitively priced goods.
The Arabian Gulf region is an important global trade hub that depends heavily on exporting oil derivates and raw materials to the world. After oil and gas, the chemical and petrochemicals industry is the second largest industry in the region and plays a vital role in the Gulf Cooperation Council economies. The value of chemical trade flow in the GCC reached $88.6 billion in 2021, with exports accounting for $68.6 billion: an increase of 56.5 percent in value in 2021 compared to the year before.
Off the back of this growth, chemical trade is emerging at the forefront of the regional agenda. In 2021, the region set a new record with its trade surplus reaching $53.7 billion (the highest since 2009).
Furthermore, growth in the GCC chemical industry translates into better job creation in the region. In 2021, the chemical sector accounted for 53,900 direct and 107,800 indirect jobs, and 48,500 induced jobs — or a total of 210,200 jobs.
While regional chemical trade has been buoyant over the last three years, opportunities to improve the chemical industry’s international trade position certainly exist. But to achieve this, the policymakers’ role is of paramount importance if we are to see growth in the share of free trade agreements and preferential trade agreements between the GCC and its trading partners. Such deals are increasingly being seen as beneficial to GCC’s economic growth as well as the sustainability of the regional chemical industry. From helping to raise living standards to attract foreign investment, fostering innovation in manufacturing, and connecting businesses with people, free trade deals have an unmatched potential to make industries more sustainable, improve revenues, generate more jobs for the local population, and facilitate the development of advanced technologies.
Free trade agreements will help the region’s downstream players to boost their innovation output and become more competitive globally. Robust provisions on intellectual property rights protection that potentially go beyond the standard protection envisaged in the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights would reduce costs of trading in IP-sensitive goods and promote innovation in sectors, such as the chemical industry. 
Free trade deals not only reduce and eliminate tariffs, but they also help to overcome behind-the-border barriers. As a result, companies can focus on producing and selling goods that best utilize their resources, while other businesses import scarce or locally unavailable goods and raw materials. It is a win-win situation for all. There is good news for local industries too. FTAs are proven to help small and medium-sized businesses to become more competitive and less reliant on government subsidies. Just imagine the sheer value that free trade agreements can unlock — for local communities, consumers, and the overall economy.
While it must be recognized that FTAs could reduce government revenues, which come from existing customs duties, this reduction in revenue would be offset by enabling GCC commodity exports to gain access to protected markets. Gaining access to new markets will in turn enhance the netback for regional exports and generate higher revenue for chemical firms, which are wholly owned by GCC governments.
The international trade landscape has been undergoing a series of tectonic shifts in the face of changing chemicals supply and demand centers, emerging economies claiming a larger share of international trade, world events, such as the war in Ukraine, supply chain challenges, the COVID-19 pandemic, and increasing protectionism.
So, what opportunities lie ahead for new FTAs? The GCC region has the highest intraregional trade share and intensity with China, India, and Turkiye. It has lower trade costs with this group of countries when compared with other economies. Consequently, free trade agreements with China, India, and Turkiye will prove to be beneficial.
If the GCC is signing or planning to sign such an agreement, it would be essential to know which goods are the most efficiently produced and select the most profitable sectors to maximize gains.
In a recent white paper issued by the Gulf Petrochemicals and Chemicals Association, we shared exclusive insights that can help policymakers evaluate the potential economic impact of a free trade agreement. It is a must-read for anyone looking to enhance their understanding of FTAs and their vital role in the chemical industry and the region.
To conclude, as we look to the next decades when the global population is projected to exceed 9 billion by 2050, demand for chemicals and agri-nutrients will continue to rise, creating unprecedented pressure on the industry to deliver its goods to an exploding global population. The GCC chemical industry has strong potential to benefit from the global increase in chemical demand, projected to double by 2050 and provide life-enhancing, safer, cheaper, and more durable chemical products to communities across the world.
05/21/2023 | Dr. Abdulwahab Al-Sadoun | Arab News

Perspectives: Friend-Shoring is No Substitute For Having Global Trade Rules

A recent speech by US National Security Advisor Jake Sullivan on the Biden administration’s approach to balancing domestic industrial policy and global trade laid out a clear objective “to build capacity, to build resilience, to build inclusiveness, at home and with partners abroad.”
Sullivan’s speech gave a number of examples of partnerships the US is pursuing with other countries – with the EU discussed first.
His focus was not just bilateral. Sullivan also mentioned the World Trade Organization, “the Biden administration is still committed to the WTO and the shared values upon which it is based: fair competition, openness, transparency, and the rule of law.”
On the surface, there is plenty of common ground with how the EU views current trade policy challenges. Brussels would also emphasise the concept of autonomy or resilience. And industrial capacity, working with friends, and remaining committed to the multilateral WTO would certainly form part of the EU’s approach to global trade.
The resort by the US and the EU to large-scale subsidies to accelerate the the green transformation in particular raises the question of where the balance lies between domestic and international considerations in their trade policy making. The crux of the matter is the extent to which it is possible to prioritise domestic manufacturing yet still maintain diverse global relationships and nurture a strong WTO.
When looking at US actions, it seems that Washington’s lowest priority is the WTO. There has instead been a flurry of activities with selected partners to pacify their reactions to the Inflation Reduction Act, which includes WTO-incompatible provisions.
Where the EU faces similar dilemmas, Brussels put a greater emphasis on WTO consistency. This feels like the right approach in that prioritising domestic activity and special deals create dangerous risks globally, as it sets a precedent for a ‘free-for-all’ on international trade rules.
Subsidies driven by a ‘zero-sum’ view of trade
Western trade politics today seem driven by three main factors – national interest currently expressed as active industrial policy, the real or perceived security and/or economic threat of China, and the low-carbon transformation. The first of these is arguably the most important, as developed countries make clear their preference for maintaining or growing manufacturing jobs at home.
With domestic interests defining the priorities, this is not a rerun of the Cold War, of one bloc against another. In any case, the level of trade with China, in both the EU and US, is of a far greater order than in the pre-1990 situation.
The underlying political belief seems to be that in effect manufacturing jobs such in the area of electric vehicles or other parts of the green tech sector can be shifted from China to the EU or US – and that that they are finite in number. However, this also means that the US in particular wants the first set of jobs to come to them, not to allies.
Major powers prioritising their own perceived economic needs with little concern for others is the world of the 1920s and 1930s. Indeed, the failure of this model was what led directly to the establishment of the non-discrimination principles underlying the General Agreement on Tariffs and Trade, and now the WTO, which saw trade as something from which all countries could gain.
There are therefore good reasons to worry about the current direction of travel in both the US and the EU.
05/10/2023 | David Henig | Borderlex


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