How the G20 can revive world trade
November 15, 2015, 3:36 pm

The G20’s principal task of reviving global economy growth has never been easy—it is harder now that world trade is contracting. Talk of a global trade slowdown is misplaced—even in volume terms world exports are down 2% since the end of 2014.

Apart from Germany, in no other G20 member did improvements in trade balances account for more than a fifth of GDP growth during 2009-2014. Even these contributions are now threatened as international commerce contracts. This matters because millions of families depend on jobs at companies meeting foreign customers’ needs. The taxes these exports generate help states tackle a growing list of societal challenges.

So what can the G20 do to revive world trade?

First it is important to diagnose the problem correctly. Our analysis had led us to reject the benign interpretation that the global trade slowdown as merely a combination of a rising US dollar, falling commodity prices, and retrenchment of supply chains involving China (as if these weren’t bad enough!). With export revenues down and jobs being lost, governments can hardly sit back and accept the latest twist and turns of the global economy.

[Image: G20, Turkey]

• That manufactured exports have been falling in price since mid-2011—suggesting that the rot set in over four years ago.
• After recovering in 2010 and the first half of 2011, world trade stopped growing in total value, plateaued, and then began falling in nominal terms after October 2014.
• That the recent fall in the total value of global trade is concentrated in a small number of product categories—for sure, commodities are well-represented, but falling trade in certain final goods is far more important than parts and components.
• That shipments of motor vehicles, a key sector with supply chains, have grown 10% since October 2014, bucking the trend.

That only 28 product categories account for 78% of the fall of world trade is hard to square with falling import demand that follows a global growth slowdown. Moreover, the jump in motor vehicles trade reinforces the impression of uneven impact. The obvious question to ask is whether policy affected the trade in these products more. In this regard the following finding of our analysis is worrying:

• That the manufactured products which account for a larger share of the recent fall in global exports happen to be the very products where the G20 has tended to impose more trade restrictions since the beginning of 2014. Interestingly, relatively fewer trade-restrictions were imposed on motor vehicles over the same period.

Stepping back and looking at the global picture we found that in 2015 the “level playing field” has taken a battering. This year the Global Trade Alert team, of which we are members, found:

• Worldwide governments imposed 538 trade distortions in the first 10 months of this year—of which the G20 was responsible for 433.
• Easily spotted G20 tariff increases were down 21%, easier-to-hide subsidies up 47%.
• Resort to trade distortions by the G20 is up 40% on the same period last year.
• Resort to trade distortions worldwide this year are two-and-a-half times higher than at the same point in 2009—when G20 Leaders took the threats to global commerce seriously.
• Since the crisis erupted G20 governments have imposed 3,581 measures that have harmed foreign commercial interests.
• 81% of all G20-imposed trade distortions remain in force–undercutting claims that crisis-era protectionism is a temporary expedient.

These aggregate developments are borne out on the ground with growing trade tensions in airlines and steel and over data storage, to choose just three examples. The time has come for the G20 to stop taking for granted the openness of the world trading system and to boost trade’s contribution to economic growth.

What should the G20 do? Realistically, in the near-term neither developments at the WTO nor the signing of the Trans-Pacific Partnership will counter falling world trade. While the Agreement on Trade Facilitation is welcome, as of now less than a third of WTO members have ratified it. Remarkably, 10 G20 members (Argentina, Brazil, Canada, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Turkey) have yet to ratify this accord.

With the multilateral and regional options offering little near-term relief, attention turns to steps the G20 can take themselves.

G20 Leaders should request that the incoming Chinese Presidency build support for initiatives to revive global trade without imposing more trade distortions. You don’t have to believe that rising protectionism contributed to the recent fall in world trade to argue that unwinding protectionism and opening markets will help revive world trade.

To that end, at their summit G20 Leaders should:

• Instruct G20 trade ministers to commission and publish third party:
  • updates on world trade levels on a quarterly basis,
  • analyses of sectors where trade has shrunk the most or where substantial excess capacity is said to exist, and
  • estimates of the impact of suspending all nuisance tariffs (3% or less) on goods imported by the G20.
• Commit that temporary tariff cuts by G20 members on parts, components and capital goods will last at least two years—reducing uncertainty faced by exporters.
• Instruct the IMF to estimate the cost of G20 fiscal incentives given by all levels of government and state-linked companies and banks to stimulate trade and inflows of foreign investment.
• Instruct the WTO, OECD, and UNCTAD to propose an updated version of the protectionist pledge that recognises the full range of crisis-era distortions to commerce.

These steps would ensure that policy changes in the coming year support the revival of world trade and with it trade’s contribution to growth.