Trade facilitation as a tool to combat inflation?

Alliance Deputy Director José Raúl Perales argues for renewed focus on trade facilitation in latest blog.

José Raúl Perales, Alliance Deputy Director

If the adage ‘never let a good crisis go to waste’ holds true, then we must be heading into some pretty utilitarian times in the global economy. Signs everywhere point to a possible global recession, abetted by a rise in interest rates in the United States that has pushed the value of the dollar to levels not seen since the 2008 financial crisis.

Currencies like the Japanese yen and British sterling are stumbling against the dollar; others are faring better but not by much. Such devaluations, rampant inflation in rich and developing countries, and coordinated monetary tightening are resulting in global economic contraction. Unsurprisingly, manufacturing output indices have also begun falling, especially on account of problems in China.

Given slowing global demand and other economic headwinds, the timing may seem odd to be discussing trade, much less trade reforms. Politicians and central bankers are hard-pressed to address rising living costs, with little room to spare on the fiscal side given that an appreciating dollar will make public debt more expensive throughout an already heavily indebted world.

Recent announcements in the United States and other advanced economies regarding industrial policy and investments in domestic industry have shifted much of the focus away from global integration. The World Trade Organization (WTO) just released its forecast for global trade in 2023, indicating a meagre 1% growth in merchandise trade. Trade reform at a time like this would not appear to be uppermost in the minds of officials and global businesses.

And yet it is precisely at times like these that leaders should double down on trade reforms, particularly the unfinished business of trade facilitation. The purpose of trade facilitation is to reduce the cost of trading across borders, allowing more businesses of all sizes to participate in and benefit from international trade.

This is not just a question of adding more exporters to the global economy – it is also about finding ways of reducing the cost of imported goods, particularly those requiring complicated levels of compliance. Surely at a time when inflation is hitting consumer pockets hard, measures that can reduce merchandise costs should remain a matter of interest for policymakers?

As demonstrated by the work of the Global Alliance for Trade Facilitation, investing in trade facilitation reforms can result in tangible savings for businesses and consumers, while improving the efficiency of border agencies.

Ample research dating back to the macroeconomic adjustments of the 1990s in the developing world demonstrates that crises can provide useful opportunities for introducing ambitious reforms, especially when the cost of doing nothing turns out to be higher than the cost of doing something.[1]

The sharp drop in tariffs and other duties since their peaks in the late 1980s is the best example of such reforms. [2] But no less important in terms of the gains from trade is the ‘behind the border’ agenda that trade facilitation aims to address. Indeed, recent research by Ben Shepherd of the Trade Policy Research Forum indicates that one-third of the observed growth in global value chain trade between 2015 and 2019 can be attributed to trade facilitation reforms.

After concluding negotiations, substantial number of WTO members began ratifying it in 2015, against the backdrop of a sharp contraction in global manufacturing. Governments responded to the crisis in several ways, including by implementing the program of ambitious trade facilitation reforms set out in the TFA.

As the world economy teeters on the brink of another period of manufacturing contraction, it is time to double down, finish the job, and invest in trade facilitation.

[1] Allan Drazen, Political Economy in Macroeconomics (Princeton: Princeton University Press, 2000); Joan Nelson, Economic Crisis and Policy Choice (Princeton: Princeton University Press, 1990)

[2] Source: World Development Indicators, World Bank (data as of 2019).