Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Asia House’s publication, Asia House Insights: Asia Trade in the New Global Order, brings together the thoughts of leading figures in global trade. Here, Robert Koopman explores the factors driving change in the world trade system.
After a relatively strong recovery in 2017, trade growth for 2018 and 2019 looks likely to slow down. The World Trade Organization (WTO) recently revised its 2018 trade growth forecast downward from 4.4 per cent to 3.9 per cent and the 2019 forecast down to 3.7 per cent.
These downward revisions reflect concerns around the recent United States tariff actions with respect to China and other countries. While we expect the direct effects of these tariffs to be relatively small, there is a unanimous view among the WTO, International Monetary Fund (IMF), World Bank and Organisation for Economic Co-operation and Development that, should these rising trade tensions start to affect firms’ investment and consumers’ consumption decisions, we could see bigger negative effects.
There is also increasing concern that financial markets could be adversely affected by monetary rebalancing and rising financial market uncertainty in some developing countries. The global macro economy, which recently seemed to have recovered broadly from the great financial crisis, now faces growing downside risks. The rising trade tensions in this increasingly uncertain economic environment likely reflects years of growing pressures from rapid changes in global relations.
Recent discussions by some members of the WTO suggest an interest in reforming a set of rules initially established 70 years ago, with the last comprehensive update in 1995. Despite important progress with recent agreements on trade facilitation, information technology act expansion, and commitments to eliminate export subsidies, many WTO members express concern that the rules of the organisation have not kept pace with modern economic developments. It is not only multilateral trade rules that countries are interested in updating, but also existing and new regional agreements often touching on important areas such as the digital economy and services.
Since the global financial crisis, trade and, more broadly, globalisation seem to have come under attack in many countries as governments, firms and people struggle with changing economic circumstances. Since the 1980s, trade and global integration have made significant positive contributions to increasing economic growth, reducing poverty, and improving the lives of many of the world’s poorest people. Simply put, trade has been a remarkable engine of economic growth and development. But that growth, and the benefits of that development, are not always evenly distributed. At the same time, perceptions of globalisation’s contribution to slow middle-class income growth in developed countries appear to have become more critical since the global financial crisis of 2008.
Robert Koopman serves as the Chief Economist and Director of the Economic Research and Statistics Division at the World Trade Organization. In this post, Robert provides the Secretariat and Member Countries with analysis and information that promotes a deeper understanding of trade and trade policy’s role in economic growth and development.
Economic theory has long identified that trade can create winners and losers, while generally growing the overall size of the pie. Too often, national and international political debates miss the complexities and subtleties of trade-related economic research. Most of this research emphasised the need for coherence between international and domestic policies, and often around the fact that trade – like many other forces, particularly technological change, changing consumer preferences, or transforming business models – requires adjustment by firms, workers and communities. Still, for many years, the structure and nature of trade agreements seemed to meet the needs of most countries, and many agreements allowed for considerable flexibility in the level and nature of their commitments.
But the world continues to change, very fast. There are at least three important forces stressing historical approaches to international rules, including very rapid technological change, changing economic geography across and within countries, and potential changes in geopolitical strategies from broad co-operation to confrontation. The rapid expansion of information and communications technology during the latter decades of the 20th century accelerated in the early decades of the 21st. This rapid technological shift brought to the hands of many consumers around the world global connectivity in the form of smartphones. It also integrated regional and global firm supply chains. This technological shift is continuing with the advances in artificial and augmented intelligence, the internet of things, and distributed ledger technologies. The WTO recently predicted that these digital technologies could reduce trade costs and increase global trade growth from 3 per cent per year to nearly 5 per cent per year.
Rapidly changing economic geography, while not unusual from an economic history perspective, has seen faster and greater change. The rise of the United Kingdom and United States during their industrial revolutions took about 100 years, Japan and the Asian tigers about 50 years, and now China in 30 years. The good news is that the emergence of a new, fast-rising global economy did not mean impoverishment of the previous economic powers, and that these rising economies, often using trade, has usually meant broadly improving global growth. But one dimension, while always present in past transitions, appears to be a more powerful force in changing economic geography in the 21st century: the rise of cities as an economic force. The combination of technology and globalisation now means that cities like those in China can quickly become a major economic force and be on the cutting edge with world-class global technology and competitiveness in many industries, while interior regions of China experience much less growth and remain much less competitive globally.
Many countries now experience such regional disparities, including developed countries such as the United States. The economic growth experience in the San Francisco Bay and New York City areas compared with that of Detroit and Gary, Indiana, let alone rural areas, shows dramatically different outcomes over the last 20 years. These kinds of regional disparities can have a trade dimension, but also reflect many other, domestic- policy-related, drivers. Increasingly policymakers need to recognise the need for coherence in policies across domestic and international dimensions, as well as across growth drivers such as infrastructure, demography, education, health, labour and competition policies.
Finally, we are seeing a major potential change in geopolitical orientation from broad co-operation to confrontation. In the post-World War II era of United States-led global institution building, the emphasis was on building cooperative approaches to global challenges. These institutions included the WTO, the World Bank and the IMF, among many others. In part, building these institutions reflected a geopolitical approach to uniting Western-style democratic market economies to counter European and Asian communism, but generally the institutions were open to all who were willing to meet certain pre-conditions. Much of the rapid global economic growth experienced since the end of World War II, as well a broader peace without global conflict, has been attributed to these cooperative institutions. But recently, the United States has begun to adopt a more unilateral or bilateral approach to global policy development, and, in some cases – particularly with respect to China – adopted specifically targeted trade policy measures. These measures were adopted largely because the US argues that China has not ‘played by the rules’ and that existing multilateral, cooperative institutions are not effective in disciplining China’s use of government policies to drive economic growth, which has global spillover effects. With the world’s two largest economies potentially moving from co-operation to confrontation, economic growth and policy responses have become increasingly uncertain.
How the three forces discussed above play out in the next decades will have important implications for the global order in the 21st century. Technological growth stresses existing business models and worker skills, rapid geographical change in economic growth within and across countries stresses international and domestic policy responses, and potential changes in the global geopolitical environment will stress global institutions, and potentially global peace and prosperity. How people, governments and institutions respond will have important implications for our futures.
This article is from Asia House Insights, a collection of commentaries by leading figures in global trade. Download now.
