The Berlin Pulse > 2018 > Christine Lagarde

Creating a Better Global Trade System

What states should do to benefit from trade in the digital era. By Christine Lagarde, Managing Director, International Monetary Fund

Recent news on global trade has tended to focus on protectionist measures and diplomatic tensions, raising concerns over growth and jobs across the world. Yet, looking past current disputes and towards the future, what is often lost in the current discussions is that we are entering a new era of trade – an era in which data flows are becoming more important than physical trade.

In many ways, the future of trade is the future of data. While the traditional global trade in goods and services is no longer growing as fast as at the turn of the century, digital flows have been booming in recent years. According to Cisco, the amount of cross-border bandwidth used grew 90-fold between 2005 and 2016, and is expected to grow an additional 13-fold by 2023.
This is not just about video streaming, Skype calls, and social media posts. Data flows boost other economic activities, especially by making services more tradable – from engineering, to communications, to transportation.

This is a huge opportunity for policymakers to build new economic bridges between countries, and to create a better global trade system. Let me highlight four building blocks of better trade. The first is about enabling more trade in services.

Global trade in services has been growing relatively fast and now accounts for one-fifth of global exports. According to some estimates, half of the global trade in services is already driven by digital technology. However, studies show that this is an area where trade barriers are still extremely high, equivalent to tariffs of some 30 to 50 percent.

By reducing these barriers and making trade more digital, services could become the main driver of global trade. I even believe that we can build the Wealth of Nations in the 21st century on trade in services.

Who will gain from more digital trade? Advanced economies, which are globally competitive in many service sectors, especially financial, legal, and consulting, could certainly benefit from new opportunities. But also developing economies such as Colombia, Ghana, and the Philippines, which are promoting growth in tradable services such as communications and business services, could prosper. Finally, digital tools could enable millions of small businesses and individuals to leverage their expertise in the global marketplace.

The second building block for improving the global trade system and increasing wealth in the 21st century is to make trade more productive. How? By encouraging a further shift in the composition of trade flows – from “physical” to more data-driven trade. For example, increasing automation is making it easier for companies to repatriate their operations. This could help rejuvenate manufacturing industries in many advanced economies and maintain domestically-based factories with higher-paying jobs. 3-D printing could for instance prompt companies to move production closer to their customers. One large shoe brand is already bringing bespoke shoemaking to the mass-market by printing customized soles in their high-street shops. If these trends were to continue, many supply chains would become shorter, more productive, and less carbon-intensive.

At the same time, digitalization will intensify competition in global trade, pushing companies to boost their investment in new technologies and more efficient business practices. New IMF analysis shows that greater competition accelerates the diffusion of technology across countries and even the rate of innovation itself. This, in turn, helps lower prices for companies and consumers.

Gains like that show the enormous benefits of building economic bridges between countries. And yet, too many people have continued to live in the shadow of these bridges. The digital revolution in trade will bring its own challenges, putting further pressure on those workers who are less well-equipped to compete.
That is why, as a third building block for a better global trade system, we need greater inclusiveness. Consider the benefits of scaling up investment in training and social safety nets, so that workers can upgrade their skills and transition to higher quality jobs. Even for an advanced economy like Germany, this means more investments are needed in digital infrastructure to ensure that the German economy is well-equipped to compete in a world of high-speed data. It also means investing in people to ensure they have the right skills to work with new technologies and in new industries.

In short, we at the IMF believe that for trade to improve, it needs to be more services-based, more productive, and more inclusive – so that everyone can benefit. We want to help countries gear up for the new era of trade, for example by working with all our 189 members on policies to help remove trade and investment barriers.

However, in order to truly adapt to the new era, global trade ultimately also needs to be more internationally cooperative. Over the past 70 years, countries have already worked together to create a multilateral trade system that has lifted hundreds of millions of people out of poverty, while boosting incomes and living standards in all countries.

Today, this system needs improvement to reflect the changes in the global economy. For example, many governments are struggling with major issues with regard to the new characteristics of trade that do not fall squarely within WTO rules. These include various state subsidies, restrictions on data flows, and the protection of intellectual property.
To address these issues, we could use “plurilateral” trade agreements – that is, deals among like-minded countries that agree to work within the WTO framework. There is also room to negotiate new WTO agreements on e-commerce and digital services. Setting a good example, the Trans Pacific Partnership is the first broader trade agreement that encompasses the free flow of data across borders for service suppliers and investors.

Now is the time to push for further trade reforms in a multilateral setting where rules are respected, where countries work in partnership, and where everyone is committed to fairness.

I believe that by building new economic bridges, by shaping a new era of trade, we can foster more prosperous and more peaceful communities across the world.

This article was originally published on the IMF Blog.

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