Multilateral Trading System in a Changing World: De-globalization or Re-globalization?

Published on 31st January 2023

One important lesson I learned as a child in my village in Nigeria, during daily trips to the stream, is that water is something we cannot - and should not - take for granted.

The same is true for the multilateral trading system which for varying reasons is getting its fair share of knocks these days. We are in danger of throwing the baby out with the bathwater. Instead of addressing specific and often reasonable concerns about exclusion, unfairness, and fragility, we run the risk of stepping away from a shared system of rules and norms that has served the world well for 75 years.

I will look back at why that system was created in the first place, what it has achieved, and what it continues to deliver for people around the world. I will argue that history suggests fracturing economic ties is more likely to heighten geopolitical tensions than to soothe them.

I will make the case that fragmentation and decoupling of the Multilateral Trading System would not just be economically costly: it would leave all countries more vulnerable to the global commons problems that now represent some of the biggest threats to our lives and livelihoods.

As the world navigates the polycrisis - climate change, pandemic, the war in Ukraine, economic slowdown, inflation, food insecurity, monetary tightening and debt distress - we need multilateral cooperation and solidarity more than ever.

Finally, I will offer an alternative vision for the future of trade. Interdependence without overdependence. Deeper, more diversified, and deconcentrated international markets - or what we at the WTO are calling re-globalization. And I hope you leave this room with this word firmly in your head, re globalization, not de-globalization.

If governments are willing to use trade constructively to solve problems rather than amplify them, the WTO can help foster not just supply resilience amid ever more frequent exogenous shocks, but also geopolitical resilience.

I want to start my case by putting a few facts on the table.

For all the talk about the end of globalization, about re-shoring and friend-shoring, trusted trade, the data show that global merchandise trade volumes are at record highs, and have been since early 2021.

In value terms for exports and imports, Australian merchandise trade was higher last year than ever before.

Also at record highs in 2021: two-way trade between the United States and China, worth US$693 billion; between between China and the European Union, at US$818 billion, with both exports and imports at record levels.

In the first half of this year, global services trade surpassed pre-pandemic levels, with strong growth in transport and digitally delivered services more than offsetting continuing weakness in travel.

These trade flows are the products of millions of choices by businesses and households. It is hard to overstate how disruptive it would be to try to undo those choices.

Nevertheless, it is an inescapable reality that with the end of our post-Cold War holiday from history - apologies to Francis Fukuyama - trade has emerged as an arena for geopolitical rivalry. Over the past decade, governments have in several instances, unfortunately, weaponized trade and economic interdependence as a way of handling big and small power rivalries and disagreements.

Weaponization of trade is problematic, not least because it creates some challenges for the rules based multilateral trading system, but also because it could slide down the slippery slope beyond a few targeted products or sectors to wider economic disruptions.

And of course, when viewed as economic coercion it could become a tit for tat exercise, with the possibility of slipping out of control, leading to broader and more painful repercussions – economic, political and social.

We would be naïve to rule out the possibility that our era could meet the same end an earlier episode of power shifts and global integration did in 1914: with fear and mistrust giving way to strategic miscalculation, misjudgement, aggression, and, ultimately, a world war. This time with nuclear weapons.

Historians have likened our predecessors from a century ago to sleepwalkers who blundered into a catastrophe no one truly wanted. We must make better choices.

The years from 1914 to 1945 provide the modern world’s principal experience with deglobalization. The global trade to GDP ratio fell from 29% in 1913 to 10% in 1945. Far from ushering in domestic prosperity and international harmony, this period was bookended by the two World Wars, and marred by the Great Depression, a protectionist breakdown into isolated trade blocs, and political extremism.

It is instructive that during each of the two horrific conflicts, people turned to trade as part of their vision for lasting postwar peace and order.

In 1918, “Equality of trade conditions” was one of Woodrow Wilson’s Fourteen Points proposed as a basis for peace negotiations to end World War One.

In 1941, Franklin D. Roosevelt and Winston Churchill issued the Atlantic Charter calling for, “the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”

The political and economic disasters of the 1920s and 30s profoundly shaped the multilateral trading system created after the Second World War.

The 23 governments that signed the General Agreement on Tariffs and Trade in October 1947 - Australia among them - were seeking to foster peace and prosperity through trade and interdependence.

After delivering several rounds of trade liberalization and new rules, the GATT transformed into the WTO in 1995. Membership steadily rose to the current 164 members, with another 24 countries working towards accession.

While the GATT/WTO system has certainly not been perfect - and I will come back to that - it can hardly be described as a failure.

It steadily unwound protectionist barriers and gave rise to a more open and predictable world economy. Businesses had the confidence to invest in export-oriented production. Average applied tariffs fell from 50% in the 1930s to single digits today. Global trade boomed, bringing with it higher productivity, greater competition, lower prices, and improved living standards. Most fundamentally, the past 75 years of increasing interdependence were marked by the absence of war among great powers - and it is this historically rare ‘long peace’ that now looks increasingly fragile.

The multilateral trading system has delivered major gains for people around the world.

As large developing economies like China embraced market-oriented reforms and started tapping into world markets, growth accelerated, lifting over a billion people out of poverty.  Close to 40% of the world population lived in extreme poverty in 1980. By 2019, it was less than 10%, before the COVID-19 pandemic, the war in Ukraine, and increased climate impacts began to derail this progress.

Businesses and households in advanced economies gained as well, in choice and purchasing power.

According to a joint report by the WTO, the World Bank, and the IMF, trade has cut the price of the household consumption basket by two-thirds for low-income families in advanced economies - and by one-quarter for high-income families, which tend to consume more non-traded goods and services.

Open global markets allowed Australia to ride shifting economic tides. In 1963, the UK was Australia’s biggest export market for merchandise and by far its largest source of imports. By 1970, Japan, then in the midst of its economic miracle, had become Australia’s top export destination. The US had become the leading source of imports. Both countries would occupy these spots for decades, until being replaced in the 2000s by China. The composition of Australia’s export basket shifted as it grew, with wool and other farm products now far surpassed by minerals and metals and the share of manufactured exports and machinery significantly lower than in the 1970’s.

Global markets continue to deliver in other ways as well.

Consider the experience with COVID-19. Most people remember the medical supply shortages and export bans early on. Frequently overlooked is that cross-border supply chains subsequently became an engine for manufacturing and distributing masks, personal protective equipment, and later, vaccines. COVID-19 vaccines are made in supply chains cutting across as many as 19 countries. Trying to scale up production within purely national supply chains would have left all countries worse off: production volumes would have been lower, and costs higher.

Trade is critical for access to food, particularly in countries with insufficient water and arable land. One in five calories consumed around the world is traded across borders, according to the FAO and the OECD, and this share has been rising. At this time of rising food and energy prices, trade plays an important role in accessibility and affordability. Put it this way: the recent opening of the Ukraine Black Sea Grain Corridor, and the way it brought prices down, shows us that situations can be more often than not worse without trade.

Trade is also an essential part of a just and ambitious response to climate change, since it is vital for diffusing green technology, cutting the cost of getting to net zero, and helping countries mitigate and adapt. I encourage you to check out our new flagship World Trade Report, which is on trade and climate and which we launched at COP27 in Sharm El Sheikh earlier this month. One finding is that 40% of the decline in the cost of solar panel systems over the past thirty years is attributable to scale economies made possible in part by international trade and value chains.

In sum, trade delivered, the GATT and the WTO delivered. The Dartmouth economic historian Doug Irwin recently said that if we allow the multilateral trading system disintegrate or to erode, we might find that we miss it very much.

Having said all this, we also need to look at the problems with how the trading system has been working.

There are challenges of socioeconomic exclusion. Many poor countries, and poor and lower-middle-class people in rich countries, have not shared enough in the gains from trade.

There are practical problems: the pandemic and the war in Ukraine pointed to genuine vulnerabilities in supply chains. Shortages and disruptions exposed the risks of excessive concentration in the production of things like pharmaceuticals, semiconductors, and some industrial inputs.

There are gaps in the global trade rulebook. For instance, several members of the WTO feel that existing WTO subsidy rules do not adequately constrain certain kinds of state support, allowing China in particular, in their view, to benefit unfairly. Many western governments have also now introduced new industrial policy and subsidy schemes to encourage semiconductor or other critical types of products. Such subsidy schemes have to be approached with care as we do not want to have destructive competitive subsidization. Poorer countries cannot afford to play this game.

Another example of a gap is that in the year 2022, we still don’t have a set of global rules for digital trade, at a time when such trade is growing in leaps and bounds, encouraged by the pandemic-driven shift online.

An additional challenge (which is not a problem per se), is the geopolitical implications of the trade-enabled convergence between rich and emerging economies.

Most consequentially, China has - after a gap of about two hundred years - returned to global economic prominence.

When China joined the WTO in 2001, it accounted for 3.9% of global GDP in current dollar terms, compared to 31.3% for the US. By 2022, China’s share had risen to 18% of global GDP, compared to 24.7% for the US.

In 2001, China’s per capita income, in purchasing power parity terms, was $3200 - about one-twelfth the $37,000 of the US. By 2021, China’s per capita income was over $19,000 - well below the $69,000 figure in the US, but now only three-and-a-half times lower).

China’s share of world merchandise exports rose from 4.3% in 2001 to 15.1% in 2021. Over that period, the US’s share declined from 11.8% to 7.9%.

Rapid shifts in the balance of economic and political power can be destabilizing.

In fact, the Harvard political scientist Graham Allison documents that rivalry between a rising power and an established one has resulted in a violent clash more often than not. He warns that China and the US risk following this pattern into ‘Thucydides’ trap’ - a reference to the ancient historian’s observation that “the growth of Athenian power and the fear that this caused in Sparta” led to the war that devastated classical Greece’s leading city-states 2500 years ago.

Kevin Rudd shares this concern. He fears a new Cold War could trigger a hot one, and is calling instead for “managed strategic competition.”

Going further, I would say that clear-headed recognition that we need global cooperation to solve certain problems of the global commons like pandemic disease and climate change should lead us to a model of co-existence that accommodates strategic cooperation alongside strategic competition.

In the face of these challenges, one response currently gaining currency is re-shoring, friend-shoring - the idea that you can relocate supply chains at home or to friendly countries that share your values.

On the surface, this makes sense in light of the supply chain vulnerabilities now evident, and some relocation of investment in highly sensitive sectors is likely inevitable – we must recognize that. The issue is one of balance, as we all know that subsidizing one industry or sector to relocate in a particular area on the basis of its priority or criticality is a slippery slope. Trading and investing only with friends could lead to fragmentation. And wider fragmentation would be economically costly for all economies.

Looking at one key sector, semiconductors, Boston Consulting Group estimates that achieving full-scale self-sufficiency by region would require $1 trillion in upfront investment and result in chips that cost 35% to 65% more.

WTO economists estimate that if the global economy decouples into two self-contained blocs, long-term global GDP would decrease by at least 5% - worse than the damage from the financial crisis in 2008-09. The IMF has furthered this work, and its modelling shows growth prospects for developing economies under that scenario would darken, with some facing double-digit welfare losses. This would enhance socioeconomic exclusion and political anger, not soothe it.

Large-scale reshoring could end up defeating its own purpose by making supply security worse instead of better. Locally concentrated supply chains would be more exposed to localized shocks, which are becoming more frequent with extreme weather events.

Politically speaking, policy-induced decoupling designed to build resilience and security could end up feeling like an own goal. Taken too far, it could be dangerous for coordination around basic security interests, and unlikely to foster the kinds of international cooperation we need for effective collective action on global commons problems like climate change, pandemics, or sovereign debt distress.

There is also the important reality that many countries don’t want to have to choose between two blocs. Maybe for Australia as a strong middle power it is different, but for the Pacific island countries, I am sure it is not.

In a recent speech, Singapore’s Foreign Minister, Vivian Balakrishnan, said ASEAN Member States want to maintain good relations with the US and China, and called for them to have overlapping circles of friends. “We tell both the Americans and the Chinese do not make us choose,” he said. “We will refuse to choose.”

I know Minister Balakrishnan’s view is widely shared among many poor and developing countries. Even for rich ones like Australia, I guess there must be times you wonder about this.

So let me outline an alternative path for the future of trade: Re-globalization. Deeper and more diversified markets would enhance supply resilience in a world of more frequent exogenous shocks. Reduced concentration in sourcing would make trade harder to weaponize.

We should acknowledge there are tradeoffs - we would lose some of the efficiency gains that come with scale and agglomeration, but we would gain in terms of resilience and adaptability.

To some extent, this would simply extend trends we are already seeing. Firms are already moving to diversify risks by adding sourcing and investment locations. We see evidence that source market concentration is diminishing, even for products like rare earths.

By taking these dynamics further - by bringing countries with good macro environments in Africa, Asia, and Latin America from the margins of global production networks to the mainstream - we can make trade more resilient whilst bolstering growth and poverty reduction.  In other words, we can kill many birds with one stone.

So what I am saying? I’m saying let businesses manage risks and diversify in a sensible manner, but if governments seek to intervene, to encourage this through subsidies or other incentives, then push for a broader, wider diversification to many more geographies, wherever the investment environment is appropriate. This would contribute to the re-globalization which we seek. 

We can tackle the challenges facing the multilateral trading system head-on. We can address level playing field issues at the WTO, encouraging transparency and mitigating negative spillovers. We can foster greater inclusion by agreeing on new rules for digital trade enabling more women and micro, small, and medium-sized enterprises to tap into international markets. We can leverage trade in service of building greener economies and creating better jobs. In short, we can tackle the shortcomings that seem to weaken the multilateral trading system.

This might sound like a tall order. But WTO members proved at our Twelfth Ministerial Conference this past June that they can work across geopolitical differences and deliver results. All 164 members - Russia and Ukraine, China, the US, Japan, Brazil, Australia, everyone - signed on to the agreements we reached, some of them legally binding. And there was one particular one on curbing harmful fisheries subsidies, and responding to the pandemic and the food security crisis, which they all signed on.

We need to keep building on these successes. As my friend and co-author former Prime Minister Julia Gillard said in another context, “reform is never easy - but reform is right.” We need to ensure the WTO reforms and continues to provide a framework for peaceful, competitive economic engagement for all members.

Strategic competition is a reality. But like I said earlier, we can - we must - have strategic cooperation alongside it. Engagement at institutions like the WTO can help build confidence, even trust, managing the multiple tensions of today and the challenges of tomorrow.

The world has changed a lot in the past 75 years, but we can still make trade a force for peace in the 21st century, as it was in the second half of the 20th.

Let me close with something Martin Luther King said that’s just as relevant today as it was in 1964: “We must learn to live together as brothers - or perish together as fools.” Brotherhood might be a lot to hope for today. But cooperating on trade, not retreating from it, can help us learn to live together.

Dr Ngozi Okonjo-Iweala

The Director-General of the World Trade Organization.

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