Amid concerns over a “new mediocre” in the global economy, trade should be seen as an integral part of the plan for increasing global growth over the medium term, a new IMF report says.
In its regular five-year review of trade, the IMF takes stock of the changes in the trade landscape and discusses key issues for the institution’s future work agenda.
A revival of trade growth, which has been slowing in recent years, has the potential to significantly impact growth in both individual countries and the global economy as a whole, the report says.
Speaking to IMF Survey, two of the report’s authors—Martin Kaufman and Varapat Chensavasdijai of the IMF’s Strategy, Policy, and Review Department—discuss the growth potential that trade reform holds and its catalytic effect on other structural reforms.
IMF Survey: Why is global trade slowing down?
Kaufman: Following the global financial crisis, trade slowed because there was a synchronized global slowdown. There was a sharp recovery in global trade in the years that followed, but more recently, trade has been growing very slowly compared to past rates. But, we wondered, is this a cyclical (temporary) phenomenon or a more structural (permanent) one?
Chensavasdijai: About half of the slowdown in trade is due to cyclical factors, we found. But there are other reasons that are more structural. These have to do with maturation of processes that led to the fast growth of trade over the last couple of decades—for instance, the emergence of global value chains. More and more final products—such as automobiles—are produced in one country using inputs from many others, partly as a result of fewer trade barriers and technology-led declines in transportation and communication costs. These global value chains were very important in terms of providing trade innovation when they first appeared.
As this business model matures in the countries that have participated in this process, it is not contributing to trade growth the same way it did initially. The same is true for the addition of new members to the World Trade Organization (WTO). Moreover, efforts to advance multilateral trade policy have been difficult and slow. All these factors have weighed on trade growth.
IMF Survey: Why is it important to get trade growing again in this environment of low global growth?
Kaufman: The IMF is focusing on policies that are needed to make sure that, over the medium term, global growth doesn’t settle into a “new mediocre.” Trade—which complements traditional structural reforms—is one such focus. Trade can also have a catalytic effect on other structural reforms. For this reason, we think trade is an integral part of the IMF’s Global Policy Agenda and one of the key reforms needed to increase global growth over the medium term.
IMF Survey: What reforms will help spur trade?
Kaufman: Low-income (and some emerging market) countries have to focus on trade integration—which means developing infrastructure, improving customs, creating a conducive business environment, and strengthening economic institutions and policy frameworks to make them predictable and credible.
But better integration into the global trading system would also involve trade liberalization, which is about reducing barriers. Increasingly, for advanced economies, this will mean focusing more on investment, services and having coherent regulations. These are the new trade policy frontiers.
Improving the coherence of regulations is complicated, because it’s not just one sector. Food is very different from car safety or financial services. It’s a complex process, but the potential gains of expanding the trade frontier towards services and reducing the cost of trading—for individual countries and the global economy as a whole—could be substantial.
IMF Survey: The expansion of global value chains helped fuel trade growth in recent years. How do you see these supply chains evolving in the future?
Kaufman: The global value chains that emerged over the last years grew organically. They first developed in countries that were naturally inclined to trade with each other. Think the North American global supply chain, or the ones in Europe or Asia.
For other countries to be part of global value chains, it will require a new mindset about the role of trade in their growth and development strategies. It’s not thinking about exporting goods; it’s about exporting tasks or parts of a final good that can bring significant efficiency gains locally and globally.
IMF Survey: Non-tariff measures have emerged as a new form of protectionism. What are these measures, and why are they an important focus of trade reform?
Chensavasdijai: Increasingly, non-tariff barriers play a role. Different countries have different requirements for testing the safety of cars, for example, or medicine. Domestic preferences often come into play—for example, with regard to hygiene, food quality, and safety. These are what we call “non-tariff” barriers to trade, and part of the problem is a lack of data, as these barriers differ across countries and are not recorded systematically. We see a risk that some protectionist tendencies may drift toward these measures, and we lack the mechanisms and the institutions to prevent them. We should not be complacent about these new forms of protectionism.
IMF Survey: Global trade talks have stalled in recent years, leaving other vehicles—such as preferential trade agreements, regional trade agreements, and plurilateral agreements—to fill the void. Do global trade agreements still matter?
Kaufman: Yes; it was good that the Bali Agreement came through in December 2013—first, because it showed a renewed commitment of the international community to multilateral efforts and the WTO; and second, because it revived trade facilitation, which helps developing economies integrate into the global trading system.
It’s true that much recent action is taking place through preferential trade efforts. These initiatives provide an opportunity to advance trade policy, which has been stagnating, and they give countries that want to proceed at different speeds a chance to do so. This is fine as long as they limit fragmenting the system, they operate in an open, transparent way, and they eventually evolve in a multilateral way. But the best guarantee for inclusiveness is progress also at the multilateral level.
IMF Survey: Can you give us a sense of the process going forward on IMF surveillance and trade analysis?
Kaufman: The review’s external experts found that the quality and the policy relevance of the IMF’s analytical work on trade issues have been high. But the review also suggests that there is scope for IMF’s bilateral surveillance to better absorb this analysis. We need to continue doing excellent analytical work to understand the evolving trade landscape; we need to enhance the way in which this is translating into implications for countries; and, accordingly, we’ll have to update our guidance to staff on macro-relevant trade and trade policy issues.
There is new momentum in trade policy at the global level, and countries should be paying attention. Instead of thinking of structural reforms in a world where the trade landscape is not moving, the IMF and its member countries need to rethink them in this new context. Bottom line: if you care about growth and you’re not looking at trade, you’re missing the boat.