Authors: Uri Dadush, William Shaw
Originally published by the Carnegie Endowment for International Peace
We are living in a special moment in history, when the benefits of the Industrial Revolution are finally spreading rapidly to the mass of humanity. In populous, fast-growing countries like China, India and Brazil, poverty rates are falling, and rapidly expanding trade is helping to forge modern industrial sectors. In our recently published book Juggernaut: How Emerging Markets are Reshaping Globalization, we anticipate that the growing economic influence of emerging markets will present new opportunities to expand and liberalize trade, but also pose new risks. In the midst of a rapidly-changing global economic order, the World Trade Organization (WTO) must adapt its role and its tools if it is to stay relevant and help facilitate meaningful reform on trade.
The world economy in 2050
China’s growth will be about half as fast in the next forty years as in the last thirty. Even so, within little more than a generation, not only will China become the largest economy in the world, but it—along with other emerging markets—will make up six of the seven top global economies (along with the United States). The rise of emerging markets with political institutions, social values, and income levels that are very different from those of the advanced countries that have dominated the global economy over the past century has immense implications for international economic cooperation, the environment, political relationships, and world trade.
One positive aspect of this coming change is the growth of demand for high-quality goods and services. What we call the Global Middle and Rich Class—people able to purchase modern goods such as automobiles, refrigerators, and air conditioners—will increase from some 1.5 billion people today in G20 countries to about 3.3 billion people in 2050, most of whom will live in emerging markets. This presents an enormous opportunity for expanded trade and for the advanced-country firms that dominate these markets.
The forecasts in Juggernaut also envision huge shifts in global trade. Emerging markets will dominate the world trading system, with their share of trade rising from less than one-third today to nearly 70 percent by 2050. China will account for a quarter of global trade, or more than three times the U.S. share. China will also dominate bilateral trading relationships—its share of U.S. trade, for example, is expected to rise from less than 10 percent in 2006 to 30 percent in 2050.
As other developing countries become important trading centers as well—India’s share of world trade, for instance, will be more than double that of Japan’s—the locus of world trade will also shift: trade among developing countries will rise from just 10 percent of world trade today to 40 percent in 2050. At the same time, advanced country shares will slip. For example, the U.S. share of trade in major countries and regions will decline, falling slightly in the EU but by about half in most other countries.
Risks
This forecast of rapid growth and enormous shifts in trade shares presents major challenges for the global trading system. Geopolitical tensions, financial crises, reactions to climate change, and differing policy objectives arising from them could each, in different ways, trigger protectionist policies.
The next forty years will see one of the greatest shifts in economic and military power in history. Such transitions are not always managed peacefully or without political tensions. The potential for conflict can be illustrated by the relationships among three Asian powers that have a history of rivalry and unresolved territorial disputes: China, India, and Japan. Twenty years ago, when Japan’s economy was larger than the two others combined, few observers believed that either country could challenge Japan’s leadership role in Asia. Now, China’s economy has surged ahead of India’s and is already as large or larger than Japan’s, and in forty years both China and India will dwarf Japan. Whether this dramatic change in power can be accomplished without conflict is a major question.
A rise in the size and frequency of financial crises is also possible over the next forty years, affecting trade. While the recent crisis was generated in advanced countries, developing countries remain both more prone to financial instability and, despite their stronger public finances, less able to respond to it1 Crisis-hit governments would likely grasp for any available instrument—including protectionism—to shore up incomes in the short term. The fact that protectionism did not rise significantly during the recent financial crisis is no guarantee of the same experience in the future should the next episode prove deeper and more protracted.
Climate change is perhaps the greatest threat to long-term prosperity, if the majority view among scientists is accurate, again with implications for trade. Absent substantial changes in energy policies, the growth rates we forecast would result in a catastrophic increase in global temperatures. The failure to take steps to control climate change could increase calls for taxes on imports from countries where emissions standards are seen as lax. Such taxes would not only be viewed by developing countries as profoundly inequitable—emerging markets account for only a small proportion of the stock of carbon emissions now in the atmosphere—but also difficult to distinguish from protectionism, and therefore extremely dangerous for countries’ commitment to a multilateral trading system.
New shifts in the global economic order will also confound multilateral negotiations. As emerging markets become the largest global economies, they will remain significantly poorer than advanced countries and are likely to have different perspectives on key global issues, such as the sacrifices that are feasible to prevent climate change, or the appropriate level of labor, environmental, and product standards. Such different perspectives will make reaching trade agreements—or even calming trade tensions—more difficult.
Moreover, lower incomes typically reflect weaker institutional capacity, meaning that public administration is less effective, corruption is more prevalent, and infrastructure is less reliable and efficient. These deficiencies make it more difficult to implement agreements that call for complex policy reforms, for example, to facilitate trade in services. While institutions are likely to improve over time, this process is slow, as evidenced by the marginal improvement in institutions in emerging markets over the past two decades, despite their rapid growth.
A new WTO agenda
The WTO approach of consensus and “single undertaking” agreements is ill-suited for this evolving world. Fewer major countries are likely to push hard for either the completion of Doha or a new trade round—advanced countries, dealing with severe debt and macroeconomic problems following the financial crisis, are unlikely to take the lead in forging a new multilateral trade deal, while the increasingly important developing countries are focused on development and poverty reduction. Reaching new multilateral agreements on trade liberalization will only be more difficult as developing countries grow into significant commercial rivals of the advanced countries.
Nevertheless, even absent a dramatically new approach to multilateral trade negotiations, we anticipate that global trade will continue to grow rapidly and that some progress in trade reform will be made. Autonomous liberalization will remain the main driver of trade reform. Regional agreements, perhaps engaging major trading nations (such as an EU-U.S. deal), will continue to spread and will increasingly involve deeper integration in services where regulatory coordination is critical. Russia, the only G20 member outside the WTO, may be brought into the fold. As more trade is encompassed by regional agreements, the WTO dispute settlement process may become less important.
Though this is not a calamitous view of the future, it forfeits significant opportunities for advancing more broadly on trade reforms because of the dysfunctional nature of a multilateral forum where everyone must agree on everything—a goal that will become even more illusory as global diversity increases.
To take advantage of these opportunities, the WTO needs to play a more proactive and substantive role by moving from a focus on universal multilateral concessions based on consensus to making a contribution to arenas where trade reform is actually occurring. The WTO should ramp up its support for autonomous reform2, encourage and support well-designed (deep, broad, and minimally trade-diverting) regional agreements, and help sponsor plurilateral deals where a critical mass of members agree, working to ensure that such agreements extend membership on reasonable terms and include favorable treatment for the poorer countries.
At the same time, the WTO should devote energy to determining how the complex web of bilateral, regional, and plurilateral agreements can selectively and gradually be translated into a set of enforceable rules that can gain wider acceptance. This should be done not by another comprehensive trade round, but piecemeal, by urging universal adoption of reform measures that require only modest steps3. All of this would require strengthening the WTO secretariat to vigorously pursue a reform agenda. With the toughest issues yet to be addressed—including agricultural subsidies, services, investment, and the high levels of protectionism against manufactured imports in many emerging markets—the global trading system urgently needs new leadership from the WTO.
1 Developing countries typically lack strong regulatory institutions and market mechanisms to ensure transparency, thus increasing the risk of financial crisis. The absence of social safety nets and (often) fiscal space to undertake countercyclical policies makes these crises more costly.
2 The WTO could, for example, provide technical expertise to support trade facilitation and exploit the Trade Policy Review Mechanism as a basis for ongoing dialogue with member governments on trade reform.
3 Examples of modest steps toward universal reform include eliminating all tariffs under 3 percent and adopting a uniform code for rules of origin, or at least a voluntary one.
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