Post-2015 Consensus: Trade Perspective, Hoekman

Perspective Paper

Summary

Hoekman points out that global trade has grown strongly since 1990 and has been accompanied by rising real incomes. However, although average incomes in the East Asia and Pacific region have risen more than 1500% since 1960, the rise has been just 30% in sub-Saharan Africa. Economic policies that increased the costs of trade have been an important factor in this disappointing performance. Anderson, in his challenge paper, makes a compelling case for the large welfare benefits which could come from liberalizing trade in the Asia-Pacific region in the absence of a global agreement on the Doha Development Agenda, but it would seem important to include consideration of reforms which encompass developing countries in the rest of the world.

Analysis shows that many developing countries impose import restrictions, which are generally much higher for agricultural produce and that non-tariff measures (NTMs) represent a substantial share of merchandise trade barriers. Barriers to trade in services are also on average substantially higher in emerging economies than OECD countries. This makes it important to consider reductions in NTMs and service trade restrictions as well as tariffs and trade-distorting agricultural support policies in the assessments of gains from trade reform. The DDA therefore only partially captures the potential net benefits of global trade reforms.

Although there is scope for widening and improving the DDA, it has delivered one positive outcome that will generate large net benefits: the Bali Trade Facilitation Agreement (TFA). Full implementation has been estimated to reduce average trade costs in developing nations by about 10%, which will generate large welfare gains. Overall gains from raising trade facilitation performance to even half that of global best practice could increase global GDP by 5%, six times more than removing all remaining import tariffs. Higher implementation costs would mean BCRs are lower than for tariff reform and subsidy reduction, but the overall benefits would be far greater.

Trade is not and should not be a goal in itself. Instead the focus should be on enhancing opportunities for firms to use trade and enhancing the real incomes of consumers in developing countries. Current goals proposed for the post-2015 agenda have a mercantilist focus on exports as opposed to trade overall. Imports can benefit local firms by providing inputs needed for exports, reducing prices and improving the quality of goods on the domestic market.

A possible goal which would provide a focal point for actions to be undertaken by governments according to local circumstances, and for which they could be held accountable, would be a certain level of trade cost reduction, such as a 10% reduction for firms operating in low-income countries by 2020. This would be economically superior to the export-focused approach in the current proposals. Reducing trade costs is neutral in the sense of benefiting exporters and importers: lower trade costs will benefit households in developing countries by reducing prices of goods.

Using a trade cost reduction target as the focal point for trade reforms post-2015 is not a panacea. Lack of guidance to governments could result in inefficient use of resources, and a country-by-country approach may lead governments to miss opportunities for cooperation. Nevertheless, there is a strong case for the SDGs to revisit business as usual and for governments to adopt a specific target to reduce the costs of trade.