Countries need to introduce trade reforms – particularly in the services sector – where barriers are as high as they were half a century ago to trade goods and escalating trade tensions threaten growth, three global organisations said yesterday.
“The system of global trade rules that has nurtured unprecedented economic growth across multiple generations faces tensions. Although only recently brought to the fore, those tensions are rooted in issues that have been left unresolved for too long,” the International Monetary Fund, World Bank and World Trade Organisation said in a joint paper.
Calls for trade reform come at a time of rising tensions between the US and China, the world’s two largest economies, and which are locked in a tit-for-tat trade war that threatens to derail global growth.
These tensions are taking place at a time when higher interest rates in the US are hurting emerging markets, which are grappling with their own economic woes.
US tightening diverges with the monetary policy in the EU, where slower growth and low inflation has prompted the European Central Bank to continue its quantitative easing until the end of this year and keep interest rates on hold through at least the summer of 2019.
“Governments need to promptly address outstanding questions involving, for example, the WTO dispute system and the reach of subsidy disciplines. Co-operative action to secure greater openness – an imperative in its own right – could also help to resolve these issues,” they said.
The World Trade Organisation is projecting trade growth of 3.9 per cent for this year and 3.7 per cent next year, below last year’s 4.7 per cent. It lowered its 2018 trade growth forecast in September from 4.4 per cent in April.
The organisation cited trade tensions as the biggest threat to global commerce growth, coupled with higher interest rates and financial volatility.
The trade outlook is based on forecasts of world real gross domestic product of 3.1 per cent this year and 2.9 per cent in 2019, which creates a ratio of trade growth to GDP growth of 1.3 in both years.
The impact of reform on trade growth, and consequently economic expansion, had slowed down even before the start of the recent trade wars.
Global trade volumes, which grew at 7 per cent per year during the 1990s at double the rate of global GDP expansion, slowed down between 2001 and 2007 with the ratio of trade growth to GDP plunging to 1.5 and reaching almost parity in the period after the 2008 financial crisis.
“While several factors lie behind the slowdown, a substantial part represents a slower pace of trade reform following the remarkable progress made from the 1980s to the early 2000s,” said the paper.
For example, developing countries cut their average tariffs from 31 per cent in 1980 to 9 per cent in 2015.
“Tariffs, regulatory differences and other policy barriers still impede trade in goods,” said the paper.
“And even as trade agreements increasingly extend behind the border, domestic policies still often distort trade.”
The services sector, in particular, needs more trade reforms as it contributes to two thirds of GDP product and employment as well as nearly half of global trade.
“The opportunities provided by information technology and other fundamental changes in the global economy are yet to be reflected in modern areas of trade policy, such as services and electronic commerce,” said the paper. “Greater openness in these areas would promote competition, lift productivity and raise living standards."