Special topic: Revival in international trade and the resurgence of bilateralism Global Economic Outlook, Q2 2014

An integrated global economy, including cross-border investments, distributed production lines across continents, innovations in IT and communications, and advancement in transportation are heightening international trade’s role as a harbinger of economic growth.

For a long time, international trade has been a driver and indicator of global economic growth. It has become more prominent in the past decade or so due to rapid integration of the global economy, including large cross-border investments, distribution of production lines across continents, innovations in information technology and communications, and advancement in transportation. For example, during 1991–2008, global trade volumes grew at an average annual rate of close to 7 percent, up from a corresponding figure of 5 percent during 1981–1990.

The dip in trade in 2009: Emerging economies to the rescue

The global financial crisis of 2008–2009 played spoilsport to the flow of goods and capital across the world. With key advanced economies slipping into recession, global demand was negatively impacted, which in turn, took its toll on trade volumes. In 2009, global trade volumes dipped 11 percent, a much sharper dip than the previous two slowdowns in 1990–1991 and 2000–2001 (see figure 1 and figure 2). This was not surprising, given the decline in demand in key advanced economies. For example, according to the International Monetary Fund (IMF), real GDP in advanced economies dipped 3 percent in 2009 while growth remained flat during 1991–2001.1

Special Topic Figure 1

Special Topic Figure 2

The contraction in international trade would have been much lower, had it not been for emerging economies. Thanks to strong growth in markets like China, India, and Brazil, global demand recovered in 2010. In that year, imports of emerging economies went up 17 percent; in contrast, advanced economies’ imports were almost flat (see figure 3).

Special Topic Figure 3

This was not the first time that emerging economies were making their presence felt in the global trade arena. Strong growth in these economies prompted a sharp rise in global commodity demand and prices since the start of the new millennium. For example, between 2001 and mid-2008, the price of crude oil rose by about 300 percent while the price for metals grew by 200 percent (see figure 4). For commodity producers, this was a big boon. It propped up GDP growth in these countries and improved their terms of trade.

Special Topic Figure 4

Despite a couple of supply disruptions—the earthquake in Japan and floods in Thailand in 2011—global trade flows seem to be on an upward trend since 2009.

A steady upward trend since 2010

Despite a couple of supply disruptions—the earthquake in Japan and floods in Thailand in 2011—global trade flows seem to be on an upward trend since 2009. The recovery would have been sharper if not for sluggish growth in the West. Certainly, Europe’s debt crisis and muted economic growth in the United States have not helped the cause of international trade. And although imports in Asia and Latin America are back on a rapid growth trend as in 2002–2008 (see figure 6), trade enthusiasts will be worried that key economies in both regions have run out of steam.

Special Topic Figure 5

Interestingly, the post-crisis trade expansion is more in line with the relatively slower growth trend of 1991–2001 than the one in 2002–2008. This is natural given that global economic growth has moved to a lower trajectory since 2010. The trend becomes more apparent from the global commodity price cycle. The pace of rising prices has steadied in the past couple of years relative to 2002–2008, especially in key emerging market importers. However, for oil, this is also because of increasing supplies (or supply prospects) due to shale extraction. The slowing pace of trade growth relative to 2002–2008 also raises questions about whether protectionism has increased. Encouragingly, this does not seem to be the case, but it is possible that the period prior to the global economic crisis enjoyed some immediate gains from economic and trade liberalization across the world.

Special Topic Figure 6

Protectionism is not on the rise, thanks to the WTO and global coordination

In the past, it was often observed that deteriorating domestic economic conditions forced trade protectionism. Sadly, this created a situation where countries retaliated against each other. This was evident during the Great Depression of 1929, when competitive trade restrictions pushed economies further down. Consequently, when the global financial crisis of 2008–2009 hit economies across the world, a big worry was whether countries would indulge in trade restrictive measures. Thankfully, that did not happen. The World Trade Organization (WTO) deserves credit for this; it ensured that countries did not resort to protectionist measures. Policy coordination among major economies also helped; for example, G20 leaders repeatedly pledged not to construct trade barriers that discriminate against foreign producers.2

Nevertheless, like many regulatory mechanisms, the current system is not a perfect one. And countries have managed to exploit some of the imperfections that exist in many WTO policies. For example, the upper bound of WTO tariff levels can be set at such levels that individual countries can raise tariffs (and thereby indulge in some degree of trade protectionism) without breaching any trade obligations.3 Also, since the recent financial crisis, economies have created non-traditional barriers, which are difficult to detect and beyond the reach of WTO agreements. These measures are intermingled with domestic economic policies, mainly through health, safety, and technical regulations. The US Federal Reserve’s asset purchases program also faced criticism in certain quarters. Some countries (like Brazil) alleged that the Fed’s actions strengthened their currencies, thereby making them less globally competitive. Japan also faced similar criticism from Asian exporters (like South Korea) after the launch of an aggressive quantitative easing program since Shinzo Abe took over as prime minister.

Interestingly, among the G20, emerging economies were at the forefront of trade-restrictive policies after 2009 (see figure 6). For example, emerging economies like Argentina, Brazil, India, Indonesia, Russia, South Africa, and Turkey accounted for 60 percent of all trade-restrictive measures over 2009–2013 while having a share of only 13 percent in total G20 imports. Among these, Russia and Argentina were the biggest offenders.4 On the other hand, despite having a share of 59 percent in G20 imports, G20 EU countries, and Japan together accounted for just 22 percent of trade-restrictive measures during that time. However, it’s important to keep in mind that many advanced economies intervened in their economies in a big way during the downturn of 2008–2009. These included asset purchases by central banks, discount windows for credit, and state aid (and stake purchases) for troubled firms.

Despite restrictive moves, international trade is more free today than at any time in the past. According to a study by the World Bank, the rate of implementation of trade-restrictive measures has not accelerated since the financial crisis, compared with the pre-crisis period. Following a temporary spike in 2008 and 2009, the number of temporary trade barriers implemented by G20 economies fell quickly.5

So far, the WTO has played a critical role in streamlining global trade policies and facilitating critical negotiations among governments.


The Doha round of WTO talks and lessons learned

So far, the WTO has played a critical role in streamlining global trade policies and facilitating critical negotiations among governments. The Doha Development Agenda (or Doha round of negotiations), initiated in 2001 after the failure of the Singapore round, tries to push trade liberalization further. It focuses on the implementation of the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which is aimed at patent protection and compulsory licensing of medicines. The Doha round also focuses on a more inclusive agenda, especially by offering assistance to developing economies and removing barriers in farming (mainly in advanced economies). In addition to that, the Doha round is trying to help developing economies implement the trade obligations of the Uruguay round in the fields of market access, trade-related investment measures, safeguards, rules of origin, subsidies, and countervailing measures. According to the World Bank, a successful conclusion to the Doha round could increase net welfare gains by $84–287 billion by 2015.6

The discussions, however, have gone on for too long, frequently breaking down on the issue of agriculture. This has not changed much, but there was positive news on trade facilitation during discussions in Bali, Indonesia, in December 2013. In particular, countries agreed to streamline customs processes. This has the potential to reduce the cost of shipping by 10 percent, increase global output by over $400 billion per year, and create 21 million jobs.7

Key takeaways from the Doha round

The Doha round has led to a number of concerns regarding multilateral trade negotiations. First, the current consensus building process makes the negotiations long, tiring, and indecisive. Initial negotiations kept breaking down due to differences between developed and developing economies, especially on issues of nondiscriminatory market access. And even after 12 long years, the success that was achieved in Bali was limited relative to the initial agenda.

Second, the negotiations were often dominated by contentious issues, be it major or minor. Consequently, other agendas were either neglected or delayed. For example, agricultural subsidies and special safeguard mechanisms (which allow countries to temporarily raise tariffs to deal with import surges or price falls) became the most dominant agenda in successive rounds. In this standstill, other important points such as cotton and banana exports from Africa or poverty alleviation measures linked to least developed economies took a backseat.

Third, the advent of emerging economies like China, India, and Brazil in the global stage has resulted in greater power for them in the negotiation process. For example, spearheaded by India, developing countries could get the peace clause implemented with respect to farm subsidies, which provide countries with a four-year immunity to subsidize staple crops. This was despite stiff opposition from developed economies. Although the rise in emerging economies makes for a more balanced global economic order, it makes discussions more difficult given that many of them often exhibit strong streaks of protectionism, owing to domestic political compulsions. This makes comprehensive trade liberalization a difficult objective to achieve.

Finally, as a few emerging economies assert themselves on the world stage, many underdeveloped countries have lost their influence. This raises the threat of greater economic isolation for these economies. Moreover, delays in multilateral trade negotiations might pressurize these economies to move toward generous bilateral agreements with other major economies (developed or emerging), which might not be beneficial to them in the long term.

Has multilateralism given way to selective bilateralism?

The delay and collapse of the Doha round has somewhat weakened the penchant for multilateral trade agreements. Consequently, bilateral agreements (or between select countries) seem to be back in favor. While multilateral discussions are more comprehensive and beneficial at a global level, bilateral agreements are faster. Partner countries can focus purely on their requirements without having to build common negotiating goals among blocs of countries. Moreover, achievements from bilateral discussions can be gradual, thereby enabling some of the benefits of reduced trade restrictions to filter in instead of waiting for multilateral discussions to conclude. Bilateral negotiations also enable countries to factor in their regional and socio-political conditions, something that is not feasible in multilateral trade agreements. The North American Free Trade Agreement (NAFTA) and the Australia New Zealand Closer Economic Agreement (ANZCERTA) are two great examples of bilateral agreements where partner countries from a region have successfully removed a plethora of trade barriers, including tariffs, export subsidies, and antidumping penalties in a relatively short period.8

As countries temporarily look beyond the WTO, a flurry of bilateral discussions is underway (see table 1). While some of these discussions pertain to expanding current blocs within the region (like ASEAN), others are aimed at a higher level of economic integration within existing blocs (like the Eurozone). Still others are wider in scope, and if successfully concluded, they would herald new dynamics in global trade. Of these, arguably the most prominent are the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP). The United States is part of both discussions, and it could stand to gain the most if both negotiations are speedily concluded under the current objectives.

Table 1. Some prominent bilateral style trade discussions underway other than TPP and TTIP

Trade pact Member countries Current status and objectives
Comprehensive Economic and Trade Agreement (CETA) Canada and EU
  • Agreement reached on key points in October 2013, planned conclusion in mid-2014
  • Will be the second-largest trade agreement for Canada after NAFTA (excluding TTIP)
EU–ASEAN EU, Singapore, Malaysia, Vietnam, and Thailand
  • In 2009, the EU agreed to pursue FTA negotiations in a bilateral format with key ASEAN countries
  • Negotiations with Singapore concluded in December 2012; ongoing talks with the other three partners
EU–Japan free trade agreement Japan and EU
  • Negotiations stated in March 2013 and four rounds of talks have taken place so far; fifth round will take place in the spring of 2014
  • Aims to boost growth and jobs in the EU and Japan; will address non-tariff measures and railways
EU–ANDEAN Colombia, Peru, and EU
  • Conceptualized in 2010, the first round of negotiations was held in Ecuador in January 2014
  • Aims at bringing Ecuador and Bolivia also on board
EU–MERCOSUR Argentina, Brazil,
  • Negotiations restarted in 2010 after brief suspension; nine rounds completed
  • Focuses on trade in industrial and agricultural goods, intellectual property, customs and trade facilitation, and removal of technical trade barriers
Paraguay, Uruguay, Venezuela, and Bolivia China and Taiwan
  • Agreement signed in June 2011; has run into protests, the most recent being in March 2014
  • Opening up of services sector and development of cross-strait exchanges
US–Morocco US and Morocco
  • Conceptualized in 2006 and signed in November 2013
  • Will boost Morocco’s economic competitiveness; focuses on Internet publication, transit, and transparency with respect to penalties
USA and South Korea (KORUS) US and South Korea
  • Started in 2006, agreement concluded in March 2012
  • Will eliminate 95 percent of each nation’s tariff on goods within five years; second-largest FTA for South Korea after the pact with the EU
Korea–China China and South Korea
  • Second round of negotiations underway
  • Planned completion within 2014
EU–India EU and India
  • Negotiations started during 2007; 11 rounds are over with an expected completion in 2014
  • Focuses on market access for goods, services, and government procurement


The Trans-Pacific Partnership (TPP)

The TPP is a free trade pact that is under negotiations between the United States, Canada, and 10 countries of the Asia Pacific region. It was originally conceptualized by four countries: Brunei, Chile, New Zealand, and Singapore. Currently, after 19 formal rounds, eight more countries—Australia, Canada, Japan, Malaysia, Mexico, Peru, United States, and Vietnam—are also included. These countries are collectively responsible for 40 percent of global GDP and 26 percent of global trade.9

Special Topic Figure 7

The main objective of the pact will be to create jobs, increase the standard of living, and improve welfare in all the participating countries. The pact will not only focus on getting market access and eliminating tariffs and non-trade barriers, but it will also harmonize a broad range of legal and regulatory issues. As estimated by Peterson Institute, TPP will create additional global income of around $223 billion per year by 2025 and additional exports revenue of $305 billion per year. The United States alone will get income benefits of around $77 billion per year and additional $123.5 billion per year in exports.10 In 2012, the US-TPP trade was $1.8 trillion, which had grown by 46 percent during the period 2009–2012. An estimated 4 million jobs were created by US exports to TPP countries in 2012.

The TPP has already set forth a flurry of bilateral negotiations among other countries while at the same time stoking the interest of other major economies (like China) in the proposed bloc. This is likely to aid dynamism to trade activity in the Asia-Pacific region. Interestingly, this agreement is also in tune with President Obama’s greater focus on Asia. It will allow the United States to enhance economic cooperation with economies where strategic partnerships are already on a rise.

There are, however, differences among the member states that are delaying negotiations. One of the main sticking points is market access. For example, Vietnam, Australia, and Japan want access to US markets for textiles, sugar, and automobiles, respectively, while Japan is resisting tariff cuts in some of its agricultural products. Other sticking points include Canada’s agriculture and dairy business policies, trade in tobacco, and intellectual property restraints. Moreover, some public interest groups are also questioning the discretion and confidentiality of the negotiations, especially on intellectual property.


Transatlantic Trade and Investment Partnership (TTIP)

The TTIP is a treaty under negotiation between the European Union and the United States since July 2013. The fourth round of negotiations was held in Mar 2014. The United States and the European Union make up close to half of global GDP and trade, but they have only 12 percent of the world’s population.11

Special Topic Figure 8

The main focuses of the pact are to drive growth, create new jobs, remove tariffs and non-tariff barriers, and abolish custom charges. According to an assessment by the European Commission, TTIP once fully implemented, will prop up EU and US economies annually by €120 billion each; it will also boost the rest of the world by €100 billion. It will create 400,000 jobs in Europe with 100,000 of them in Germany alone.12 Also, imported goods will get cheaper and boost the purchasing power of the average household in the European Union by €545 per year. The proposed treaty also aims to unify standards and licensing procedures. For example, a car approved in the European Union currently needs to get an approval again from United States even though the safety standards are similar.

In theory, the TTIP pact—for two of the largest economies to come together and boost their mutual trade and also unify the standards and licensing procedures—looks extremely logical. But significant political and cultural hindrances lurk beyond the figures and policy details. The biggest political challenge is for President Obama to get the trade bill cleared by US lawmakers before the upcoming elections while the house is completely divided and Democrats have been raising concerns regarding domestic industries. There are also fears in Europe that the pact will bypass EU safety and environmental standards, including the impact of imported GM crops on health.13 Another major hurdle is streamlining the duplication of rules and regulatory policies within the two regions, when there is a major cultural difference in consumer patterns and consumer protection ideas.14

Countries nowadays prefer to ally with partner countries in a bilateral agreement, which is mutually beneficial and quick to negotiate.

The need for some caution amid the bilateralism euphoria

Over the years, the WTO has greatly supported the smooth flow of international trade and discouraged countries from protectionism. But with the shift in the global economic landscape toward emerging markets and the changing trade environment, multilateral agreements have become more difficult to come by. Countries nowadays prefer to ally with partner countries in a bilateral agreement, which is mutually beneficial and quick to negotiate. So, bilateralism seems to be the buzzword in the trade arena. Potential blocs like the TPP and TPIP have made this even more apparent.

However, bilateral agreements are not the best way to claim the benefits of free movement of goods and capital. Trade theory tells us that efficient production and exchange of goods happens only when there are no barriers. Many times, bilateral agreements block out more efficient producers who are not in the requisite bloc. Moreover, countries involved in bilateral agreements face challenges in practical enforcement of dispute settlement, compliance, and regulatory measures as each agreement is negotiated with different sets of rules. Also, too often, policymakers involved in bilateral negotiations offer the argument that such agreements are a stepping stone for more multilateral discussions. The truth is up for debate.