Global Trade and the G20: Navigating Through Rough Waters? | ISPI
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Commentary

G20 and Global Trade. Navigating Rough Waters

Lucia Tajoli
28 ottobre 2021

It looked like 2020 was supposed to be an annus horribilis for international trade. Instead, despite the pandemic, the international trade system withstood the impact, though not without some bruises. Global trade flows contracted by about 5%, much less than during the 2008-9 financial crisis: an overall better performance than what had been estimated during the first wave of Covid-19 which, due to sudden and rigid lockdowns, paralyzed many supply chains. Investments, however, did not do as well: FDI flows dropped by 40%, though given a context marred by unprecedented uncertainty, it is understandable that investors would prefer to maintain a "wait-and-see" attitude.

 

With the gradual improvement of the global health situation and with the economic recovery decidedly underway in large parts of the West, it is reasonable to expect a strong recovery in global flows, both in terms of trade and investments. The upward rebound is also facilitated by the fact that the crisis was relatively moderate and, during the pandemic, the use of restrictive trade policies was contained on the whole. According to UNCTAD, international trade is expected to grow by 16% in 2021 compared to last year. Forecasts by the WTO are slightly more conservative (+10.8%), but they also reflect an improvement in the global trade outlook (previous forecast in March announced a +8%). A growth mainly fueled by trade in goods, while the demand for services is still struggling to take off. Why so? Because exchanges of services often require the movement of the people who provide them or who benefit from them, which is still difficult in some countries. The most striking example (as one might guess) is tourism (Europe alone registered a 74% reduction in tourist flows in 2020), though reduced mobility has also seriously impacted international trade. This includes the so-called "mode 4" of trade in services, that is, activities of a professional nature that require international travel or cross-border transfers between a multinational company’s branches.

 

Supply chains are increasingly under pressure: a change in the organization of global production in sight?

Though the data on international trade is quite reassuring on the whole, there is no shortage of tensions in global markets: companies are growing increasingly greedy for rare earths; meanwhile, shipping containers have become gradually scarce and therefore expensive (with the price of freight from Asia skyrocketing by over 500%), demand for consumer goods is booming (especially around electronic and hi-tech), and inflation is reaching figures that had not been registered in years —all within a context of geopolitical tensions among the world’s main powers. These might be all the elements necessary for a perfect storm that could seriously undermine the paradigm of globalization; however, the economic system seems to be holding up overall. As such, what is actually going on? What is there to worry about?

It all starts with China and the countries that most depend on it, such as Vietnam, Indonesia, and Malaysia. The spread of Covid-19 cases, the high costs of raw materials, the bottlenecks that are still currently afflicting supply chains are all behind the slowdown of Asia’s industrial production of the past few months. The risks of this spilling over onto Europe and the US are concrete and best epitomized by the increasing shortage of semiconductors, whose demand is growing among manufacturing industries that depend on digital applications. Major car companies, including the likes of Toyota and Volkswagen, have already been forced to cut their vehicle productions, but the shortage also affects other consumer good sectors and could peak around Christmas time, causing supply problems.

 

Covid is actually not the primary cause of this situation, though the pandemic has accelerated – and amplified – the issues of a complex international dynamic that are now coming to a head. Trade’s booming recovery after a few months of substantial paralysis has contributed to creating a discrepancy between demand (which is positively recovering) and supply (which is obviously less flexible and less resilient to adapting). As such, these are structural problems that preceded the pandemic and that will be solved by normalizing demand but, above all, with adjustments on the supply side, especially in the logistics and infrastructure sectors. The benefits of global supply chains and the setup of international production have been evident in recent years, but the crisis triggered by the pandemic has also highlighted some weaknesses that must be resolved to ensure efficient supplies through these channels. The crisis has therefore opened the doors not to an elimination or reduction of global supply chains, but to their partial restructuring and reorganization to make them safer and more efficient. These changes, in turn, could create other “bottlenecks” in the short- to medium term.

 

Do old and new rivalries threaten multilateralism once again?

The crisis of the multilateral trading system is nothing new. The World Trade Organization (WTO) had been in a stalemate for some time, mainly due to the failure to renew the Trade Appellate Body, the dispute-resolution body vetoed by the US under Donald Trump. The appointment of Nigeria’s Ngozi Okonjo-Iweala as the new General Manager in February 2021, together with Joe Biden's victory in the US, had raised great expectations for a change of pace that could have brought the WTO back to center stage. In reality, however, it is more prudent to adopt a pragmatic and realistic attitude for now that takes into account a complex international situation marred by geopolitical tensions ranging from East to West. In fact, relations between Washington and Beijing remain particularly tense and the next battleground — both strategically and economically — could be the Asia-Pacific region, as evidenced by the recent "AUKUS" agreement between Australia, the United Kingdom, and the United States, as well as Beijing's willingness to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the region’s free trade area that was originally promoted by Barack Obama to contain China in the Pacific.

 

Amid the difficult relationship between China and the US, the European Union risks being left aside: the concept of "open strategic autonomy" also includes trade policy; but despite Ursula von der Leyen’s recent announcements to strengthen the industry in some key industries such as semi-conductors, Brussels’ policies still have to confront uncoordinated member states.

Against this rather intricate backdrop, the WTO’s Twelfth Ministerial Conference is approaching: it was initially scheduled for last year in Nursultan, Kazakhstan and later postponed to December 2021 due to Covid at the organization's headquarters in Geneva. The summit, scheduled for early December, is important to try to make progress on politically sensitive issues, including fishing subsidies and environmental sustainability in trade and e-commerce. The G20 under the Italian presidency is preparing ahead of the Conference, and the 11-12th of October meeting among Trade Ministers in Sorrento was an important litmus test to assess whether political alignments over a few fundamental objectives can be achieved, going beyond a standard and routine — albeit lacking in content — call for support of free trade and the multilateral system. Actually, results were not too impressive as the Ministerial Statement lacks precise commitments on a roadmap to reform the WTO. However, it was good to note that the G20 acknowledged the link between trade and health as well as the increasing importance of digital trade and the need to better regulate e-commerce.

 

What prospects for digital and “green” commerce?

The pandemic has contributed to accelerating an already growing trend, that of e-commerce, which is increasingly playing a central role in international trade. E-commerce has opened the doors to great opportunities, expanding the choices available to consumers and allowing manufacturers to expand (at least on paper) their target markets. However, its pace of evolution has left several regulatory and normative problems to be solved, hopefully multilaterally. Currently under Australia’s, Japan’s, and Singapore’s leadership, the WTO is carrying out an initiative that includes 86 member states aimed at signing a joint declaration (hopefully in time for the MC12) to regulate some of e-commerce’s aspects, especially around the protection of consumer data and the issue of open government. However, there are other issues, particularly related to the regulation of marketplaces and more generally of digital markets, to ensure small and medium-sized enterprises’ participation and access, considering this sector is currently heavily dominated by large multinationals.

 

On the other hand, it will probably be more difficult to reach a convergence, at least in the short term, on the issues that see international trade intersect with the ecological transition and climate change. The main international players (the US, the EU, and China) are mobilizing in an uncoordinated fashion on the possible introduction of a carbon adjustment mechanism at their borders, which would essentially entail a tax on imported goods considered to be highly polluting. The WTO should enter the debate trying to at least foster an inclusive discussion, considering the issue will be extremely divisive in coming years. This isn’t the first time that a request to apply protective measures to certain groups or categories within international trade is rejected as it inevitably raises barriers to international commerce and is seen as a covert form of protectionism, a particularly insidious one at that given that these obstacles are typically more difficult to overcome for emerging and developing countries. Even if taxes on the most polluting products are introduced, it would be easy to expect that the adoption of similar mechanisms would be pointed out by developing countries as a protectionist measure by richer countries masked by the fight against climate change.

 

Rough waters: the T20 showing the way ahead?

As such, there are several elements pointing to global trade tensions possibly increasing rather than decreasing in the near future. The Think 20, through its Task Force on Trade, Investment and Growth, produced a number of Policy Briefs which include dozens of recommendations directed to the G20 and aimed at making the multilateral system more inclusive, better functioning, and more open to new trends and global issues. In particular, the T20 key proposals were: revitalizing multilateral trade negotiations, building also on inclusive plurilateral agreements;  exploiting recent outcomes on cross-border data flows in RTAs and digital economy agreements (DEAs) to Hasten progress in the WTO JSI on E-Commerce; cooperating in developing consensus-based international cybersecurity standards to reduce regulatory friction; developing a common understanding of the impact of FDI flows and screening on growth prospects to enhance transparency and level the playing field; promoting digital trade accessibility, especially for SMEs, also through greater integration of trade policy with technology and investment policies. We are aware that the time is not ripe yet for these recommendations to be heard and implemented in full: yet, we trust our contribution will be useful to the G20, in a forward-looking perspective that will continue through future G20 (and T20) Presidencies, starting with Indonesia in 2022.

 

The WTO’s potentially renewed effectiveness would therefore be essential in overseeing bilateral and plurilateral disputes within a framework of common principles and rules. At the same time, however, the Geneva-based organization will have to find new tools to keep up with the macro-trends that will radically change the global economy in the coming decades. Globalization as we know it is going through rough waters: there is room to overcome them, but we will need everyone’s foresight and pragmatism, as well as the acknowledgement that the current economic interdependence ought to be the underlying principle to try to contain — and “normalize” — ongoing international disputes.

 

Lucia Tajoli is Senior Associate Research Fellow at ISPI and Co-Chair of the T20 TF3 on Trade, Investment and Growth.

 

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