Wednesday, December 28, 2011

New Trade Rules for the Evolving World Economy

I recently ran across a World Trade Organization working paper published last May by Richard Baldwin called 21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules.
Baldwin begins: 

"The last time multilateral trade rules were updated, Bill Clinton was in his first term of office, data was shared by airmailing 1.4 megabyte HD floppy disks (few people had email), cell phones looked like bricks and calling costs were measured in dollars per minute. Trade mostly meant selling goods made in a factory in one nation to a customer in another. Simple trade needed simple rules – a fact reflected in both multilateral and regional trade agreements."

Baldwin points out that patterns of trade in the 21st century are fundamentally different than the make-it-in-a-factory, ship-it-to-another country trade that prevailed in the late 20th century. 
"The heart of 21st century trade is an intertwining of: 1) trade in goods, 2) international investment in production facilities, training, technology and long-term business relationships, and 3) the use of infrastructure services to coordinate the dispersed production, especially services such as telecoms, internet, express parcel delivery, air cargo, trade-related finance, customs clearance services, etc. This could be called the trade-investment-services nexus. ...

 "[T]he nexus entails two elements, each of which generated new demands for more complex international disciplines:
  • Doing business abroad. When firms set up production facilities abroad – or form long-term ties with foreign suppliers – they typically expose their capital as well as their technical, managerial and marketing know-how to new international risks. Threats to these tangible and intangible property rights became 21st century trade barriers. 
  • Connecting international production facilities. Bringing high-quality, competitively-priced goods to customers in a timely manner requires international coordination of production facilities via the continuous two-way flow of goods, people, ideas and investments. Threats to these flows became 21st century trade barriers.
For an illustration, here's a graph of the number of Japanese auto and electrical machinery plants  manufacturers in other countries in east Asia, and how they have increased in the last 20 years or so.

 The basic role of the World Trade Organization, as with the GATT before it, has been to reduce tariffs gradually over time, and to referee arguments over what trade practices are "unfair." But when thinking about 21st century trade, in which supply chains and ownership stretch across international borders, this focus is inadequate. Baldwin offers some examples of the kinds of international agreements that are needed to facilitate 21st century trade--or to put it another way, the kinds of agreements whose absence will tend to block the development of 21st century trade. Here are his examples:

  • The sharing of tacit and explicit technology and intellectual property is facilitated by assurances that foreign knowledge-capital owners will be treated fairly and their property rights will be respected.
  • Foreign investments in the training of workers and managers, physical plant, and the development of long-term business relationships are facilitated by assurances on property rights, rights of establishment, and anticompetitive practices.
  • Assurances on business related capital flows – ranging from new FDI to profit repatriation – also helped foster the investment part of the trade-investment-services nexus.
  • Connecting factories often involves time-sensitive shipping, world class telecoms and short-term movement of managers and technicians, so assurances on infrastructure services are also important.
  • Tariffs and other border measures also matter – just as they mattered in the 20th century but more so since the ratio of value added to value on individual shipment falls as the production chain fragments, even though tariffs are applied to the value of the goods as they cross borders.
 In short, tariffs still matter, and non-tariff barriers still matter, but in 21st century trade, they become a much smaller part of the overall trade liberalization agenda. In addition, negotiations over these matters tend to detailed and industry-specific. Baldwin argues that the need for a new kind of trade liberalization has contributed to the near-zero progress in recent years on an overall Doha trade agreement, while at the same time the world economy has seen a "regionalist" trade agenda, in which countries negotiate regional trade agreements, bilateral investment treaties, and even take unilateral steps to reassure potential trade partners. This graph shows on the right-hand axis the drop in world tariff rates over time, and on the left-hand axis the explosion of new regional trade agreements.

So far, as Baldwin readily admits, the regionalist trade agenda has not blocked a dramatic expansion in world trade: "Trade liberalisation has progressed with historically unprecedented speed in the 21st century ... As a result, trade volumes have boomed, lifting billions out of dire poverty. Twenty years ago, one could wonder whether regionalism would be a building or stumbling block; now we know there were no stumbling blocks on the road to zero tariffs. The road remained open and the world is driving down it as fast as ever."

But on the other side, the notion of global trading rules is being continually eroded. In such a world, the world's most powerful economies--which will include the U.S., the nations of Europe, along with rising global trading powers like China, India are Brazil --will write new ad hoc trading rules as they go. Baldwin notes:  "If the RTAs and their power asymmetries take over, there is a risk that the GATT/WTO would go down in future history books as a 70-year experiment where world trade was rules-based instead of power-based. It would, at least for a few more years, be a world where the world's rich nations write the new rules-of-the-road in settings marked by vast power asymmetries. This trend should worry all world leaders."

How to rethink the world trading rules so that they can focus clearly on the issues of 21st century trade is very much a work in progress. But as world trade rules march steadily toward an ad hoc set of bilateral and regional agreements based on the economic power of the participants, it's important to start considering what alternative paths might be viable.