Reforming the International Trading System for Recovery, Resilience and Inclusive Development

The world economy is still reeling from the COVID-19 shock and the subsequent restrictions to social and economic activity. While in the developed world governments have been able to mobilize a massive arsenal of monetary and fiscal measures to prop up their economies, estimated at between 20 and 25 percent of their GDP, the poorest developing countries have mobilized just one percent of their output to mitigate the damage from a vicious cycle of capital flight, plunging trade and investment flows, collapsing output and tax revenues and, in some cases, soaring debt service. While the global economy is now recovering, there are growing concerns that developing countries might face a lost decade and miss the achievement of the UN Sustainable Development Goals by 2030.

For some observers, the sharp declines in trade and foreign investment flows caused by the COVID-19 crisis, along with a resort to export restrictions, are only the latest in a series of setbacks for the international trading system. In particular, a surge of “murky” protectionism following the global financial crisis has, it is argued, been compounded over the last decade by “populist” politics and reinforced by deepening political rifts at the World Trade Organization (WTO). These hidden and more overt forms of protectionism have, it is claimed, not only distorted and slowed down global trade, but also triggered a dangerous retreat from the post-war liberal international economic order.

From this perspective, the best hope of building back better from the current crisis comes from adopting policies at the domestic level to increase competitiveness and at the international level to deepen integration through reforms at the WTO, including further reductions in industrial tariffs, liberalization of services (particularly those linked to the emerging digital economy), stronger intellectual property rules, ending “unfair” state support and the alignment of trade rules with climate goals.

Such measures are tightly tuned to the demands of a hyper-globalized world and attached to the promise that supporting entrepreneurship, extending supply chains and strengthening competition will boost trade and investment and revive growth, particularly in developing countries. In reality, the revival of hyper-globalization after the global financial crisis, coincided with sluggish investment demand, a marked increase in market concentration and rising corporate rents, exacerbating income inequalities and squeezing domestic markets, all of which contributed to a slowdown of trade over the past decade.

These intertwining trends follow, in part, from many of the measures adopted to boost competitiveness (particularly through wage repression) which tend to weaken domestic demand, based on the illusion that all countries can be net exporters. The more likely result has been a “race to the bottom.” But these trends were also associated with a prolonged period of trade and financial liberalization which had constrained the role of the public sector and narrowed the policy space needed both to respond to economic shocks  and to advance a transformative agenda for sustained and inclusive development. As a result, many developing countries have become even more dependent on attracting footloose capital inflows, on commodity exports or assembling low-skill manufactures and on remittances, as sources of foreign exchange.

In a new paper, Rob Davies, Richard Kozul-Wright, Rashmi Banga, Jeronim Capaldo, and Katie Gallogly-Swan trace the emergence and spread of free trade advocacy in support of hyper-globalization, resulting in rules and practices that privilege a small number of countries, perpetuating economic asymmetries and imbalances that hamper the prospects for inclusive and sustainable development, particularly in developing countries. The paper identifies key trends in the modern trading system, neglected in much of the current debate on its reform, and outlines alternative principles for rebalancing it. The authors set out a recovery agenda for developing countries, focusing on reforms to the existing rules and structures of the trading system, which could help them recover faster and in line with the SDGs.