Why is international trade growing

The future of world trade

Since the 1950s, world trade has almost regularly grown faster than global economic output. China has now risen to become the world export champion. This was made possible by continuous multilateral trade liberalization, which, however, has stalled since the beginning of this century. Regional agreements currently dominate global trade policy. The move away from multilateralism is also to be understood as a move towards a power-based system. The interests of the weaker trading nations are given less consideration. The volume of traffic also increases with trade, which has ecologically undesirable consequences.

New trends in world trade - or is everything still the same as it used to be?

Holger Görg

In the "export nation" Germany, developments in foreign trade as an indicator of the country's economic performance are frequently and extensively commented on. This topic has become even more topical in recent months due to the discussions on Germany's export surplus, which not all trading partners like, and on the "Transatlantic Trade and Investment Partnership" (TTIP), i.e. the planned trade and investment agreement between the EU and the USA. Overall, the long-term trend is clear: not only Germany’s exports, but all international trade in the world economy have grown vigorously - even if growth has weakened somewhat in recent years.

The trend is clearly upwards

In 2013, according to the World Trade Organization's 2014 World Trade Report, goods worth around US $ 18.8 trillion were traded around the world.1 In the same year, trade in services was around US $ 4.6 trillion. A comparison that lags a bit, but reflects the magnitude of these figures well: The World Bank estimated the gross domestic product (GDP) of the USA to be around US $ 16.8 trillion in 2013, and Germany's GDP at US $ 3.7 trillion - $ - almost a trillion less than the entire international trade in services. 2

The volume of trade for 2013 conceals massive growth rates: in 2003 the total volume of world trade was “only” US $ 7.5 trillion, trade in services was US $ 1.8 trillion (see World Trade Report 2004) .3 Both types of trade are thus increased by about two to three times over the ten-year period. It is interesting that the share of trade in services in total global trade (goods plus services) has remained relatively constant at around 20% over the past ten years - despite the observed and much commented shift in economic activities in industrialized countries from manufacturing to services .4

The long-term development of global goods trade is shown in more detail in Figure 1. The average growth rates between 1950 and 2000 were just over 5%. After the slump in world trade in 2001, due to the “dot-com bubble” and the terrorist attack on the World Trade Center, growth increased again rapidly. In 2009 exports fell sharply, which can be explained by the beginning of the financial crisis, triggered by the collapse of “Lehman Brothers” in autumn 2008. However, the negative growth was quickly offset by positive record rates in 2010 and 2011. In 2012 and 2013 the growth of world trade was rather modest, due to the rather slow development of the world economy. The World Trade Organization puts the average growth rate in trade between 2005 and 2013 at 8% per year. According to the World Trade Report 2014, trade in services also rose by an average of 8% annually over the same period. So trade in services is an important aspect of international trade, but there is no suggestion that this type of trade is growing faster internationally than the more traditional trade in goods.

illustration 1
Worldwide trade in goods and gross domestic product
annual growth rates, in%

Source: own calculations based on WTO: International Trade Statistics 2011 and 2014.

There are many reasons for the rapid growth of trade. Apart from the dismantling of customs barriers in many countries within the framework of the World Trade Organization, and the increased tradability of services through technical progress such as the Internet, there are two other important reasons: first, the growth in emerging countries such as China and India, which are not only important Exporting as well as importing countries are, and, partly connected with this, secondly, the widespread use of international value chains.

The World Trade Report 2014 of the World Trade Organization shows the growing importance of developing and emerging countries for the growth of global exports and imports. It can be seen, for example, that this group of countries was responsible for around half of international trade and global production in 2013. In 2000 this proportion was only around 32% and 40%, respectively. This economic growth goes hand in hand with a stronger demand for foreign goods (imports) and an increased supply of own goods on the world market (exports).

The opening up and growth of these countries also leads to better use of international cost differences in production in so-called global value chains. The production of tradable goods can be optimized globally from a cost perspective and parts can be produced in different locations, which leads to increased imports and exports of intermediate goods and services. For example, Kei-Mu Yi argues in a much-cited research paper that vertical specialization - what one could call global value chains - combined with the dismantling of customs barriers in many countries around the world can explain around 50% of the rapid growth in international trade

Table 1
Leading export and import countries in global trade in goods, 2003 and 2013
rankExport country 2003valueExport country 2013valueImport country 2003valueImport country 2013value

1

Germany

748

China

2209

United States

1303

United States

2329

2

United States

723

United States

1580

Germany

601

China

1950

3

Japan

471

Germany

1453

China

413

Germany

1189

4

China

437

Japan

715

Great Britain

390

Japan

833

5

France

386

Netherlands

672

France

390

France

681

6

Great Britain

304

France

580

Japan

382

Great Britain

655

7

Netherlands

294

Korea

560

Italy

290

Hong Kong

622

8

Italy

292

Great Britain

542

Netherlands

262

Netherlands

590

9

Canada

272

Hong Kong

536

Canada

245

Korea

516

10

Belgium

255

Russia

523

Belgium

235

Italy

477

World as a whole

750318816

World as a whole

777818890

Source: World Trade Report 2004 and 2014.

A new top trading nation: China

Regardless of the growing importance of the emerging countries, the rankings of the ten most important trading nations (which were responsible for around 50% of exports and imports in 2013) have seen only a few but important changes in the last ten years (see Tables 1 and 2). .

For a long time, Germany was the “export world champion” in the goods trade, closely followed by the USA. In 2003, for example, 10% of global exports came from Germany. This changed a lot in 2013. Now China is by far the “best in class” and is responsible for almost 12% of global exports. Germany is in third place with a similar export volume as the USA (with, of course, lower economic output as measured by GDP). It is interesting to note that both Germany and the USA have roughly doubled their export volume in the past ten years. In contrast, China has more than quintupled its exports.

China's rise was supported by many factors, e.g. the country's market opening since the 1980s, joining the World Trade Organization in 2001, the expiry of the Multifibre Agreement for Textiles in 2005, and last but not least the government's promotion of export activities.6 It is also noteworthy that China not only exports relatively cheap and labor-intensive products (such as clothing), but is also increasingly active in the production and export of high-tech products

No less significant than China's rise, however, are other changes in the exporter ranking. While in 2003 places five to ten were occupied by European countries and Canada, 2013 shows the growing importance of other participants - above all South Korea and Hong Kong, but also Russia. However, in contrast to those of other countries, Russian exports are mainly gas and oil, not goods of the manufacturing sector.8 Singapore, India and Taiwan are still in the top 20 of the ranking.

Table 2
Leading export and import countries for global trade in services, 2003 and 2013
rankExport country 2003valueExport country 2013valueImport country 2003valueImport country 2013value

1

United States

287

United States

662

United States

228

United States

432

2

Great Britain

143

Great Britain

293

Germany

170

China

329

3

Germany

115

Germany

286

Great Britain

118

Germany

317

4

France

98

France

236

Japan

110

France

189

5

Spain

76

China

205

France

83

Great Britain

174

6

Italy

72

India

151

Italy

74

Japan

162

7

Japan

70

Netherlands

147

Netherlands

64

Singapore

128

8

Netherlands

63

Japan

145

China

54

Netherlands

127

9

China

46

Spain

145

Ireland

50

India

125

10

Hong Kong

44

Hong Kong

133

Canada

50

Russia

123

World as a whole

1795

4644

World as a whole

1780

4381

Source: World Trade Report 2004 and 2014.

The picture looks similar with the imports. Here the USA is still the most important importing country in 2013. However, China is clearly the second most important country, with imports also increasing almost fivefold between 2003 and 2013. The growing importance of Asia in the ranking is also evident in the case of imports, in particular of South Korea and Hong Kong.

When it comes to trade in goods, there are clear shifts in terms of the most important trading nations towards countries in Southeast Asia and the Indian subcontinent. It is not only the “big ones”, China and India, that play an important role, but also smaller countries that are strongly oriented towards trade. Nonetheless, the US, Japan and European countries are still important global players with great economic output and trade volumes. These should not be neglected when it comes to international trade in goods.

The situation in the service trade shows also important changes in the last decade. It is true that nothing has changed in the top 4 (USA, Great Britain, Germany and France) - apart from the fact that the USA has significantly expanded its position as the most important exporter and clearly widened the difference to the second, Great Britain. However, the growing importance of Asia is also evident in the service trade, in particular China and India, which in 2013 were fifth and sixth in the ranking. Furthermore, Hong Kong slipped into the list of the top 10 exporters in 2013.

An important explanatory factor for the growing importance of these Asian countries for the trade in services, similar to the trade in goods, is, among other things, the importance of global value chains. Due to the better tradability of these services, including via the Internet, service production can be relocated to countries that can provide these services at lower costs.

China and India have also risen sharply in the ranking of the most important importers of services and in 2013 were in 2nd and 9th place respectively. Singapore is 7th as another representative of Southeast Asia. and 21 (India). Russia is also now on the list at number 10.

The growing importance of Asian countries is also evident in the trade in services. However, with Great Britain, Germany, France, the Netherlands and Spain, the EU still provides five of the leading exporters of services and four (Germany, France, Great Britain, the Netherlands) of the most important importers, and the USA and Japan are important trading partners for services.

The rapid rise of the trading nation China is also reflected in the current trade statistics of the Federal Statistical Office for Germany.9 There, after France, the USA and Great Britain, and ahead of other European countries, China is listed as the fourth most important country for German export goods. In 2005, China was not yet in the top 10. In addition, China is the second most important country for German imports, after the Netherlands and ahead of France and the USA. However, other Asian countries are not (yet) of particular importance for Germany - in 2013 South Korea was only in 19th place in the list of destinations for German exports.

What is being traded?

While the relationship between trade in goods and services has hardly changed in the last ten years, there are shifts within the product groups. However, these are subject to strong fluctuations over the years. Overall, according to data from the International Trade Statistics 2014, exports of the manufacturing sector rose the most in the last three years, with an average of around 4% between 2011 and 2013.10 Exports of agricultural products were similarly just below this period 4% increased. The fuel and mining products product group showed only very little growth of just over 1.5%, with the 2013 growth rate being zero.

Within the manufacturing sector, electronic products, textiles, clothing and household goods were the most important growth sectors in 2013, with growth rates of between 7% and 12% compared to the previous year. In absolute terms, however, fuels, chemicals, food and automobiles are by far the most important export sectors.

So a picture emerges that is on the one hand consistent with the explanation of “traditional” trade between countries with different factors. Countries that are rich in mineral resources export them (e.g. oil and gas from Russia), or countries that are richly endowed with the labor factor and the associated relatively low wage levels export goods that are relatively labor-intensive (e.g. clothing from China). The example of clothing in particular also shows the integration into international value chains, in which clothing is produced inexpensively in countries with low wage levels and then exported.

Within the service trade, commercial services (with the exception of transport and travel) are the most important segment in absolute terms, accounting for almost 55% of service exports.11 Within this category are again so-called “business services”, i.e. technical, management or legal advice, auditing, marketing or similar services the main group. The highest growth can also be found in commercial services, especially in the area of ​​computer and information services, communication and financial services.12 Here, too, the growing tradability of services is evident, supported by technical progress.

Conclusion

Global trade in both goods and services is growing relatively unconcerned. Some aspects point to “business as usual”: Germany and the USA are represented in both types of trade with the three most important exporters and importers. In addition, there are no indications that trade in services has increased disproportionately compared to trade in goods in recent years.

However, this picture lacks a few important changes. On the one hand, there is the importance of the trade in services. Even if this has not increased more in the last few years relative to the goods trade, a growing importance of this type of trade can be expected in the future. Technical progress plays an important role here. In addition, the possible dismantling of trade barriers in the service sector opens up great potential for trade in this area worldwide.

On the other hand, the rapid rise of China as the most important exporter and second most important importer of goods is evident. But that's not all, China is also an important player in the trade in services. In addition, the importance of other countries in Southeast Asia and India is growing.

So the question arises as to whether the effort to negotiate TTIP between the USA and Europe is worthwhile - or whether the actors on the world market are not focusing more on the growing Asian market or the multilateral dismantling of barriers to trade in goods and services worldwide should focus.

  • 1 The World Trade Report 2014 is available online at www.wto.org/english/res_e/publications_e/wtr14_e.htm.
  • 2 http://databank.worldbank.org/data/download/GDP.pdf.
  • 3 www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_report04_e.pdf.
  • 4 In 2007, services accounted for around 74% of the gross domestic product of highly developed OECD countries, see J. Francois, B. Hoekman: Services Trade and Policy, in: Journal of Economic Literature, Volume 48 (2010), H. 3, pp. 642-692.
  • 5 K.-M. Yi: Can Vertical Specialization Explain the Growth of World Trade ?, in: Journal of Political Economy, 111th Jg. (2003), H. 1, pp. 52-102.
  • 6 For state funding, see e.g. H. Görg: Are subsidies the engine of Chinese export success ?, 2010, available at www.oekonomenstimme.org/autoren/holger-goerg/.
  • 7 Cf., e.g. P. K. Schott: The relative sophistication of Chinese exports, in: Economic Policy, 23rd vol. (2008), pp. 5-49; and S. Girma, Y.Gong, H.Görg, Z.Yu: Can production subsidies explain China‘s export performance? Evidence from firm level data, CEPR Discussion Paper 6052 2007.
  • 8 See K. Schrader, C.-F. Laaser: German-Russian Foreign Trade: An Inventory, Kiel Policy Brief, 73, Institute for the World Economy, 2014.
  • 9 www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Aussenhandel/Handelpartner/Tabellen/RangführungHandelpartner.html.
  • 10 www.wto.org/english/res_e/statis_e/its2014_e/its14_highlights2_e.pdf.
  • 11 See World Trade Report 2014.
  • 12 www.wto.org/english/res_e/statis_e/its2014_e/its14_highlights3_e.pdf.

Internationalization without end? We cannot expect too much from world trade

Martin Klein

Europe is in crisis. It wants to reinvent itself through innovation and regain its future. Internationalization has become a key concept. Developing growth potential on world markets, opening up to global competition, innovation and internationalization: this is the motto in the European Union and in its member countries, right down to the regional level. The middle class has become the special target of these efforts. This is understandable, because it is not only the source of many innovations in Germany. At the same time, the barriers to accessing foreign markets are relatively higher for medium-sized companies than for large companies. In a detailed report, the European Commission presented in detail the opportunities and growth potentials as well as the difficulties small and medium-sized companies encountered in internationalization.1 In their joint “SME Offensive”, the federal government and the federal states place strong emphasis on the connection between innovation and internationalization. 2 The new federal states in particular are endeavoring to make up for their lag in internationalization so as not to lose touch with domestic competition. In Central and Eastern Europe too, opportunities for small and medium-sized companies are seen in internationalization. 3

Can world trade meet the diverse expectations that internationalization has placed on it? Or is it possible that too much is being expected?

Unstoppable growth in world trade?

For decades, world trade has grown faster than global gross domestic product (GDP). Figure 2 illustrates this using indices of world GDP and world exports. Compared to world GDP, world exports are growing at almost twice the rate, but also with much higher volatility.

It makes sense to see a system behind these stylized facts. In the tradition of Adam Smith, one would diagnose that global economic progress (growth, innovation) is driven by increasing division of labor and increasing specialization of nations, and that this is only possible through free and steadily growing international trade. But does global trade have to increase faster than global added value for this? Dean et al.4 investigated this question. The main explanatory factors they identify are the relative cheaper prices of tradable goods due to productivity growth and the removal of tariffs and other barriers to trade. So it looks like there is a systematic economic trend behind the simple stylized facts of Figure 2.

At second glance, however, it becomes clear that world trade growth has not always been the same. This is not about volatility, but about the fact that world trade went through two distinct phases of expansion, during which it recorded growth rates well above the average. The relationship between world exports and world GDP was raised to a new level. Outside of these expansion phases, the relationship between world trade and world GDP is volatile, but without a clear trend. The first expansion phase (in the period considered here, i.e. from 1960 to 2013) was from 1972 to 1974. The ratio between world exports and world GDP almost doubled at that time. The next phase of expansion came in the years 2003 to 2007, and again led to a nearly doubling of world trade compared to world GDP.

The driver of the trade expansion in the early 1970s was the oil price shock of that time. Within a few years, crude oil imports from the industrialized countries, which can hardly be substituted in the short term, became more expensive. The real export values ​​of the OPEC countries rose. In the medium term, imports from these countries also rose (due to increased incomes), as a result of which the export values ​​of the industrialized countries rose again. The trade expansion in the mid-2000s was driven by the upswing in China, which in turn was driven by China's export boom, which then led to increased exports to China via an income effect. One can see: a simple trend extrapolation could lead to misleading expectations about the future of world trade, because the decisive shifts in the relation between world GDP and world exports occurred in concrete historical circumstances. So what can we really expect from the future of world trade? What can the economic theory of international trade tell us on this question?

Figure 2
World trade and global gross domestic product


Growth ratesWorld GDPWorld exports
Mean value in%3,56,1
Standard deviation in%1,79,3
Coefficient of variation 0,48 1,54

Gross domestic product (GDP) according to data from the United Nations, exports according to data from the World Trade Organization. Both sizes are calculated in real US dollars. To deflate exports, the consumer price index (urban consumers) of the U.S. Bureau of Labor Services used. The black line shows the exponential trend in exports.

Sources: UN; WTO.

Limits of world trade

It may come as a surprise, but international trade is not part of the mainstream economic theories of international trade. It is only introduced as an abstract assumption. It appears in these theories by enabling the participating countries to manufacture more (or less) of a product than they consume internally. The surplus supply (or the surplus demand) is then sold to other countries via export (or bought in from them as an import). The actual global trade in goods, e.g. in the form of shipping on the oceans, which handles 90% of international transports, 5 this actual international trade is not the subject of the theory of international trade. And here is the problem. A theory that completely ignores the physical reality of world trade cannot predict its long-term future or its limits. We have to orientate ourselves elsewhere for this.

With regard to actual international trade, the real logistics (shipping, air traffic, rail and road transport), and the consumption of resources, the consumption of fossil fuels, environmental problems, the littering of the world's oceans, climate change, the finiteness of our biosphere and the unchangeable conditions of our natural environment, such as the critical bottlenecks in world shipping lanes. For decades, if not centuries, this trade has been increasing: more ships and larger ships6, more ports and more shipping7. Not all of these long-term trends can be extrapolated into the future at will. Ports cannot be increased at will, ships cannot be increased at will. What is technically possible in shipbuilding does not necessarily make economic sense. Ports and shipping lanes place limits on the size of ships. The number of boat trips will continue to increase worldwide. In this area, world trade shows a clear shift to Asia. The share of European and North American ports in world shipping has been shrinking since the 1970s, while the share of Asia has been increasing.8 However, more shipping in partially unlawful areas also means more litter, more pollution in the world's oceans, more ship accidents and more accidents, some of which have dramatic consequences for the environment . Even if such accidents are rare or improbable events, over sufficiently long forecast periods even events with a low probability become certainties. These negative consequences of growth are mostly overlooked in trend extrapolations.

Climate change can also affect world trade. One example is the Panama Canal, where extreme weather and water shortages are among the greatest concerns.9 Enlargement of the canal should make it passable for larger ships, but this requires more water to be discharged from the operator country Panama in order to actually keep the canal navigable. The water supply could become the central problem for the sewer operators. In return, extreme rainfall threatens the canal's infrastructure through flooding.

The borders of world trade are not marked by clearly visible, insurmountable demarcation lines. You will notice that the relationship between the benefits and costs of trade is becoming increasingly unfavorable for the societies involved. Political and social problems will become noticeable long before we actually reach hard limits (e.g. due to bottlenecks in logistics or the destruction of the ecosphere). While political instability and extreme poverty are the risk factors in developing countries, world trade in industrialized countries is losing social acceptance and political support. Michael Pettis therefore believes 10 that it is only a matter of time before the current system of world trade collapses. His central argument is that the USA is currently responsible for the functioning of the system in two ways, on the one hand as a political guarantor and agenda setter for free world trade and the world trade order, on the other hand as a market of last resort, which is open to everyone and which is always fully financed and has purchasing power thanks to the dominant role of the US dollar as a world reserve currency. For decades, according to Pettis, the US has absorbed the volatility of world trade in this way, but its willingness to do so is coming to an end because the cost-benefit calculation has become less favorable. If this argument is correct, then the central guarantor of world trade will fail in the future.

Internationalization without world trade?

The considerations outlined above lead to conclusions about the natural, political and social limits of world trade. Let's start with the natural limits. International trade will not be able to escape the debate on sustainable development within the framework of the finite planetary biosphere (“planetary boundaries” ).11 The more the finite biosphere is used, the more environmental problems and crises will increase. These issues will occupy an increasingly prominent place in the public debate about the consequences of globalization. The previously clearly drawn boundaries between trade and environmental policy are becoming porous. Environmentally motivated trade policy measures (“border taxes”) will increase; from a tolerated exception they could become the new normal. International logistics (shipping, air traffic) are increasingly coming under criticism because of the environmental damage it causes.

In order to save the positive aspects of internationalization from the growing ecologically motivated protectionism and the exertion of political influence, one possible way out is to act less, in other words: to actually physically move fewer goods around the world. This is the solution that Johan Rockström and Jeffrey Sachs advocate in their recommendations to the United Nations.12 New technologies, especially in the IT sector, offer the possibility of bringing information and technology to the spot, which should reduce the need for goods movements. While this vision does indeed lead to a significant decline in global logistics, the fact remains that it carries significant risks for developed countries. You would be the giver in this new world; Instead of industrial goods, technologies, designs and capital would flow into emerging and developing countries. This would only be incentive-compatible if there were a resilient and trustworthy international system for the protection of material and immaterial (intellectual) property. But since the start of the Doha Round in 2001, this has been an unresolved issue within the WTO.

This addresses the two neuralgic points of the European and above all the German debate on the future of world trade: investment protection and regionalization. In view of the stagnation of negotiations at the WTO, the regionalization of the world trade order offers a way out. At least this is the declared intention of the negotiations on regional free trade agreements between Europe (TTIP) or Asia (TPP) and the USA. It is precisely the protection of investments that is of particular importance here, because direct investments can make a decisive contribution to reducing trade flows and thus physical goods logistics. They serve to relocate local production to the consumer, to integrate developing countries into global value chains and thereby give them the opportunity to participate in modern technology. Direct investments therefore offer much better opportunities for sustainable growth, which - as Rockström and Sachs call for - must respect the “planetary boundaries”. The protection of investments in TTIP is the crux of the matter that the debate between politics and civil society has to overcome if Germany wants to make a constructive contribution to the further development of the world trade order. If the US is less willing to guarantee free world trade, then Germany will increasingly have to take on creative and economic responsibility if it is to continue to benefit from the advantages of advancing internationalization. But this will only succeed if Germany overcomes its internal blockages.

That brings us back to the question of whether we are not expecting too much from internationalization and world trade. A preliminary answer could be: there is reason for skepticism, there is no reason for pessimism. Internationalization can continue to be an important driver of innovation, especially for medium-sized companies, but it must not be reduced to a neo-mercantilist export orientation. Instead of goods, more know-how and capital than before will have to flow across borders in the future. World trade must reinvent itself. This will not succeed without a proactive international regulatory policy.

  • 1 European Commission: Opportunities for the Internationalization of European SMEs, Final Report 2011.
  • 2 See also: Offensive Mittelstand, http://www.offensive-mittelstand.de/.
  • 3 Association of Chartered Certified Accountants (ACCA): SME internationalization in central and eastern Europe, 2012.
  • 4 M. Dean et al .: Why has world trade grown faster than world output ?, Bank of England, Quarterly Bulletin, Fall 2004.
  • 5 See Shipping and World Trade, http://www.ics-shipping.org/shipping-facts/.
  • 6 H. Haralambides: The Role of Ports as Potential Bottlenecks in Global Supply Chains, Conference contribution: United Nations Economic Commission for Europe, Conference on Hinterland Connections of Seaports, September 17-18, 2008, Piraeus, Greece.
  • 7 C. Ducruet: Global maritime connectivity: long-term perspective, in: Port Technology International, issue 65, February 2015.
  • 8 See ibid., P. 35 f.
  • 9 A. Spanne: Climate change may 'bottleneck' the Panama Canal and disrupt world trade, in: The Guardian, August 14, 2014.
  • 10 M. Pettis: Will the AIIB one day matter ?, in: China Financial Markets: Global Imbalances and the Chinese Economy, 2015, http://blog.mpettis.com/2015/04/will-the-aiib-one- day-matter /.
  • 11 Planetary Boundaries, http://www.stockholmresilience.org/21/research/research-programmes/planetary-boundaries.html.
  • 12 J. Rockström, J. Sachs et al .: Sustainable Development and Planetary Boundaries, Background paper for the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda, 2013.

Quo vadis world trade?

Michael Pflüger, Oliver Krebs

It has become quiet around the World Trade Organization (WTO). In Europe, especially in Germany, tempers are heating up at the planned transatlantic trade and investment partnership TTIP between the USA and the EU countries. In the USA, the public debate is currently even more dominated by the Trans-Pacific Partnership TPP, which is supposed to connect the USA with eleven Pacific countries and for which President Obama is currently trying to secure an extended negotiating mandate. Regional trade agreements, especially the two “megaregional” ones, have undoubtedly gained the upper hand in trade policy practice over multilateral negotiations at WTO level.

Where are we standing?

The conclusion of the Uruguay Round and the creation of the WTO were already 20 years ago. In the face of the first round of world trade to Uruguay, which started in Doha in 2001 and has not yet been concluded, one could easily be tempted to diagnose a stillbirth. But that would be a mistake.The WTO and the idea of ​​multilateralism are alive and well and have achieved considerable success in the last two decades: 1

  • World trade has become freer since the WTO was founded: the dismantling of tariffs and non-tariff barriers, especially for industrial goods, but also in the agricultural sector, has made further progress; With the exception of a slump in the wake of the 2008/2009 financial crisis, global trade flows have risen sharply - faster than global production.
  • 38 new members have been accepted since the WTO was founded, including Russia and China.
  • The financial and world economic crisis has led to protectionist reflexes, but not to major upheavals like the one in the Great Depression of the 1930s.
  • The agreements concluded in the Uruguay Round have been implemented. The areas of textiles, agriculture and services were subjected to multilateral rules, and the TRIPS agreement made it possible to incorporate intellectual property rights. In particular, the new dispute settlement mechanism has proven its worth.

However, these positive aspects cannot hide the fact that the Doha Round is waning. In December 2013, a very limited agreement was passed in Bali, which in particular provides for the dismantling of bureaucratic trade barriers, but also improvements for developing countries as well as an initially temporary acceptance of storage programs for food. The central Doha issues, the dismantling of protection for agricultural products in the “North” and for industrial goods in the “South”, however, were left out.

In contrast, regional initiatives are on the advance. Since the conclusion of the Uruguay Round, an average of ten new preferential agreements have been added each year.2 The best known are the two “megaregional”, TPP with negotiations beginning in 2005, which includes the USA, Canada, Mexico, Japan, Chile, Peru, Australia, New Zealand and integrates four ASEAN countries and thus comprises around 40% of global production and a third of world trade, as well as TTIP, with negotiations beginning in 2013, which represents around half of global value added and a further third of world trade. Both initiatives exclude China, which has become part of the RCEP (Regional Comprehensive Economic Partnership) and has taken over the lead from Japan. The ten ASEAN states and their free trade partners would be involved in this agreement. There are also initiatives such as the one between the EU and Canada (CETA).

Preferential agreements dominate

Obviously, preferential agreements currently dominate global trade policy. Why is that? An important reason for the sluggish development of the multilateral trade talks was and is the strong influence that particular interests (especially in the agricultural sector) exert on trade policy in the economically highly developed countries. In addition, the WTO is guided by the idea of ​​a “single undertaking”. An agreement is only considered to have been reached when there is consensus on all the items to be negotiated. A disagreement on a question means that the negotiations are over.

In the past two decades, important new structural developments in the world economy and new questions have emerged which have made progress on the Doha Round difficult and resulted in the regional route being used as an outlet:

  • The WTO now has 161 members who can act on the principle of “one country, one vote”. Civil society is increasingly involved in public discourse in the form of non-governmental organizations, which among other things means that smaller countries are also more easily heard.
  • The weights in the world economy have changed massively.3 For example, the shares of China, India, Russia, Brazil (BRICs) and other emerging countries in world production and global trade and direct investment flows have increased dramatically and have also led to an increase in the political importance of these countries . This goes hand in hand with growing demands to assert one's own interests (e.g. in the case of industrial goods).
  • The developing countries can be seen less and less as a single bloc; their interests are more heterogeneous today than at the end of the Uruguay Round. In addition to the rapidly growing emerging economies, there are poorer food exporters and importers who have very different expectations of a reform of the agricultural policies of the “North”.
  • The classic task of the WTO - tariff dismantling - has not yet been fully achieved. There are still tariff peaks in the agricultural sector. Bearing in mind an average tariff of 4% at the end of the Uruguay Round, we have come a long way. As a result, non-tariff trade barriers come to the fore: this involves industrial, safety, health, environmental and labor standards, national security, the service sector and public procurement.
  • We observe that production processes are broken down into ever finer individual steps that are relocated to the most cost-effective locations worldwide (“offshoring”). Since these processes often take place within multinational companies, the interest in investment protection agreements has increased further. The increasing international division of value chains also makes the acquisition of technological knowledge easier and therefore the protection of intellectual property more important.

These new fields mean nothing less than that the rules of the world economy must be further developed.

What's next?

So far, the GATT and the WTO have given preference to the multilateral route over regionalism and only provided the latter in exceptional cases. In research, the dangers of regionalism are comprehensively described:

  • Preference zones increase trade between the countries involved, but divert it from the most economically efficient providers to providers within the zone. This prevents efficient allocation and harms third countries.
  • Free trade zones (in contrast to customs unions) allow different external tariffs. In order to prevent the country with the lowest external tariff from being used as a gateway, country of origin rules must be introduced, which cause immense bureaucratic effort.
  • In practice, preference zones tend to spring up like mushrooms, creating an opaque network of agreements (“spaghetti bowls”), which also causes high bureaucratic effort.
  • It is easier for lobbies to assert their particular interests in preferential agreements than in a multilateral system, since fewer interests compete with one another.
  • Experience shows that taking the regional path ties up political energy that is not available for multilateral negotiations.
  • Turning away from multilateralism and turning to regionalism means a change from a rule-based to a power-based system. On the one hand, this is a disadvantage for the smaller and less developed countries. But it also harbors the risk of hardening trading blocs.

Multilateralism skeptics are well aware of the classic arguments against regionalism. In the current discussion, however, they claim that the multilateral path is politically (currently) not feasible. They further argue that this need not be a problem, as the preference zones could be made open so that other countries could easily join. Regionalism would be "multilateralised" as it were. Ultimately, free world trade would simply be achieved in a different way than through classic multilateralism.

In view of the dangers of the regional route and the achievements of the WTO, a move away from the multilateral route is worth considering. Are the current developments rejecting a multilateral solution and are they forcing a regionalization of the world trading system? The following considerations on the above points show that this by no means has to be the case:

  • Growing membership: Will the WTO become incapable of acting if its membership grows? Proponents of open regionalism argue that it is easier to solve problems when a small group leads the way than when many participants are seated at the table. This thought is obvious at first glance. However, it is neither necessary nor sufficient for “multilateralization” to succeed in the end. It is not necessary because interests can be bundled in groups even in multilateral negotiating contexts and therefore voting cannot be ruled out even with many members - such bundling of interests was common practice in the GATT negotiations. However, open regionalism is also not sufficient for multilateralization, because the design of the regional alliances according to the wishes of their members does not necessarily make accession for other countries attractive.
  • New balance of power: How can the economically emerging countries be integrated into the world trading system? One advantage of the multilateral system is that when countries join the WTO, they submit to its rules and regulations, and thus not least to the intergovernmental dispute settlement procedure. Rule violations can be sued and punished before the WTO. The negotiation process ensures that demands, including those of economically and politically powerful countries, can only be achieved through mutual concessions and that strong partners are integrated for the benefit of all. This rule-based commitment by WTO members seems to be underestimated today: The USA and the European Union are currently relying primarily on preferential agreements in order to counter the new balance of power. TTIP and TPP are intended to establish norms and rules that will then also become authoritative for the global economy, and especially for China.
  • Heterogeneity of developing countries: No argument against a multilateral process can be derived from the growing heterogeneity of the group of developing countries. On the contrary, with the exception of the economically fast-growing countries, the developing countries appear to be better served, even with different interests, if the world trade order develops within the framework of multilateral, rule-based processes and not through regional, power-based agreements.
  • New tasks: The balance between multilateralism and open regionalism is certainly the most controversial with regard to the “new tasks” that result from different regulations, investor protection and “offshoring”. A central motive for the formation of the "megaregional" is the desire to create a set of rules for these tasks that is to become a role model for the world economy. That sounds obvious at first, but it raises other and important questions. Will this set of rules be created in the TPP or in the TTIP? Can the ideas of the Americans and the Pacific Rim be congruent with the rules that Europeans and Americans agree on? Can the European Union and the USA, for example, find a consensus on consumer protection issues where they have been wedged for years on these issues? Why should other countries adopt these standards? These questions indicate that it is completely unclear whether rules for the world trade order can be created at all on a regional basis. Another fundamental question is in which areas common standards are necessary at all - a diversity of countries, if exercised in a non-discriminatory manner, should not be assessed negatively.

Development of the "megaregional"

If one takes a look at the process of the formation of the “megaregional”, the classic disadvantages of the regional route become apparent.

  • Negative third country effects: Most studies on the economic effects of TTIP show that - despite all the uncertainty about its ultimate design - negative trade diversion effects would occur to the detriment of third countries.4 The trading partners closely linked with the USA and the EU are particularly negatively affected. However, poorer developing countries would also be negatively affected. In order to minimize such negative effects, TTIP would have to be designed in a developing country-friendly manner. A current study for the Federal Ministry for Economic Cooperation and Development has presented a 10-point plan, which, however, largely reads like a multilateral work program and relies on a strong WTO.5 Then why not call for the multilateral path right away?
  • Power-based instead of rule-based: Three examples can be used to illustrate how aspects of power manifest themselves in the “megaregional” areas. Firstly, politicians in Europe are guided by the idea that TTIP, together with the USA, could create an exemplary system of rules and values ​​for world trade. The USA, on the other hand, is taking a two-pronged approach: in the TPP negotiations between the USA and the Pacific countries, which have already progressed further, the central issue is the creation of a regulatory system. It is therefore completely unclear where and how the rules are ultimately set. The US, however, is in a stronger position to influence this. Second, the study by Krebs and Pflüger shows that the US, compared with the EU, achieves a much greater welfare gain from TTIP than from a multilateral agreement.6 This corresponds to the hegemon's thesis, which prefers preferential agreements to multilateral agreements.7 Thirdly, economically important China is neither involved in TTIP nor in TPP, but is in charge of the competing RCEP. This development could indicate a hardening of the trading blocs, with known economic and political disadvantages.
  • Undermining the WTO: The intergovernmental dispute settlement platform of the WTO has so far proven to be very effective. It is unclear whether in the “megaregional” system the WTO would be used as a dispute settlement platform in the event of a conflict, or whether alternative platforms would be chosen. This would devalue the dispute settlement process of the WTO and weaken the WTO.

Conclusion

Multilateralism has fallen behind in recent years. Our reasoning suggests that this is not appropriate. With regard to the questions at issue, the multilateral platform of the WTO - with suitable further development - offers advantages over regionalism. A critical look also shows that the previous development of the “megaregional” has classic problems of the regional path.

The WTO is therefore not obsolete, but is still urgently needed. However, multilateralism must be strengthened in order to do justice to the “new tasks”. Specifically, the Doha Round must first be completed quickly - along the lines that were staked out with the Bali Package. The regulations on trade facilitation contained in this package show that the multilateral system in no way stands in the way of harmonizing standards in sensible areas. The TRIPS agreement also offers points of contact for advancing the protection of intellectual property. The topic of investment protection, which is causing a lot of excitement in the context of TTIP, ultimately requires the establishment of an international court, which should also put an end to the proliferation of bilateral investment protection agreements. Because of the deep and still growing international networking of production, the WTO will also have to deal more intensively with questions of international investments. In order to shoulder these tasks and to be able to achieve goals, more political capital has to be invested in the multilateral path.

What about the “mega-regional”? Our reflections indicate that there are many problems lurking here. Whether they have the creative power to form widely accepted, good and consistent rules for the world trading system seems highly questionable. For Germany and Europe’s position on TTIP, this means: Better to risk a smallest solution or the breakdown of the talks than a lazy compromise.

It is also clear that the further path of the world trading system depends crucially on the USA, which is still the undisputed leading power. The US should not lose sight of the stability and prosperity that the multilateral trading system that it has largely shaped has brought, including the US itself.