WTO puts across a strong message about gloomy global trade but is anybody listening?

Commenting on the latest – and gloomy – trade forecast, the World Trade Organization’s (WTO) director-general, Roberto Azevedo, said: “The dramatic slowing of trade growth is serious and should serve as a wake up call.”

To recap, the WTO said on Tuesday that world trade will grow just 1.7 percent in 2016, lower than its April estimate of 2.8 percent. It has also lowered its projections for 2017; in April it had said world trade would expand by 3.6 percent next year, now it puts growth in a band of 1.8 percent to 3.1 percent. This will be the first time in 15 years, the WTO says, that the ratio between trade growth and world gross domestic product (GDP) has fallen below 1:1; it will be around 1:0.8.



Several wild cards could spook the outlook, the WTO says. Monetary policy changes in developed countries could lead to financial volatility, for one. The Brexit vote in the United Kingdom, it notes, has also increased uncertainty about future trading arrangements in Europe. And there’s the growing trend towards protectionism across the globe.

The last is also a concern flagged in the International Monetary Fund’s (IMF) forthcoming World Economic Outlook (WEO). Chapter 2 of the WEO notes that “the waning pace of trade liberalization and the recent uptick in protectionism are holding back trade growth, even though their quantitative impact thus far has been limited”. Protectionism, it points out, is detracting from the reduction in trade costs achieved through conscious policy measures between 1985 and 2007.

Like the WTO, the IMF too identifies overall sluggishness in economies across the world as the principal reason for the trade slowdown. The WEO says this, especially the investment slowdown in many advanced and emerging economies, accounts for up to three-fourths of the slowdown.

Another factor, it says, could be the slower expansion of global supply chains, which had earlier got a fillip because of lower trade costs and advances in transportation and communication. However, it is not very sure if the slowing of global supply chains is the result of a natural maturation of existing chains or the result of policy-induced trade distortions.

The WEO also points out that the slowdown in real trade growth has been widespread across economies and broad-based across goods, while services trade has been a bit more resilient.

So Azevedo is right – this should serve as a wake up call. But what should one wake up to?

The WEO gives a couple of tips. One, it says, governments across the world need to focus on removing constraints that are hobbling domestic economies, especially investment demand. This would strengthen trade as a by-product.

Two, it says that countries should avoid protectionist measures and revive the process of trade liberalisation through reforms that lower barriers.

But both are easier said than done.

Governments are increasingly turning protectionist because of domestic political compulsions. The advanced economies, which were champions of trade liberalisation so long as they were the gainers, have now changed tack when they realised they too would have to bear the costs.

While conventional wisdom says that trade liberalisation helps economies - the WEO devotes a lot of time to pointing out how this can improve productivity within an economy – the political leadership in many countries see protectionism as a way to shield their economies. Increasing globalisation is seen as a threat to jobs for people at home, especially in the advanced countries. When Donald Trump talks about getting foreign workers out of the United States, he is tapping into a growing domestic resentment. The WEO does say that it is equally important to provide domestic safety nets to those who could lose out, but when economies are contracting, there are fiscal constraints to this as well.

Similarly, emerging economies are getting increasingly suspicious of multilateral trade forums like the WTO, which is increasingly being seen as pandering to pressure from advanced economies like the United States and the European Union. The Doha Round of the WTO appears to be clinically dead. The WEO appears to be making a strong pitch for the Trans Pacific Partnership (TPP), but there is even more suspicion among emerging economies about this than about WTO.

This is not going to be an easy conundrum to solve. Political leaders across the globe need to understand the value of trade liberalisation and accept its gains and pains. There is little point in talking about wake up calls if people don’t want to wake up at all.

Updated Date: Sep 28, 2016 18:33 PM

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