New Thinking Needed to Boost Trade

Indian driver waits for his truck carrying cotton bales to be offloaded at the Wagah Cargo Terminal in Pakistan.
Indian driver waits for his truck carrying cotton bales to be offloaded at the Wagah Cargo Terminal in Pakistan.

By Steven Beck

We need to better explain and implement free trade agreements, support other fast-growing emerging markets, keep closing trade financing gaps, and embrace new technologies to bring in more players.

There may well be an innate human tendency to think life will always go back to the way it was after a crisis. The fact is, however, that global trade growth won’t naturally revert to pre-2008 levels when it was fueled by Chinese hypergrowth and the mushrooming of international supply chains, the combination of which pulled millions of people out of poverty. In the uncharted economic territory in which we now find ourselves, we need to navigate in different ways with different instruments.

To boost trade, we need to better explain and implement free trade agreements. We should better support other fast-growing emerging markets, continue to close trade financing gaps, and embrace new technologies that can bring more players into global trade.

Last year, trade dropped by a whopping 13.5% versus 2014 in dollar value terms due to a collapse in commodity prices. The volume of trade transactions, though, increased at approximately 2.8%, much slower than during the previous 15 years up to 2008, when growth in transactions averaged 5% a year. 

Trade growth has been hit by weaker demand from the West and by maturing emerging markets rebalancing their economies. Supply chains seem to be reconfiguring to incorporate 3D printing and robotics into the manufacturing processes. Economic growth in the People’s Republic of China (PRC) has slowed and it is unrealistic to expect the country to resume annual growth rates of 10%, even though at rates of between 5% and 6.5%, the PRC’s contribution to global growth will remain huge. In the medium term, trade growth is likely to match GDP growth as it did in the 1970s and early 1980s, according to the World Trade Organization.

We aren’t necessarily going to end up stuck in the doldrums, but we cannot be complacent.  

We need a new approach to trade agreements to ward off the prevailing anti-trade sentiment and the protectionism that is again raising its head. That means shifting the discussion from market access for industry sectors and economic theories about comparative advantage to the real value of freer trade in terms of jobs and access to goods. This also means addressing the adverse impact of trade so that those who lose out from trade agreements—and there are always losers—are better compensated. Leveling the playing field on labor and environmental standards will also help garner more support for trade in the West, along with arrangements between governments to address tax avoidance.

Since the PRC won’t be able to make the oversized contribution to global trade that it once did, and notwithstanding India’s potential to play that role, smaller, still large emerging markets—like Indonesia, Viet Nam, Bangladesh, and the Philippines—could. After all, the Republic of Korea, with 50 years of 7% annual average growth, saw living standards of a very poor developing country improve to those of a leading industrialized nation. With the right mix of policies applied consistently, we could expect the same of other emerging economies.

Part of the answer will be to close trade finance gaps. A 2015 ADB Trade Finance Program study showed $1.4 trillion in trade finance was lacking globally, of which $600 billion is in developing Asia. Not surprisingly, the most underserved segments are small- and medium- sized enterprises (SMEs). The study also concluded that if companies had access to 5% more trade finance, they would produce 2% more and require 2% more staff.

New technologies can play a massive role in broadening the base in the global trading system by addressing the two greatest impediments to SME finance: a lack of information about borrowers and the high cost of providing loans to SMEs.

A single window on a computer or mobile phone, through which everyone in the world trades and which records all transactions, would allow a financial institution to easily and inexpensively access a wealth of information: a company’s whole supply chain, its history of paying and performing under contracts, and whether there have been commercial disputes. 

Meanwhile, ‘smart contracts’ which are digitized and self-executing could send supply chains into hyperdrive by making huge efficiency gains, boosting productivity, and lowering costs. For instance, once an electronic payment is made, the smart contract would automatically trigger release of a shipment.

These technologies may sound far-fetched, but banks and others have already invested significant capital and are cooperating and running proof-of-concept tests in these areas.

Government issued e-currency—alongside physical money—is also inevitable and will hasten the kind of technological innovation described above. The central banks of the UK, the PRC, and Canada have all said they will issue e-currency in the medium term, likely 2 years or so.

We can promote and hasten technology’s potentially revolutionary role in global trade by improving coordination between all the players – IT geeks, bankers, regulators, academics, companies, and governments. And all companies and individuals will need digitized unique legal identifiers—as defined under Sustainable Development Goal number 16.9—to ensure targeted and efficient implementation of these new technologies.

By charting a new course in these days, we can ensure that the trade winds are always in our sails.