How an activist approach on trade could stimulate global demand – Roberto Azevêdo

Roberto Azevêdo, director-general of the World Trade Organisation, has written a fantastic piece arguing that trade can be used to drive growth and create jobs:

How an activist approach on trade could stimulate global demand

First, globalisation has not expired. A defining feature of the globalisation phenomenon is the spread of production chains across borders. The parts for a Boeing 787 Dreamliner come from more than 40 suppliers based in over 130 sites around the world. Even seemingly simple products are made in complex global networks. A jar of Nutella can contain hazelnuts from Turkey, palm oil from Malaysia, cocoa from Nigeria, sugar from Brazil and flavouring from China.

Some argue that these production chains are now contracting, indicating a less globalised world economy. If so, you would expect to see trade in components declining as a share of global trade — but data we collect at the World Trade Organisation show that this is not happening. True, the scale of trade growth is lower overall, but the pattern of trade is unchanged.

The second misconception is the expectation that trade growth will return to the pre-2008 levels — a period when globalisation had gone into overdrive. This is highly unlikely. Trade growth has been hit hard by low global demand as developed countries come slowly out of recession and as emerging economies mature. The most recent WTO forecasts show that slower growth — 2.8 per cent compared with a pre-crisis average of 5 per cent — is set to continue.

So what should we expect from trade growth in the medium term? Before the financial crisis, trade was growing twice as fast as gross domestic product. Today it is growing at the same rate as GDP — as it did in the late 1970s and early 1980s. In future, we expect this ratio to improve to a midpoint between today’s doldrums and the rapid expansion of the pre-crisis years. This would bring it in line with the postwar average.

Exactly how this unfolds will depend on a number of factors. The next big burst of globalisation is likely to come from Africa’s integration into the world economy. Africa is the fastest-growing continent and it has the youngest population. As emerging economies climb the development ladder, elements of the global production networks will relocate and their likely destination is so-called “frontier markets” — in Africa, central and south Asia, and Latin America. While this dynamic process can be unsettling in the short term, it is essential for growth and development, and it is fundamentally global in nature. This is one reason why maintaining global trade rules is vital. A focus solely on regional trade deals cannot address this process.

The most important factor in determining the pace of future trade growth is whether we fight for it, and whether further big trade deals can be struck and implemented. Governments have pushed monetary and fiscal policies to the limit, but there is still room to move on trade; a more activist approach here could help to stimulate global demand. The WTO’s recent Trade Facilitation Agreement and deals to scrap farm export subsidies and tariffs on a wide range of IT products show what can be achieved. Implementing the TFA, for example, will cut global trade costs by up to 15 per cent. This is a bigger impact than eliminating every remaining tariff the world over, and it could deliver a trillion-dollar shot in the arm for global trade.

Trade-driven globalisation has not come to a halt — rather, it is constantly evolving. How we shape the next stage of its evolution is for all of us to decide. We should remember that a major reason global GDP dipped just 2 per cent during the recent financial crisis, compared with 17 per cent in western countries during the Great Depression, is that there was no rush to protectionist policies this time around — surely this is not a lesson that we need to learn twice.

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