Fast-changing nature of world trade poses new policy challenges

Trends in international trade

• Dramatic decreases in transport and communication costs have been the driving forces behind today’s global trading system. Geopolitics has also played a decisive role in advancing and reinforcing these structural trends.

• In the last 30 years, trade in merchandise and commercial services have increased by about 7 per cent per year on average, reaching a peak of $18 trillion and $4 trillion respectively in 2011. When trade is measured in value-added terms, services play a larger role.

• Between 1980 and 2011, developing economies raised their share in world exports from 34 per cent to 47 per cent and their share in world imports from 29 per cent to 42 per cent. Asia is playing an increasing role in world trade.

• For a number of decades, world trade has grown on average nearly twice as fast as world production. This reflects the increasing prominence of international supply chains and hence the importance of measuring trade in value-added terms.

• Simulations show that in a dynamic economic and open trade environment, developing countries are likely to outpace developed countries in terms of both export and GDP growth by a factor of two to three in future decades. By contrast, their GDP would grow by less than half this rate in a pessimistic economic and protectionist scenario, and export growth would be lower than in developed countries.

Fundamental economic factors affecting international trade

• Demographic change affects trade through its impact on countries’ comparative advantage and on import demand. An ageing population, migration, educational improvements and women’s participation in the labour force will all play a role in years to come, as will the continuing emergence of a global middle class.

• Investment in physical infrastructure can facilitate the integration of new players into international supply chains. The accumulation of capital and the build-up of knowledge and technology associated with investment, particularly foreign direct investment, can also enable countries to move up the value chain by altering their comparative advantage.

• New players have emerged among the countries driving technological progress. Countries representing 20 per cent of the world’s total population accounted for about 70 per cent of research and development (R&D) expenditure in 1999, but only about 40 per cent in 2010. Technology spill-overs are largely regional and stronger among countries connected by production networks. In addition to the traditionally R&D intensive manufacturing sectors, knowledge-intensive business services are emerging as key drivers of knowledge accumulation.

• The shale gas revolution portends dramatic shifts in the future pattern of energy production and trade as North America becomes energy sufficient. Increasing water scarcity in the future in large swathes of the developing world may mean that the long-term decline in the share of food and agricultural products in international trade might be arrested or even reversed.

• Ample opportunities exist for policy actions, at the national and multilateral level, to reduce transportation costs and offset the effect of higher fuel costs in the future – improving the quantity and quality of transportation infrastructure, successfully concluding the Doha Round negotiations on trade facilitation, introducing more competition on transport routes, and supporting innovation.

• Improvements in institutional quality, notably in relation to contract enforcement, can reduce the costs of trade. Institutions are also a source of comparative advantage, and trade and institutions strongly influence each other.

Trade openness and the broader socio-economic context

• Successful integration into global markets requires the constant need for individuals and societies to cope with changes in the competitive environment. These adjustments can put labour markets under strain and can shape attitudes towards trade openness. Job losses in the short-run can exert pressure on governments to use barriers to trade. In the end, it is open economies with a well-trained workforce and a business-friendly environment as well as an effective social protection system that tend to be better placed to adjust successfully.

• Societies’ transition to a sustainable development path requires careful management of the multi-faceted relationship between trade and the environment in order to maximize the environmental benefits that open trade can bring. Competitiveness concerns may result in governments incorporating trade-restrictive non-tariff measures into environmental policies as a means of compensating affected firms and sectors. Such green incentive packages may undermine their environmental effectiveness and exacerbate their potentially adverse trade effects.

• The expansion of trade needs to be supported by a stable financial and monetary system – delivering a sufficient volume of trade finance at an affordable cost, particularly for developing countries, and macroeconomic policies that promote exchange rate stability.