How the World Trade Organization Can Shore Up the Global Economic Order
June 9, 2022
As trade officials gather on the calm shores of Lake Geneva for the World Trade Organization’s long-delayed 12th ministerial conference, a perfect storm is brewing in the multilateral trading system. The cumulative effects of the COVID-19 pandemic and the war in Ukraine have led to prolonged supply chain disruptions, global food shortages, and skyrocketing energy prices. These breakdowns of international trade are causing some to proclaim the end of the era of globalization. Business and political leaders such as BlackRock CEO Larry Fink, European Central Bank President Christine Lagarde, and U.S. Treasury Secretary Janet Yellen are questioning the future of an integrated global economy. They predict that the steps that firms and governments are taking in response to the current crises will effectively “deglobalize” the world economy: for instance, the business practice of “just-in-time” value chains that move materials across borders just before they are needed could shift to a “just-in-case” model that focuses on maintaining large inventories to safeguard against supply chain disruptions. This also means that the offshoring of production to the most cost-effective location could give way to so-called re-, near-, and friend-shoring: putting production in closer or friendlier destinations that align with the home country’s political values and lower a company’s exposure to external risks.
But there are good reasons to be skeptical of the globalization doomsayers. Of course, it is still too early to evaluate the long-term effects of the recent disruptions. For now, though, evidence suggests that global economic integration continues, even if it is slowing and changing. This evolution also means that traditional measurements of global integration are becoming obsolete as value chains adapt to new realities. For instance, one historical metric of globalization is the ratio of merchandise trade to global GDP, which measures the relative importance of international trade of goods in an economy. That ratio has declined from its peak before the 2008 global financial crisis, suggesting that globalization is indeed on the retreat.
Yet the ratio of services trade to global GDP, which measures the relative importance of international trade in services such as sales, marketing, management, administration, engineering, and education, has increased during the last 15 years, fueled by the rapid growth of cross-border digital networks. At the same time, the falling ratio of merchandise trade to global GDP should also come as no surprise: the economic integration of China, whose participation in global value chains was a key driver of globalization over recent decades, is facing diminishing returns. Moreover, China’s economy is now undergoing a structural shift toward domestic consumption and services. China’s weighty role in the world economy masks the fact that many other economies, such as Bangladesh and Vietnam, are continuing to integrate ever more deeply into global value chains.
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Other factors also indicate that global economic integration is here to stay. Global exports of goods and services, for example, are still growing steadily in absolute terms. Even bilateral trade between China and the United States, geopolitical rivals that are increasingly at odds, continues to reach record heights—in the face of a trade war and a pandemic, no less. Moreover, notwithstanding the political rhetoric of their governments, many European and U.S. firms are doubling down on their investments in China. Other indicators point in a similar direction: both the DHL Global Connectedness Index and the KOF Globalisation Index indicate that global integration is deepening in various economic, social, and political dimensions. In the short run, there is, therefore, a discrepancy between business realities and political objectives: for the most part, discussion of so-called decoupling is occurring in policy planning rooms, not corporate boardrooms. Such contradictions may expose the limits of economic statecraft.
This is not to say that the political choice to curb further integration of the global economy will not have consequences, but for now, deglobalization is mostly a point of principle rather than of practice. Nonetheless, it is clear that the international trading system and the course of globalization are being put under pressure by new fault lines, namely, great power competition, digital transformation, inequality, fallout from the pandemic, and climate change. Given these rising challenges, there are steps that the members of the World Trade Organization must take to prevent deglobalization talk from becoming a reality.
The current upheavals certainly have the potential to transform the global economy. Perhaps most important, China’s rise and Russia’s invasion of Ukraine are causing the geopolitical structure underpinning global trade to undergo a dramatic shift. Although Russia may soon be relegated to the sidelines, the rivalry between the United States and China will continue to be the most defining feature of international politics for years to come. In the face of mounting tensions, Washington and Beijing are already trying to decouple sensitive segments of their economies to limit the availability of dual-use technology—designs that can be used for both peaceful and military aims—for the other side. Countries and regions that have deep economic ties with both the United States and China, such as the European Union, are increasingly caught in the middle. This rift, however, is mitigated by the fact that major global challenges such as climate change and public health will require global cooperation, so the two sides will have to keep talking to each other. What the former Australian Prime Minister Kevin Rudd calls “managed strategic competition” will therefore predominantly play out in the economic domain, with significant implications for the trading system. For example, Beijing is pushing for greater internationalization of the renminbi to conduct more of its trade in a currency that is independent of the U.S. dollar, insulating it from U.S. economic weapons such as sanctions. Both countries are building more and more domestic capacity for critical supply chains in strategic sectors, such as semiconductors, to lessen their dependence on the other. In the digital sphere, they are advancing different, if not opposite, visions of data governance, with the United States advocating for the free flow of data and China seeking to stifle it.
Recent technological developments are also changing the nature of trade itself. The digital transformation, for instance, is redefining how business is conducted across borders, and stay-at-home measures to fight the COVID-19 pandemic have only accelerated this change. More parcels are crossing borders than ever before as a result of the wider use of online platforms to buy and sell goods, shifting the relationship between businesses and consumers toward digital mediation and driving new global markets for small and medium-sized businesses. The digital platform and app economies are creating international ecosystems with products such as social networks and media streaming that were inconceivable when WTO members began discussing the implications of electronic commerce in the mid-1990s. Artificial intelligence applications like machine translation and image recognition are generating new efficiencies and value in cross-border exchanges. Telework is changing global travel patterns and allows service providers in developing countries to directly participate in the world’s largest consumer markets.
These examples illustrate how digital trade across borders is changing so quickly that it is presenting the trading system with a range of thorny challenges, including consumer safety, cybersecurity, ethics, competition policy, and taxation. Although for many years the Internet was a self-regulated space, it has become subject to intergovernmental negotiations, such as the WTO’s Joint Statement on Electronic Commerce, which seeks to develop global rules on digital trade; digital trade chapters in regional trade agreements such as the United States–Mexico–Canada Agreement; and new, stand-alone digital economy agreements, such as the Digital Economy Partnership Agreement between Chile, New Zealand, and Singapore. But the emergence of different models to govern the flow and storage of data, which is crucial for digital services and other forms of trade, also suggests we are entering a new era in which globalization occurs with firewalls.
The multilateral trading system remains the backbone of the globalized economy.
Amid growing socioeconomic dislocation and political upheaval in many parts of the world, countries will also need to reckon with the uneven distribution of the rewards of globalization—and come up with policies to address it. Increased trade boosts overall welfare but, by definition, produces winners and losers. To avoid social disruptions, many countries liberalizing their economies therefore implement trade adjustment programs that provide aid to workers adversely affected by increased imports or rely on social safety nets to compensate and retrain employees. Although there is evidence that countries with more robust social safety nets are also more open to trade, it is also clear that income inequality within many countries has increased during the last decades as economic integration has accelerated. What is less clear, however, is how much of this inequality can be attributed to exposure to foreign competition—the so-called China shock, in which rising Chinese exports led to a loss of manufacturing employment in high-income countries—and how much of it can be attributed to creative destruction from technological change, in which more efficient economic structures supersede old ones. Regardless of the causes, a growing segment of the public in many countries has come to view trade as the main culprit behind inequality, an assumption that has fueled anti-trade politicians, such as Donald Trump, who seek to reduce the exposure of their countries to the global economy.
When the coronavirus sent the global economy into a tailspin, states took unprecedented steps to help their citizens and businesses weather the pandemic. G7 economies, for example, put in place support schemes amounting to $12 trillion, about one-third of their combined GDP. These were, without a doubt, necessary and timely steps to address the crisis. Some efforts, such as the EU’s State Aid Temporary Framework, were specifically designed to avoid distortions to international competition. Nonetheless, given the extraordinary size of the funds that governments disbursed quickly, these efforts are certain to tilt the playing field and have an impact on global trade, at least in the short to medium term.
Finally, the climate crisis should compel governments and policy experts to fundamentally rethink how the trading system interacts with the environment. In the long run, the impact of climate change on food production and water-supply networks will dramatically alter the nature of agricultural trade. Moreover, the growing adoption by many governments of green energy production may well end by the middle of the century the iron grip that fossil fuels have long had over geopolitics, a transformation that has the potential to shift political alliances and reconfigure trade flows. In the shorter run, policies to reduce greenhouse gas emissions will not be contained by international borders, and climate-conscious governments may increasingly resort to carbon border adjustment mechanisms—which impose a cost on carbon-intensive imports such as cement and steel—to avoid carbon leakage, where actors outsource greenhouse gas emissions to countries with lower production standards.
The many vulnerabilities created by continued globalization require firms and governments to reprice the risks of international trade. They also pose new challenges for the trading system, which was primarily built to address the negative effects of protectionism. To survive in the twenty-first century, the multilateral order must learn to address the effects of precautionism—the desire by consumers, firms, and governments to limit their exposure to the risks from participation in the global economy.
ESCAPING A SELF-FULFILLING PROPHECY
This is where the members of the World Trade Organization can—and must—step in. The WTO is not a world government and cannot be expected to solve all problems. At the same time, the WTO has played a crucial role in forging and underpinning the rules-based trading system that sustained globalization over the last three decades, a time during which global per capita income almost doubled. Although the challenges the world faces today may be unique, it is also important to recall that political leaders and policy experts have debated regionalization for as long as the WTO has existed. The proliferation of regional trade agreements, expanding from 55 in 1995 to 355 in 2022, seems to support the view that the system has been fragmenting for some time. However, at most one-third of world merchandise trade has preferential tariffs that go beyond the nondiscriminatory WTO rates, and even the degree to which firms use these trade preferences is an open question. As it stands, the multilateral trading system therefore remains the backbone of the globalized economy. Of course, if multilateral trade rules are not updated to address twenty-first-century challenges, countries could increasingly fall back on the expanded network of regional trade agreements. But the economic inefficiencies that such fragmentation entails would leave all WTO members worse off and hurt the poorest countries the most.
If WTO members fail to move quickly, deglobalization could become a self-fulfilling prophecy.
Managing the new fault lines of globalization will be a challenge—one that WTO members must rise to meet. The 12th ministerial conference will focus on fisheries subsidies and vaccine equity, which are important issues in their own right. But tackling these issues will not resolve the deeper structural challenges facing the multilateral trading system. If WTO members want the current order to survive, they urgently need to forge a shared understanding of how geopolitics, technology, inequality, subsidies, and climate change are affecting international trade. Many things stand in the way of this goal: for one, it is an open question to what extent WTO members can weaponize trade in the name of security, as in the case of Western sanctions against Russia, without causing the system to implode on itself. Structural divisions between competing data-governance models present a challenge for a plurilateral agreement on electronic commerce and may shift the locus for regulating digital trade elsewhere. So-called worker-centered trade policies must not ignore the fate of workers in the developing world, or they could end up fueling populist movements in some developing countries that undermine the rules-based system even further. WTO members will also need to find an arrangement that accommodates the vastly expanded subsidies that many countries have been using to address the economic impact of the pandemic, or risk a harmful subsidy race. Finally, uneven emissions and the growing political support in many countries for efforts to address carbon leakage must induce reforms of the multilateral trading system to bring it in line with the goals of the Paris Agreement.
In the absence of meaningful reform, anti-trade political forces may eventually succeed at tearing the integrated global economy apart. But for now, fears about deglobalization have little grounding in economic reality, and the multilateral trading system continues to provide an important public good that delivers substantial benefits to people everywhere. At the same time, the current wave of inflation serves as a reminder that a less predictable and more volatile path of globalization would come at a high economic and political cost to all. Recognizing this, WTO members can take initial concrete steps that improve the governance of the institution and could help them to tackle the more complex issues facing the multilateral trading system. These include increased transparency; reform of the WTO’s appellate body, its main dispute-settlement mechanism; a right of initiative for the secretariat, which would empower WTO staff to develop constructive proposals; and more cooperation in plurilateral initiatives, such as the Trade and Environmental Sustainability Structured Discussions, to build momentum on collective initiatives that address the thorny issues facing the global economy. The consequences of inaction are dire: if WTO members fail to move quickly, deglobalization could become a self-fulfilling prophecy.