Global trade just got the boost it needed

Blog | 3 March 2017

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For advocates of trade liberalisation as a means to spur growth, 2017 got off to a rocky start. US withdrawal from the Trans-Pacific Partnership (TPP) saw the end of an ambitious free trade agreement that had potential to add billions of dollars to the economies of the twelve Pacific Rim partner countries. The TPP was also designed to raise standards for labour practices, environmental controls and regulatory transparency to the benefit of the peoples it covered.

But soon after the TPP hit a wall, a new pact has leapt forward at the World Trade Organization (WTO), which should give businesses, workers and consumers everywhere fresh reasons for optimism. When Chad, Jordan, Oman and Rwanda ratified the Trade Facilitation Agreement (TFA) on 22 February, it gave that pact the two-thirds majority support it needed and so brought it into force for all WTO member countries. This is a truly significant development and marks the first time a multilateral trade accord has been implemented by the WTO. The TFA paves the way to simpler, safer and cheaper cross-border trade, and so promises a significant uplift for the global economy.  

Global trade faces many challenges - from tariffs levied at the border to inconsistent regulatory standards - that understandably deter some small and mid-sized businesses from trading internationally. This new pact will make it easier for businesses of all sizes - whether they’re buyers or sellers - to reap the benefits of global trade by making it more efficient.

Practicality breeds business

Reading through the text of the TFA, I’m struck by the practical nature of many of the provisions. It makes intuitive sense, for example, to consult on new customs laws and regulations, to minimise documentation requirements, publish customs procedures in a non-discriminatory manner, post information on the internet, and accept electronic payments for fees and duties.

The WTO itself estimates that the TFA could reduce the time it takes to import goods by about a day and a half, while cutting the time it takes to export by almost two days. In part due to these time savings, the OECD thinks the TFA could cut the cost of cross-border commerce by 12.5% to 17.5%.

Implementation of the TFA offers the prospect of win-win outcomes. Preventing deadweight losses from unnecessary delays and expenses at the border is in the interest of both sides of a transaction. It’s not surprising that the deal could boost trade annually by more than US$1trn, and add up to US$555bn to global GDP, according to the WTO.

Of course we must acknowledge that statistics only tell part of a story. Many people are concerned that further liberalisation could have negative implications for some types of jobs and wages, particularly in developed markets. Here businesses and governments have a greater role to play in providing social support for those who are displaced, for example through retraining and up-skilling.

But trade is often wrongly blamed for changes that are caused by other factors such as automation. In fact, trade can offer economic benefits for the labour market. We know from various studies that businesses trading internationally tend to be more productive, pay higher wages and provide better working conditions than less trade-oriented firms.

Far from harming the economy, imported inputs for production may actually help domestic firms become more competitive and so able to create jobs. Consumers benefit as well. Imported finished goods may stimulate competition and offer those on low incomes better value for money.

In economic terms, the majority ratification of the TFA shows that multilateral trade deals can still be part of the solution to weak global growth. And there’s still no shortage of initiatives underway with this goal in mind.

A broad group of WTO members, for example, recently opted to provide each other’s companies with duty-free access to a wide range of electronic products. Another group is pursuing a deal to remove tariffs on a long list of environmental goods.

These initiatives are not limited to global discussions at the WTO. Sixteen Asian nations are still negotiating a ‘Regional Comprehensive Economic Partnership’ that, though less ambitious than the TPP, could still become a substantial catalyst to intra-Asian trade and growth.

So while the path towards trade liberalisation will remain a rocky one, many people are clearly still willing to walk along it. Those who believe that free, rules-based trade helps to boost prosperity have reasons to celebrate the signatures of Chad, Jordan, Oman and Rwanda on the TFA, and much work to do to help realise its potential.

Natalie Blyth is global head of trade and receivables finance at HSBC

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