Important Developments in International Trade

Regional Trade Agreements

• After the implementation of the Uruguay Round, members of the World Trade Organi­zation (WTO) launched a subsequent round in Doha, Qatar, in 2001 to further reduce trade barriers. The focus of this round has been on the reduction of trade-distorting agricultural subsidies provided by developed countries and the introduction of equi­table trade rules for developing nations. The negotiations are at a complete stalemate with no prospect of success in spite of considerable progress on specific issues. In a multipolar world, there are a number of power centers and a proliferation of national interests that erode international consensus across many areas. This is going to impede the development of international trade rules and standards and undermine the role of the WTO as a forum for trade negotiations.
• The current irreconcilable deadlock in the Doha Round has provided additional moti­vation for countries to engage in bilateral and regional trade agreements. Bilateral and regional agreements require less time to negotiate and provide opportunities for deeper trade policy integration. The United States, for example, has recently launched trade agree­ments with Asia and European countries (the Trans-Pacific partnership for Asia and the Transatlantic Trade and Investment Partnership with Europe). Many developing countries also perceive such agreements to be the most feasible means for gaining market access as the prospects for completing the Doha negotiations seem more remote. The share of trade among bilateral and regional trade partners is likely to grow in the next few decades.
• Many scholars believe that such bilateral/regional agreements are inferior to the multi­lateral, nondiscriminatory approach of the WTO. Bilateral/regional trade arrangements discriminate against nonmembers and create a maze of trade barriers that vary for ev­ery exporting country: rules of origin, tariff schedules, nontariff barriers such as quo­tas, and so on. There are concerns that such agreements also work in favor of powerful nations that will sneak in reverse preferences such as protection of intellectual property rights or labor standards.

1. Global Trade Imbalances

• The U.S. current account deficit reached 5 percent of GDP in the last quarter of 2012. Imports exceed exports by about $780 billion (2012). At the same time, the East Asian economies (including Japan) held about $6.1trillion (U.S.) in official foreign exchange reserves out of a global total of $9.2 trillion in 2012. China’s foreign currency re­serves alone was estimated at $3.31 trillion (U.S.) by the end of 2012. The Southeast Asian countries’ heavy reliance on exports as a way of sustaining domestic economic growth, weak currencies, and high savings rates has resulted in unsustainable global imbalances. Global imbalances cannot diminish without, inter alia, reducing such ex­cess savings through currency adjustments and/or increased imports in the surplus countries.
• Export-led growth in surplus countries feeds (and is dependent on) debt-led growth in deficit countries. It is impossible for all countries to run surpluses, just as it is impos­sible for all to run deficits. A country’s trade balance is a reflection of what it spends minus what it produces. In surplus countries, income exceeds their spending, so they lend the difference to countries where spending exceeds income, accumulating interna­tional assets in the process. Deficit countries are the flip side of this. They spend more than their income, borrowing from surplus countries to cover the difference, in the process accumulating international liabilities or debts.
• So long as trade deficits remain modest and economies invest the corresponding capi­tal inflows in ways that boost productivity growth, such imbalances are sustainable. But the imbalances we see today are of a different character. First, they are much big­ger. The most egregious is that between China and the United States, where China is running a huge trade surplus with the United States ($334 billion in 2012). Many of the other imbalances are between countries of broadly similar levels of economic development, such as those between members of the euro zone or that between Japan and the United States.
• Trade imbalances lead to destabilizing capital flows between economies. For example, the global financial crises of 2007 and the subsequent euro-zone crisis were basically the result of capital flows between countries. Overleveraged banks amplified the prob­lem, but the underlying cause was outflows of capital from economies with excess sav­ings in search of higher returns. The deficit countries that attracted large-scale capital inflows struggled to find productive uses for them: rather than boosting productivity, the inflows pumped up asset prices and encouraged excessive household borrowing.

2. Developing Countries in World Trade

• There has been a steady growth in the role of developing countries in world trade. Be­tween 1995 and 2011, the share of developed nations (value share) in world merchan­dise trade declined from 69 to 52 percent while that of developing nations increased from 29 percent to 48 percent. Over this period, China’s share alone increased from 2.6 percent to 11 percent. The share of Latin America and the Caribbean also increased from 4.5 percent to 6.2 percent.

• China joined the WTO in 2001. Within three years, its exports doubled, and the coun­try is now the world’s largest merchandise exporter ($1.9 trillion in 2011) and second largest importer of goods ($1.74 trillion in 2011).
• Only a few developing nations have managed to climb up the value chain and di­versify their export base to cater to the expanding global market. About 83 percent of the increase in the share of developing countries’ total trade (1995-2010) ac­crued to a small number of emerging economies: the BRICs (Brazil, Russia, India, and China), Mexico, and South Korea. India, China, and South Korea accounted for about one third of world exports and about two thirds of developing-country exports in 2011.
• Such shifting patterns of trade and the increased demand for primary commodities from rapidly growing economies have strengthened South-South (trade among de­veloping countries) trade and economic cooperation. South-South trade increased at a rate of 14 percent per year (1995-2010) compared to the world average of 9 percent. During the same period, merchandise exports from the developing countries to the developed nations increased by 10 percent per year.

3. Transportation and Security

• About 60 percent (by value) of total world merchandise trade is carried by sea. In vol­ume terms, 75 percent of world merchandise trade is carried by sea, whereas 16 percent is by rail and road (9 percent by pipeline and 0.3 percent by air). Increases in fuel prices could act as a disincentive to exports by raising transportation costs. In air transportation (which is more fuel sensitive than shipping), rising oil prices could severely damage trade in time-sensitive products such as fruits and vegetables and parts in just-in-time production. Faster economic growth in emerging economies is also putting pressure on the limited supply of other raw materials such as copper and coal.
• World air cargo traffic has grown during the past decade due to increased trade in high-value-low-weight cargo, globalization, and associated just-in-time production and distribution systems.
• In light of increasing threats of terrorism, countries have put in place procedures to screen cargo across the entire supply chain. There is an overall attempt to facilitate international trade without compromising national security.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.