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The future of trade: thoughts from the IMF

Nick Jeffrey Nick Jeffrey

Day three (part two): TTP, TTIP and how the digital economy is revolutionising trade

"The Doha round is not dead," Yi Xiaozhun, deputy director general of the World Trade Organization (WTO), announced at the World Bank summit on the future of trade. But as momentum builds for a number of regional trade deals, including the TransPacifc Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), and the ASEAN economic community,  is the need for a multilateral trade deal diminished? Does a new era of service globalisation ushered in by the digital economy mean that these deals are redundant anyway?

Regional trade deals: the end of multilateralism?

Mike Froman, the US Trade Representative, whose country is the driving force behind both TTP and (arguably) TTIP, said multilateral deals remain the ultimate goal of trade liberalisation. However, the Doha round is seemingly stuck in a quagmire of agricultural tariffs and quotas. Doug Irwin, professor of Social Sciences at US Dartmouth College, likened the WTO to a car with one accelerator and 150 handbrakes. He said it is "tough to see it pushing the agenda for trade liberalisation in the short to medium-term".

Clearly not every big economy in Asia is included in TTP and Arvind Subramanian, chief economic advisor to the Government of India, worries that regional deals tend to reflect the dominant economy's "view of the world", but admitted that his country needs "domestic reform to embrace and benefit from globalisation". Mari Elka Pangestu, professor of international economics at the University of Indonesia agreed, arguing that it would be difficult for her country to join the TPP due to the stringent labour and environmental laws included which might require more "liberalisation" than was palatable for many local stakeholders.

China is another economy currently excluded form TPP negotiations but Min Zhu, deputy managing director of the IMF, argued that the pact is "a lot about China in a strategic sense" and that it could have a huge impact if China decided it wanted to liberalise and join. Froman did not specifically identify China, but did agree that the greatest impact could fall on those countries excluded from any agreement if it "spurred them on to action reforms". He argued that the TPP deal (and to a certain extent, TTIP) is about raising standards across the world, making a multilateral deal easier to achieve in the future.

The digital economy: true globalisation through services

All the panellists agreed that the digital economy is the next frontier in terms of global trade agreements. Pangestu stressed that the change in global value chains (for example, 70 per cent of the sale price of a loaf of bread is in services) and the movement from making 'stuff to fluff' (in other words, from products to services) makes for a much more complex system. She highlighted the example of farmers in Indonesia who are designing logos for fledgling companies in the West by night, using Google Translate and freely available design software, thus "leapfrogging into the global value chain".

For Froman, the free flow of data is absolutely vital for the next phase of global growth, especially if we are to move above what the IMF is calling the 'new normal'. The barriers to global expansion have been broken down by the internet and other new technologies. For many small and mid-sized businesses, without the scale to set up operations abroad, the digital world is principally how they are engaging with the global economy.

Yi says the WTO has the digital economy and services high on its agenda once the Doha round is concluded, although experience tells us this may be some way off. In the meantime, expect regional deals to lead the way.

Key considerations for business leaders

  • businesses in economies covered by the major regional trade negotiations should understand what sectors, goods and services would be affected by an agreement
  • the digital economy has broken down barriers to going beyond borders at an unprecedented rate, opening up new markets to dynamic businesses for export and supply – are you or your clients ready?
  • trade agreements normally offer preferential terms for businesses looking to export overseas so it's worth finding out which markets your country has deals with; for example, Mexico has 11 free-trade agreements, covering 43 economies.