Robert Koopman, chief economist at the World Trade Organization (WTO), said US-China tensions have not adversely affected world trade but created opportunities for more countries to participate in global value chains.
He feels that the digitalisation and servicification of trade will have transformational impacts that are predicated on digital cross-border data flows, privacy and ecommerce. In addition, massive stimulus measures to combat the pandemic have spurred growth, particularly in nations and regions with economic “gravity”, that have benefited global trade.
Some of the key points discussed during the RadioFinance session:
The following is the edited transcript of the interview:
Emmanuel Daniel (ED): Hello, everybody. Welcome to another live session of RadioFinance, which is broadcast to The Asian Banker, Wealth and Society, and a number of other platforms around the world. My name is Emmanuel, Daniel, I am the founder of the Asian Banker. I'm here in Beijing, I'm very happy today to have as my guest, Robert Koopman, the chief economist of the World Trade Organization (WTO), and who joins me from Geneva. Thank you for joining us, Bob.
Robert Koopman (RK): Thank you, Emmanuel. Happy to be here.
ED: There's nothing like talking to an economist who sees the hard numbers, and follows the flow of global trade and the economies of all the different countries from substance, rather than from, a lot of the media-driven, popular issues that we face today. I also noticed you have a new boss. It's been wonderful to see Dr. Ngozi Okonjo-Iweala, taking over as the director-general of the WTO. She did a very credible, first press conference in February, I believe, setting out her priorities, which will be your priorities as well. You could start by, just giving us a sense of the priorities that you have in front of you, as the chief economist and the conversation that we want to have really is one of trying to construct in our own mind, how the agendas have evolved for the WTO and for global trade, given so much that's happening around the world today.
RK: It is very nice to have our new boss on site. She hit the ground running. She is a force of nature. She brings a different perspective than our previous boss, Roberto Azevedo, who is a former ambassador and really knew the ins and outs of the day to day committee meetings at the WTO. Dr. Ngozi brings a different perspective. She's a former finance minister, former high-level World Bank official. You could say she has a different Rolodex than Mr. Azevedo did. When she picks up the phone and makes calls, it's a different kind of connection that she makes. She has a broad view of what she'd like for the WTO. She has to see what members will agree so the big challenge for any director-general is we're member- led. But I do think she's trying to bring a different perspective, different level and try to get members to sort of break a gridlock that's been here for a few years and see if she can disrupt things a bit.
ED: Right. In fact, one of the first gridlocks is the conflict resolution mechanism at the WTO. We will not go into that as much, rather on the realities of the global trade and the global economy. One of the interesting things that you said in a recent comment that you made was that the US-China trade war is not as deterministic of what's happening in trade, as the pandemic and as other issues. Let's use this conversation to put that in perspective.
World trade has not been adversely affected by US-China trade conflicts
RK: It is interesting, there's definitely serious trade conflict between those two large nations. Don't forget that the US also has trade tensions with the European Union. In some ways, those are deeper and more structural. But what we've seen from global trade, it's quite an interesting story. If you look at from 1990 to 2005, global trade was growing more than twice as fast as global GDP. Since the 2008-2009 financial crisis, trades grow much slower about one to one. You add the trade conflict in there with US and China, it hasn't really moved the dial, it stayed at about one to one. It created a lot of trade diversion. Rather than so much bilateral trade between the US and China, China looked to offshore production and disassembly was already doing that prior to the trade conflict. It provided an opportunity for many other countries to start to join in global value chains and exporting. Now, its cost both countries. There are losses as a result of it, but global trade has not been that adversely affected. The system has been holding, even though we have this bilateral conflict.
ED: Now, what's interesting there is that I looked up a piece of data which said that, there are about 580, bilateral/ multilateral agreements, in place around the world, and the big ones are getting bigger. China has one with the rest of Southeast Asia Regional Comprehensive Economic Partnership (RCEP). Another one coming up with Japan and Korea. It's a capital sharing agreement with the European Union (EU) at the moment, and North American Free Trade Agreement (NAFTA) has seemed to have been reconfigured. How would you put what's happening on the bilateral/ multilateral front to get equivalent, generalised front?
Regional and bilateral trade agreements carry deeper commitments
RK: One way to think about the regional trade agreements or preferential trade arrangements and investment agreements is they have a lot of the WTO DNA in them. WTO is the foundation from which those agreements typically, then go WTO plus, in other words, the commitments will be deeper than what they've made at the multilateral level, sometimes, they go beyond. It's a new issue that they've introduced or new issues that they brought into that agreement. That's very useful for the WTO because it shows where members have updated interests, economic interests, and where they would like to advance things. That's a lesson for multilateral negotiations. It shows areas where perhaps they might want to pursue deeper discussions here. The challenge has been getting those deeper discussions to actually occur here in Geneva. But keep in mind, over 80% of global trade, merchandise trade occurs at WTO tariffs and 50 percentage points of global trade is WTO zero tariffs. The other 30% is WTO Most Favoured Nation (MFN) tariffs. Those preferential trade arrangements don't affect that much of global trade, at most 20% of global trade. Now, that can be important for certain countries in certain sectors. Overall, you see that the WTO foundation is still pretty strong.
ED: How much of that is a result of the lack of conflict resolution mechanism at WTO? How much of that also is shifting dynamics from manufactured goods to services to intangibles?
WTO likeminded-members explore joint-statement initiatives(JSIs)
RK: The breakdown of the appellate body here at the WTO, I don't think at this point is very visible in Global Trade Statistics or even global trade relations. It has longer term implications, particularly in those areas where members have existing WTO commitments. Despite the fact that there isn't an appellate body, members are still bringing cases and they're still at the first stage of disputes that’s continuing where there's a lot of opportunities for members to try to resolve their conflicts at that first stage. Or even informally, we have mechanisms for informal resolution. Now, the bigger changes the digitisation of global trade, the servicification, of global trade, that's really having a transformational effect. It's an area in services, we have something called the gaps, which is the services-related elements of the General Agreement on Tariffs and Trade (GATT), which is very important and useful. But there are certain areas around digital cross-border data flows, privacy, e-commerce, where we don't have specific commitments, and members have started a group effort. We call them joint statement initiatives (JSI). This is on e-commerce, the e-commerce JSI where they're trying to see if they can come to agreement on a set of rules to help take this forward. That's not all members, that's a group of members like-minded members, which is how the GATT used to work. The predecessor to the WTO was much more like-minded countries, advancing negotiations in certain sectors.
ED: Some of the members coming together, starting to put on the table, what's important to them for e-commerce and how that's going to be shaping up? What's shaping up on the e-commerce front, taxation, know your customer (KYC), borders? What's shaping up on that front?
RK: Privacy and security are two very important elements here and getting a common understanding of how different regulatory approaches might be coherent in that area. There are three different views of these. There's the China view, there's the European view, and then there's the US view. So these are sort of centres of philosophy of approaches. Each of these centres is trying to get more and more countries to join their particular perspective. That makes it a challenge to come together and reach some sort of coherent approach to these challenges of privacy and security.
ED: The China view is being predicated by what China is doing domestically as well. There's a greater concentration of the use of data back into state-owned platforms, rather than the private sector platforms. They say, centralisation as it were, maybe a form of centralisation is taking place in the US. We don't know yet. But there's a desire to at least breakdown these huge silos of the individual data platforms that exist. The Europeans, how would you characterise, what each of these different philosophies is essentially about?
RK: China sees privacy and security as very integrated, but it's a different kind of privacy. It almost goes sort of to the cultural, more communal approach that many Asian countries have compared to sort of individualistic approach of countries like the United States. They see this merger of privacy and security, particularly security around the state. Many Chinese citizens feel like they want somebody who's going to filter out fake news. At least, these are the kinds of conversations I've had around dinner tables in China. My sister and my mother in the countryside, don't really know how to distinguish between real news and fake news. They see the state as playing as many Chinese citizens see the state as playing this protective role. There's a big philosophical difference in the US, where many citizens see fake news, mainstream media, you see all these debates. The general philosophy is, it's up to the individual to decide what's real and what isn't to them. Privacy is interesting in the United States, when it comes to government collecting data. The privacy standards have very strict whether it's commercial data, or individual data. What happened is we've had this big explosion of the private sector doing a better job in many respects, of collecting data than the government. Now, so if you were in the 1970s, 1980s, the best data available about what was happening in the global economy came from, the US Central statistical organisations. They might have credit agencies that provided good information about individuals. Firms like Amazon and Apple, Google have much better data than the government does about individual behaviour. That's interesting, that kind of grew up in a vacuum around data rules. It's only starting to become clear to individuals that we need to have some rules around this.
ED: What you just said about individualism in the US, data and privacy protection. Noam Chomsky has the description of the WTO as a protector of big business and the state, as opposed to the individual. We are now getting into a world for a number of reasons, including the pandemic, where people are living to work from home, and choosing how, when and why they would want to trade or buy services. And yet, states claiming the right to be able to dictate that process, and somewhere in that picture are big businesses as they are evolving today. Big businesses 10 years ago would be IBM or GE and big businesses today would be Google or Baidu. This move towards individualism. Do you see something about protecting the common man, that should be a trade objective in the long run? President Biden said there should be a global taxation regime now, especially with e-commerce. Will the WTO now be a platform for implementing that process by which the state doesn't lose out on income on tax, proceeds of global trade in a digital world?
RK: Well, most of those negotiations are happening at the Organisation for Economic Co-operation and Development (OECD) in Paris, which is much smaller and more like-minded membership than the WTO. We have 164 members, but there are clear implications for global trade. We see tax arbitrage and trade data around intellectual property, where companies locate their intellectual property where they allocate profits. It distorts trade flows. Is it a major distortion of trade flows? In some sectors, I would say so. Has it influenced the location of production of goods, I would say so but a lot of that also has to do with all of these regional trade agreements (RTAs) and bilateral investment treaties and the firming up of property rights globally in many countries. But I do think, going back to this sort of moral philosophy question you have is the WTO, about being business and the state. The WTO is about rules for global commerce. Many of those rules are basic principles such as non-discrimination, most favored nation. You can't discriminate against a foreign company compared to a domestic company. You can't discriminate across different foreign companies under WTO rules. You have to treat everybody the same that applies whether you're a big business or small business.
Technology change and free-flow of capital have increased impact of trade on labour markets
Now, the WTO, one thing we've seen with all the technological change and integration that falling transportation costs, and IT costs have brought about, along with all the rules and regulations ensuring the relative free flow of capital and property rights around that capital is that, trade has now gone from being maybe a minor factor in labour markets to a bigger one. Not the driving factor in labour markets, but a bigger one than it was, say in the 1960s and 70s. But at the same time, you've got automation, digitisation, technological change, having big impacts on labour markets, and people are having a hard time. Workers, households are having a hard time sorting out, is this a trade effect? I saw that factory closed down, I heard it moved to Mexico and I've lost my job. While unemployment in the US has been relatively low for a very long time, except in economic downturns, which have very little to do with trade. There's been relative full employment, but there have been unequal returns in the labour market, where those who have the appropriate skills have done relatively well. Those who don't have the right skills for the modern economy have not done well at all. The question is, should the state help with that? What's the role of trade versus technology versus changing consumer preferences? We at the WTO in the past few years, put out a number of research pieces, basically saying you need to have coherence between your trade policies, and domestic policies. Those countries that have better coherence between those, we could tell those domestic policies, safety net policies. They could be education policies, infrastructure, investment policies. Those countries that have paid attention to that and adapted their domestic policies to these big changing global forces have done relatively well. You see much less of this populism rising up. Those countries that haven't done well, I would say the US is one of those that hasn't done that well, in terms of adapting its domestic policy environment, to the changing technology and global environment now is realising that they do need to make those kinds of changes. To sum up, the WTO isn't just about big business and governments. It is about people, it's about opportunity. But it's not clear that we've got the right kind of balance in each of the member countries, or that member countries have brought the right kinds of discussions here at the WTO. This is a shock and a learning event for both the members here in Geneva but also back home in their capitals.
ED: You're putting into place the three dimensions that have to work with each other - capital, labour and trade. You also have technology, which is transforming everything. When I look at your numbers in trade in services or trade in labour, I was quite surprised to see that construction was at the very top, followed by financial services. Further down is information and communications technology (ICT) and transport and all the stuff that we normally associated with labour, tourism. Construction and finance, those are odd bedfellows. One is hard services, the other is soft services. In the countries that do well in construction, or others need construction, cheaper construction, labour are sometimes quite different from the countries that are essentially financial centres. Just talk a little bit on trade and services, and labour, and how that's shaping up especially, in a post-COVID world.
RK: Increasingly, what we see in services trade is cross-border services trade, digitalisation of services trade. Those kinds of service activities that can be digitalised, are increasingly being traded across border. You'll have concentrated production sites that are delivering in a very dispersed geographic area, that can be domestically or cross-border. You'll see financial services concentrated in certain cities in a country delivering services across a broad geographic area, and increasingly, that's happening globally. Things like construction, you've got to be there, their back-office elements and design, coordination of the supply chains for delivery, but you have to have boots on the ground and a sense in that area. The construction services are supported by digital technology in back-office stuff, but you still got to have plenty of people on the ground. In areas like financial services, what we're seeing is less and less boots on the ground. Less and less affiliates being formed. In other countries, because companies are realising we don't need to create an office there. We can provide this digitally and those kinds of services that can benefit from that are seeing their trade costs fall. The physical trade costs, the cost of moving bytes across borders falling significantly, and the organisational structure of cloud computing but also the regulatory environment that's facilitated this. That's also created challenges in taxation when it comes to e- commerce. That's the debate right now, largely being pursued at the Organisation for Economic Co-operation and Development (OECD), but it has implications for the WTO because of how the WTO agreements treat taxation. Is it direct taxation, indirect taxation? It gets very complicated. We don't know where that's gonna go, we are following it. We're trying to make sure that our members are informed about that debate. I'm a bit sympathetic that governments have to fund infrastructure, they have to fund social programs. The more companies are essentially able to avoid that because of these new technological or legal arrangements that undermines the foundational support that business operates on which is well functioning government, well-functioning, infrastructure, whether it's soft infrastructure sources, law, courts of law, or hard infrastructures like rail, ports and road transport, those things have to get paid for.
ED: Let's pin down some of the broad areas that we can cover up in a conversation like this into some of the concrete things that are happening around the world right now. The pandemic, trade flows, manufacturing, supply chains and subsidies. What are some of the topics that are topmost in your head as a result of the pandemic? Vaccine distribution is something that Dr. Ngozi has indicated as being very important and making it available, right across all of the developing as much as developed countries. Related to that would be manufacturing, licenses, subsidies. Just talk us through some of the key issues around the pandemic.
Economic activities continue to grow buoyed by $16 trillion fiscal support and $10 trillion equivalent in monetary policy
RK: The pandemic had big impact on global GDP, global trade, much more aggressive fiscal and monetary policy to address this pandemic, compared to the great financial crisis of 2008-2009. We've seen $16 trillion of fiscal support, and the equivalent of $10 trillion in liquidity, monetary support. Massive, support for this global crisis has helped ensure that trade performed, not as bad as in the great financial crisis. The ratio of trade decline to GDP decline in the great financial crisis was six. Trade declined six times more than GDP. In this pandemic, crisis, the great lockdown as it's being called, we've seen trade only declined by twice as much as GDP. That's pretty robust. Trades done well, trade and medical goods done well, trade and medical goods increased. Last year, merchandise trade in volume terms declined by 5.3%, medical trade increased by 16%, and some goods much higher than that. Trade in critical food security-related products has been very stable, no decline whatsoever.
Manufacture of vaccines is highly concentrated in US, Europe, India, and China
Trades really played a very, helpful role here. Now, we are worried that if we can't get the virus under control, that the recovery will be slower than it otherwise would have been. We've done reasonably well in getting through the crisis, then moving forward, when we have a fast recovery or slow recovery. That has to do with whether or not we're going to be able to get the virus under control. Vaccinations are going to be very critical in that. Vaccination production is highly concentrated. It's US, Europe, India, China. We see concentrated production, but to produce in those concentrated areas, those countries are importing from many other countries. While the actual production of vaccines is concentrated, the supplies, the components, the parts, all that stuff is very widely dispersed. Trade is playing a critical role in helping with the production of vaccines. Then it's going to play a very critical role in the delivery of vaccines to other countries. We're having a program, we're having vaccine producers, non-governmental organisations (NGOs), other interested parties coming in and telling us where do they see problems in the supply chains. Where might there be a trade policy issue? Where might there be an infrastructure issue? Where might there be some other behind the border regulatory issue that might slow the distribution of vaccines? US can produce more than 10 times the amount of vaccines they need for the domestic population. It will have a big exportable surplus. India can produce about what it needs in a year for its domestic population, if you think of two shots per person. But once its population is taken care of. If it can scale up production even more, you then have a big exportable surplus. Then you run into the political economy thing. When do we take care of our domestic population? Or do we do what the medical professional say, which is take care of global elderly, infirm first, and then bring it down? That's a very difficult political economy question for any government. We don't have very good information, I just gave you some data on production capability. We don't necessarily know where inventories are. We don't necessarily know where the supply chain constraints are. Governments are often making decisions based on not very well put together databases. One of the things we hope to be able to do out of this is get a coalition of the private sector and international organisations and governments to improve our data collection. If you look at the trade data, we use something called the Harmonised Tariff system, the HS system. There is one tariff line at the six digit for vaccines for human use. That's mumps, measles, you name all the different kinds of things which there might be vaccines. There's one tariff line. After that, we don't know how much of that is for COVID-19. We need to improve the trade data so that we know how much trade is going on in different kinds of vaccines. With the big increase in COVID-19, what's happening to the production and trade of other kinds of vaccines? It might there be knock-on effects there? What are inventories? What is happening to the production, is it being consumed domestically or traded? We need to do a better job of just getting our head around core data in this area, so that better-informed business and government policy decisions can be made.
ED: How much of that is giving the WTO an opportunity to even deal with some of the issues that have been long-standing like intellectual property, tax, taxation of goods and services, that could be dealt with?
RK: Many members have put forward proposals to liberalise trade and health-related goods, and to set up early warning mechanisms and a system to help us deal with future pandemics, including this one. On intellectual properties, there's a big debate. Some members have said, we need to have something called a trips waiver, which waives the intellectual property rights and would allow countries to start producing vaccines on their own. The challenge with that, it's a reasonable proposal. It's an option. Countries can do it anyway. They can invoke a critical need, and go ahead and do that. What that allows you to do is to take the recipe. Imagine you're going to prepare a meal, and you get a list of ingredients, that's all you get. No! What steps for mixing the… that's know-how. Often in a recipe, there's a lot of know- how. When it comes to vaccines, the know-how is almost more important than the recipe. So the trips waiver, lets you look at the recipe, then you have to figure out how to produce it. Then do you have everything in terms of know-how and equipment to do that production? What Dr. Ngozi would like to see is more distribution of that both the recipe and the know-how, so that we don't run into such concentrated production capabilities. That's something that governments have to come together and decide. We've seen this in the Global Alliance for Vaccines and Immunisation (GAVI). In 2001, there were about five manufacturing plants where they could procure vaccines, not COVID vaccines, because COVID wasn't an issue back in 2001. By 2014, there were 11, they went from five to 11 different vaccine production sites where they could contract to get the kinds of vaccines. Do we need a response like that, where we diversify the potential sourcing for COVID vaccines going forward? That's the kind of discussion she wants to have. In the short term, what we've got to do is make sure that what can be produced is produced. We don't run into supply chain bottlenecks. What is produced gets distributed efficiently and well, domestically and globally. Where are their trade-related policies or infrastructure challenges? We're even behind the border regulatory challenges that are clogging up the system and preventing them from operating as efficiently as possible. There's short-term, and then there's long-term. She describes this as we need to walk and chew gum at the same time. We need to be thinking, we need to do stuff right now, but we also need to have a destination.
ED: India had not taken part in a regional trade agreement called RCEP in this part of the world, because one of the issues that they had was exporting medicines to China, and China basically wants to produce its own medicines. I was wondering if an issue like vaccine export economy would broker again, the opportunity for these countries to talk to each other.
RK: I do think they're gonna end up talking to each other. There needs to be a meeting of the minds. It can't just be health ministers doing this. It also has to be trade ministers. It has to be commerce ministers, domestic commerce ministers. There has to be this alignment of policies across domestic and international so that we come up with an efficient solution that deals with the short-term challenges, but improves our long-term outcome. Countries have different views here. China is recognising that because of the concentration of production in China, which from a fundamental economic perspective, you've got sort of Adam Smith efficiency specialisation. David Ricardo said countries should specialise in different kinds of things. They’re trade economists. Firms are starting to realise that there's this risk versus efficiency trade off. It isn't just international trade. If you get a hurricane or a storm in Texas that shuts down a big state that's got a lot of different kinds of production capabilities that provide domestic parts and components to US production. That's as disruptive as an ever given getting stuck in the Suez Canal, or China's city that produces all the world's buttons going into a health lockdown. Firms are starting to realise we need to have diversified production, diversified sourcing, that doesn't necessarily mean re-onshore, doesn't mean domestic. It may mean some more domestic. One of the interesting things I heard about the pandemic was many manufacturing firms in the upper Midwest in the US, using 3D printing prototypes machines, where they would prototype a design, and then they would outsource for scale to Asia. They ended up because of supply chain disruptions using those prototype machines on an interim short-term basis to produce the parts and components they needed to keep at some level of manufacturing going on. You'll see a lot of that kind of flexibility around inventories, flexible production processes, diversified, sourcing globally, but you're not going to get rid of those efficiencies, Adam Smith and David Ricardo. But risks are being increasingly noticed by businesses.
ED: How much of the impact agenda the United Nations sustainable development goals (UN SDG) goals are beginning to creep into the WTO agenda today?
WTO members’ impact agenda includes climate change, carbon taxes, and fisheries
RK: Well, a lot, actually, and it's been driven by members. Members want to talk about environment, they want to talk about sustainability. We have a couple of initiatives forming, I mentioned these JSI, joint statement initiatives. There's one forming around climate change. There's one around plastics and plastic pollution.
ED: Who's driving the one around climate change because I'm very curious now that the US is back?
RK: It’s a group of countries that are pushing it. You see Europe, I believe Canada. There's a lot of countries that are very interested in climate and what we can do. Then, that gets to things like carbon border adjustment mechanisms, carbon taxes. It will be a very interesting discussion. Those issues are definitely coming in to the WTO. We have ongoing negotiations around fisheries and global fisheries, and how can we sort of make them more sustainable and reduce some of the distorting policies that are resulting or driving global overfishing. But these are all very knotty problems. Knotty in the sense of, difficult Gordian knot kinds of problems. Some countries basically say, well, we haven't had the opportunity to exploit fishing yet, we should have that opportunity. When the countries that have been big global fishers should let us go ahead and do it. When in reality, everybody has to pay a price and it's difficult figuring out how to share that burden.
ED: After so many years, it's interesting that the WTO hasn't come up with a narrow specification of shared resources, like fisheries, that both the developing countries and the ones which had over fished in the past would be able to share. How much of what you're putting in place in negotiation parameters, reflect the Paris accord, and the commitments that the countries have made to the Paris accord?
RK: That's forefront in many members’ minds. These are all member-driven. As a secretariat, we help members with their negotiations, we give them facts, expert analysis. We synthesise complex issues for them, but we don't take sides. Members have to decide where they want the agenda to go. That's a very important thing to understand. When there's criticism of the WTO not working, it usually means that members are not doing their part.
ED: Given the job that you need to do, how does blockchain help global trade? Maybe a comment from you on that front and what you're doing on that?
RK: We have an agreement here, one of the last big agreements that the WTO came up with, that was in Bali, on trade facilitation agreement, which is about members trying to find ways to make border crossings more efficient for goods and services. Blockchain is one of those technologies, distributed ledger technologies that could help with trade finance, in terms of know your customer. It could help with reducing the paperwork burdens. We find in many countries, the number of pieces of paper and stamps, one has to have is very burdensome and costly, and it takes a lot of time to do. Anything like distributed ledger technology can make that more efficient, smooth that one package of electronic documents that follows the goods across borders. It will shave a lot of global trade costs, and could be a very important contributor. We are discussing those things here. There aren't negotiations around it. But members are very aware of it. One of my team, Emmanuelle Ganne, is our blockchain expert. She has written a couple of manuscripts on this. The objective is to help guide the private sector through what they need to make this happen. Make sure governments are hearing from the private sector as to what kind of rules and obligations might make this more of an easier thing to roll out and get efficiency and coherence across the approaches.
ED: In fact, we are hearing stories of agricultural blockchains from Kenya, being sourced out to Japan and Australia, on a very specific basis, right down to the seed that they wanted, and which time of the year. That's looking very good. I just wondered, to what extent it featured in the WTO’s overall scheme of things. The Suez Canal felt the center of global trade, $9 billion a day. What were you working on when the ship hit the side of the canal?
RK: I had a pretty strong reaction of this kind of stuff happens a lot.
ED: What will happen if something like this happens?
RK: It happens a lot. It's just not as usually that kind of image in people's mind. It was a very powerful image of what can go wrong in global supply chains, but the impact will be lost in the overall data. It just was not that big of a deal when you're talking, $22 trillion worth of trade, $9 billion a day doesn't go that far. There are bigger knock-on effects and certainly some companies, some countries are more adversely affected than others. But as I mentioned, you get winter storms in Texas. You get a typhoon in Asia that knocks out a paint plant. You get a fire in a factory that produces computer chips for cars. Those things happen every day, and firms have them in their risk evaluation matrix. There is a concern around climate change that some of these events could be more frequent and bigger. If infrastructure degradation continues to occur, you could see more of these things happening. But if governments are taking care of infrastructure, if they're taking care of the rules and regulations around global trade, and we find ways to mitigate climate change, I don't think you're going to see that risk element from supply chain disruptions like that, going up very much. Things like global pandemics, that was a big concern, much bigger than the ever given.
ED: But, during all this time, China had been building this railroad link into Europe. For a number of years, they were highly subsidised, in fact, underutilised. Do you see new trade routes as a result of something like this, that didn't exist before that suddenly becomes viable?
RK: Yes, it's very possible. I've seen a number of presentations in conferences in China, where this gets a lot of attention and the special trains they run from China
ED: All the way to London.
RK: I don't really know the economics of that. It sounds reasonable. I don't know, I haven't seen any numbers on the kinds of subsidies that are being provided. But if you're doing that you're competing with other transportation mechanisms. You're competing with road freight, competing with air, you're competing with ocean freight. If we continue to get global warming, the Russians believe you'll be able to pass over the North Pole. I really don't know how that will sort out. I really don't. One of the things about my profession is so many things are changing all the time. If you look at just one thing, you forget about what's going on in your peripheral vision, you end up being very surprised.
ED: At the same time trade routes. In fact, within Africa, what I've discovered is when the payment platforms started evolving - the electronic payment platforms, there were payment trails between countries that have nothing to do with each other in the past. So between Tanzania and Nigeria, which don't really have a trade route, but have a payment route and then you wonder what was driving that, and between East Africa and West Africa. This whole notion of trade routes and how that might be shifting, I just wanted to explore, to what extent that might feature in your thinking?
RK: Well, obviously, we care about global trade. I've mentioned global value chains, historically, I've done a lot of work on that. One thing about global value chains is they’re regional. There's an economic relationship called gravity, economic gravity, that basically says, two large countries will trade a lot together. Two large countries close together will trade a lot more together. Two small countries far apart won't trade very much. This is very real in the data. It's there. Supply chains tend to be regional. They tend to be concentrated around big economies, the United States in North America, in Europe, China, and Japan, Korea, and Asia. But there's still a fair amount of these flows like you describe the relationship in payments, there is still a fair amount of these flows that the regions trading with each other. But it's still hard to overcome that regional concentration of economic activity and in those relationships. Regions do trade with one another, are going to continue to trade with one another, but the regional elements will always remain very strong simply because time and distance and size matter in economic relations. It's very, present in the data, it seems hard to overcome.
ED: How would you distinguish between the EU and Association of Southeast Asian Nations (ASEAN)? Both are regional, both have a trade component in there. But one is far more formalised than the other and one is more loosely-oriented. How would you characterise these two trade blocs?
ASEAN has less regulatory integration and coherence than EU
RK: EU is a deep agreement. It's regulatory. It's very deep touching on not just how much does it cost to move goods across a border. ASEAN is shallow, there's much less regulatory integration and coherence than in the EU. There is some so don't think that I'm saying there's none. There is some, but it's been much more about reducing tariffs, and that kind of coordination, rather than trying to get that regulatory alignment and consistency. So deep agreements tend to go well beyond things like goods, trade and tariffs and get very deep into the regulatory sphere.
ED: As an organisation, do you, see greater harmonisation in regulation, that it gets deeper eventually, that it comes stable or is a shallow arrangement also good?
RK: Shallow is good. But keep in mind when it comes to moving, say a typical good between two rich countries, it costs about 170% of the factory gate cost of production to deliver a good in another country. Between the US and EU, let's say it's 170% for a particular good, the tariff might be 1% or 2%. The tariff is not necessarily a big driver there. Often it's a regulatory difference, or the cost of transporting it from one place to the other, or just the cost of learning what does it take to sell a good in another market in terms of understanding demand, and consumer preferences. So reducing tariffs, these shallow agreements help. They reduce something that's a policy mechanism governments can touch on, but the regulatory stuff is hard. Think about the US and EU. The EU often has something called the precautionary principle. Unless it's proven safe, we're not going to allow it to be done. In the United States, it's the opposite. It's unless it's proven bad, we're gonna let it happen. That's an extreme characterisation of complex thing, but I hope it captures the imagination. That philosophical difference is just very big. It drives a lot of the trade tensions between the US and the EU. Then you've got China that's got a different view on that too. It's a very interesting thing. In the WTO, we've done a very good job between advanced economies in reducing tariffs. We've also done a reasonably good job around things like regulatory coherence and mutual recognition but there's much more to be done there and that's where a lot of the trade costs remain.
ED: Rules-based, principles-based and vice versa. You just released your report saying that the WTO forecast for merchandise trade is up 8% in 2021, and 4% in 2022. It's more on the optimistic side. There are regional differences, Asia is a lot more positive in that way. Just talk us through a little bit about the drivers. China just issued its 14th five-year plan and the Prime Minister Li Keqiang was defending saying that, this year, we can do 6% GDP growth that's domestic. The large countries are looking to become more domestically-oriented. China calls it the dual, circulation. US when it puts out $2 trillion in domestic infrastructure spending, is probably doing the same thing. To what extent is the numbers that you're putting out, driven by maybe one or two large countries like China and to what extent, is it more generalised and specific in other places?
Shifts in consumption in China coupled with supply shifts in US towards infrastructure will address imbalances
RK: The biggest explainer of global trade is GDP growth, just fundamental growth drives a lot of trade growth. You could have no changes in trade policies, but you get economic growth. This gravity model I just described, will tell you that there'll be more trade as a result of it. How you worry on that trade. and we also talked about how competitive foreign goods are in the domestic market. We have domestic trade costs and foreign trade costs. This is peripheral vision. Another element of the peripheral vision that I was talking about, you can become less competitive by letting your infrastructure run down, by not investing in productivity enhancing activities. Another country doesn't necessarily have to subsidise anything, if you're driving up your relative trade costs, because you're not investing in things that help improve your efficiency and competitiveness. You can indeed, subsidise, reducing those domestic trade costs, and you can put barriers in place. I would argue that those kinds of elements are not the biggest explainers of trade flows. So that 8% trade growth is GDP recovering, it's the $16 trillion and $10 trillion that I’ve talked fiscal policy. $10 trillion equivalent monetary policy. That's a big burst of demand growth, and that's driving global trade, but it's unbalanced. It's a big demand stimulus in the United States, and to some extent, in Europe, sucking in imports from Asia. Asian stimulus has been much more supply side as opposed to demand side. That kind of imbalance typically lead to trade tensions, and that got us to previous US administration’s US-China trade conflict that saw the average tariff between the US and China go from 3% to over 21%. It didn't have big impacts in overall US trade balances because trade policies like that aren't the biggest drivers of trade. It's much more of these macro financial things. They do have implications for efficiency and efficient growth. But the bottom line is, we could see increasing trade tensions. The world needs to see countries like the US investing in infrastructure. Countries like China, giving more money to consumers, letting consumers keep more of their money, and encouraging them to spend. We need to see a big household demand shift in China, and then a supply shift in the United States. At the same time, ensure that the savings and investment ratio in the United States comes more into balance and the same in China. You could still see just as much trade, it would just be much more balanced and that would help alleviate some of the trade tensions. The dual circulation policy is something China, it's the next step of China's long-term plan for 2030.
This is just the next step. They're basically saying they want to supply more of their own. But do let other countries also meet some of that foreign demand. Resources are going to get tight in China, labour markets are going to tighten up. It's going to be a rapidly ageing society, it's going to be hard for them to produce everything for their own economy that they may want. They're going to continue to open up to trade and rely on trade.
ED: To what extent countries using the WTO mechanism overcome some of their competitive issues like China and microchips? To what extent are some of the emerging technologies that are coming on stream, the largest capitalisation on Nasdaq is companies like Tesla, and now in space technology. The competition on highly competitive industries, to what extent is the WTO embroiled in it or being caught up in the conversation? You might even be a resolution because China desperately wants to get that artificial intelligence (AI ) chip going, and the rest of the world needs rare earth and all of that, so to what extent is some of these conversations taking place in the WTO?
Setting "rules of the road" is crucial to ameliorate the effect of industrial policies that distort competition
RK: There's certainly part of the geopolitical background to the discussions. I have not seen discussions around computer chips specifically, or space or electric cars, other than coming in through the sustainability aspect, or through the digital discussion, but setting those rules of the road, are going to be pretty important. I started my career working on agriculture and agricultural subsidies. One of the reasons there's a WTO agreement to limit subsidies and agriculture's because they're counterproductive. When you get into a subsidy race, you end up increasing the costs, as the other country increases its subsidies you can be increasing your subsidies. Other countries benefit. There are positive spillover effects, particularly for consumers but often, for other countries, producers, there are negative effects. The idea is to try to set some rules of the road that everybody can agree to. Every country has its own industrial policies. In the US, they have theirs, whether they call it an industrial policy or not, whether it's tax policy, or the Defense Advanced Research Project Agency (DARPA) effort. That's an industrial policy. China has its industrial policies. Coming up with some rules of the road that keep it productive in solving global challenges, that's a good thing.
Capitalisation and the ability to generate economic value are not directly correlated
When it becomes counterproductive, and just almost unnecessary competition to see whose company is going to be the one with the big margins, that's not helping the general population of your country. Some of the biggest companies in the world don't make a lot of money, they have big cap. Don't confuse capitalisation with generating economic value. Now, it's the market’s expectation that those firms are going to generate a lot of economic value.
But then from an economist, is that a competitive economic value? Or their monopoly profits or imperfect competition margins there? Very complex issues. I don't have all the answers to this, but it's very complex things for society to try to navigate through. Trade plays a role in many aspects here, but not every you.
ED: All the things you just mentioned, capital, labour, technology subsidy and impact in all of that, how all these coagulate, and show up in global trade, and how that's going to be evolving? You've given a perspective on how to think about it. Each country makes its own decisions and comes to the table after it made its own decisions. Some things that are happening in the US right now. The private sector and profitability and massive capitalisation is in itself a form of subsidy or you might call diversion of capital, that is going to cost us something.
RK: It’s the policy environment that has helped bring that outcome about. It's not clear that it was an intentional policy decision and maybe it was, I'm not sure, I don't know.
ED: It was an opportunity to just touch base with you on your report, and on some of the global issues shaping global trade right now. Thank you very much.
RK: Thanks, Emmanuel have a great day.