Marianne Schneider-Petsinger
Hello and welcome to this Chatham House webinar on The Future of Global Trade: Beyond ‘Peak Globalization’? And I think it’s quite clear that the COVID-19 pandemic and Russia’s invasion of Ukraine have very much highlighted the vulnerabilities of global trade and globalization in general, but also, further headwinds really weighing on trade and global economic integration with major economies facing recession, and I think even before these recent shocks, it’s quite clear that globalization and trade were in trouble. We’ve seen rising trends of protectionism, but also very much, recent shocks that, again, have further weight on global trade and globalization trends.
Some measures indicate that globalization has slowed down. There was the globalization, but very much more recently, the buzzwords are around deglobalization, or perhaps re-globalization. So, we’re here to explore those aspects and whether the ‘peak globalization’ has been reached, is that a myth, is that a reality? And I’m really delighted to be joined by Anabel González from the World Trade Organization, where she is the Deputy Director-General, and Tim Figures, who is Associate Director for EU and Global Trade and Investment at the Boston Consulting Group. I’m also very much hoping that Martin Wolf, the Chief Economics Correspondent from the Financial Time, will be joining us, and we’re still working in the background to facilitate that.
My name is Marianne Schneider-Petsinger. I’m a Senior Research Fellow here at Chatham House and Project Director for the Global Trade Policy Forum. I’m really delighted that this event today will be part of the discussions taking place under the Global Trade Policy Forum, which we launched in 2020 and really couldn’t do without the support of our funders, AIG, but also very much Boston Consulting Group, who’s joined as an Associate Partner recently, alongside Clifford Chance, Diageo and UPS as supporting partners. So, a big shoutout to them.
Before we get started, let me also say that this event is taking place on the record. It will be recorded, and we very much encourage you to submit questions via the Q&A function. If you would like to ask your question directly, then please indicate that in the Q&A function. Otherwise, I will just read out your questions and address them to our panellists. And again, a big and broad range of discussions.
We only have one hour, so really want to go straight to Anabel for her take on where globalization is headed. Are we seeing a new era of deglobalization and what is the role of the WTO in all of that? Because particularly, around 1995, when the World Trade Organization was created and in 2001, China’s accession, that really marked, I guess, the high mark of the previous wave of globalization. So, where do you see the WTO in all of that? Anabel, over to you.
Anabel González
Thank you. Thank you very much, Marianne. It’s a real pleasure to join you, Tim and hopefully, Martin, today. I want to use my introductory remarks to make three points. The first is that notwithstanding the buzz, there is still a lot of momentum behind trade and globalization, and, also, notwithstanding the many pressures waiting on the global trading system. And I think that momentum is visible in the decisions of businesses and consumers all around the world who are driving continued growth in the global flows of goods, services, capital, people, data, ideas.
Take, for example, the volume of global merchandise trade. At the end of this year, it will be higher than ever, 8-10% above pre-pandemic levels. For both the US and the EU, bilateral merchandise trade with China is at, or close to, record levels, and global exports of digitally delivered services have more than tripled since 2005. So, simply put, no region is close to being self-sufficient. Momentum behind trade is also visible in what many governments are saying and doing. Most governments I talk to are asking, not how can they retreat from global value chains, but how can they increase their participation in the global economy to reap the benefits of trade?
Now, though domestic reforms – trade reforms have slowed, they have not gone into reverse, and we’ve seen countries continue to enter into trade agreements, from CPTPP to RCEP, to the Africa [means African] Continental Free-Trade Area, and do some new types of engagements, as well as the Indo-Pacific Economic Port Framework. And perhaps most importantly, I see many countries not interested in choosing sides in great power competition and instead, wanting to preserve open, transparent and predictable trade relations with all of their trading partners.
So, trade and globalization are not on the wane, but they are changing, which is my second point, and I think the signs of this are everywhere. One sign is that trade is becoming increasingly intangible. The Digital Revolution has supercharged the trade ability of services. Between 2005 and 2019, global experts of digitally delivered services grew at an average annual rate of more than 7%, which is far more than the rate of other services, exports and for goods. And data flows grew at a distinct 50% rate annually between 2010 and 2019, a trend that, of course, was accelerated by the pandemic.
Another sign of change is the ongoing reconfiguration of global supply chains, the pandemic, the war in Ukraine and widening geopolitical rifts have pushed the issue of supply chain resilience up front of mind. And as you would expect, multinational companies are trying to adapt, they’re recalibrating their supply chains to strike a better balance between efficiency and risk and they’re doing so, you know, by building up inventories, by adding suppliers of raw materials and other critical inputs to their supply chains and others.
Now, at the same time, we are seeing efforts by some governments to take the research for resilience in new and sometimes worrisome directions that makes supply security with techno-nationalism, power rivalry and distortionary industrial policies. And all this adds to already high trading uncertainty and the risk of fragmentation, and if taken too far, this could turn out to be costly. With fragmentation would come increased concentration of risks, reduced resilience, lower competition and higher cost. So, fragmentation would also undermine innovation, the life blood of productivity and economic growth and it risks sucking out the oxygen from multilateral trade co-operation at a time when mounting, or collective, challenges call for more co-ordination and co-operation.
So, what can the WTO do in this more challenging environment? And I want to, sort of, pose that a well-functioning global trading system, it’s not a choice. It is a necessity, a necessity to manage the risks arising from a vastly more complex trade policy landscape, a necessity to fill the gaps in global governance that are waiting on the ability of countries to respond to pressive collective challenges, such as climate change, and a necessity to help make international trade more resilient, inclusive and sustainable.
And I see three very important contributions that the WTO can make, and we can talk more about them in going forward. The first is to manage and, if possible, de-escalate trade tensions, which means tackling on, you know, a number of topics, like subsidies, but it also means furthering dialogue and deliberation to include trust, sort out divergences and to put in some guardrails. And it also means restoring the effectiveness of the dispute settlement system.
The second is to facilitate co-existence and even perhaps some degree of convergence wherever the interests of governments are aligned, and climate change is a case in point. A successful response to climate change can only be achieved if countries act in a co-ordinated and decisive way, including on trade issues. And third is to tap new sources of trade growth.
I have made reference, for example, about the opportunities that digitally enabled services can bring. The same can be said, for example, by the drive to decarbonise supply chains and many other opportunities that the WTO can help countries and firms tap on. So, we’ve seen some positive momentum at the WTO, in some of these areas, particularly with the successful conclusion about our 12th Ministerial Conference last June. But of course, much more needs to be done and happy to talk a little bit more about that in going forward. Thank you, Marianne.
Marianne Schneider-Petsinger
Thank you very much for setting the stage, and I guess one quick follow-on question, but it really is perhaps not a quick, kind of, question, is, to what extent do you think that there’s a real risk that we’re seeing, kind of, splintering into two major trading blocs and spheres of influence, on the one hand, a, kind of, US-led one, on the other hand, a China-led one? And again, in that environment, where we’re seeing very, very different economic systems, the market economic systems versus China select model, what do you think is the future of the WTO in all of that? Is it about managing co-existence really, or is that path of trying to create convergence really beyond us now?
Anabel González
So, I think several points. The first is that this drive I see in specific sectors, mostly related to hi-tech and energy. So far, it’s not, you know, it’s not overflowing into other areas, and I think if this were to happen, of course this would be much more dangerous. Second, I see a very strong push by many governments, many members of the WTO, to avoid choosing sides. I was in Singapore just a few days ago and a Minister of Foreign Affairs at Singapore gave a very strong speech, basically saying, “We want to have a concentric circle of friends, but we don’t want to choose. And I’ve heard that everywhere, including in the European Union, in many dimensions.
And the third point is that I think that WTO – what we have is, you know, alongside some of this strategic competition, we also have some strategic co-operation. And I think we saw that, again, in our June Ministry, where countries came together and made, you know, all the geopolitical challenges, including the war in Ukraine and they agreed on a landmark agreement on fishery subsidies, on curbing fishery subsidies. So, I think that, you know, this competition can co-exist, or should co-exist, with the collaboration and where there is conflict, the WTO can provide the means to help manage and diffuse those tensions.
Marianne Schneider-Petsinger
Excellent, in terms of the analysis of, you know, the dynamics of globalization and, you know, what has shaped the current, I guess, positive plateau. But looking ahead, Tim, let me bring you in, where do you, and your colleagues at BCG, see trade headed and globalization in ten years’ time?
Tim Figures
Well, thank you very much, Marianne, and thank you, Anabel, for your thoughts from Geneva. So, what we’ve tried to do, because as you could imagine, it’s the kind of question that we are asked by businesses and governments all the time, is what will trade look like in 2031? To what extent will the kind of trends and currents that Anabel was talking about change the way we see global trade ten years from now?
So, we’ve developed a pretty sophisticated future of trade model, where we try to look at a range of qualitative and quantitative factors in order to answer that question. We’ve just recently updated it to take account of the really big developments that have taken place during 2022 and at the top level, there’s relatively good news. We think by 2031, global goods trade overall will have increased, compared to this year, by around 2.3%. So, the overall volume and value of trade will continue to grow.
But what is really, really interesting is seeing some very significant shifts in trade flows, in particular in three key areas, disrupting the traditional relationship that you would see between trade and GDP. Normally, if the GDP of two trading partners increases, you’d expect trade between them to increase broadly proportionately, but there are three main places in the world where we see that not happening.
First thing, I guess, perhaps most obviously in 2022, trade between Russia and the West largely disappears during the time period of our forecast due to sanctions, and we are assuming that sanctions will continue to remain substantially in place for the foreseeable future. Now, some of that trade will be reallocated elsewhere, as Russia trades more with China and India and the West trades more with itself, but that very significant trade flow that was there in 2021 has now, effectively, disappeared.
Secondly, China to the West, in particular China to the US and vice versa. So, we’d see the, kind of, tariffs, trade restrictions and export restrictions that we’ve seen from the US over the last few years continuing, focused on particular sectors, as Anabel mentioned, and that will have an appreciable impact over time on China exports to the US. However, interestingly, we would see the US continuing to grow its exports, particularly in sectors like agrifoods, to China, over that period of time. They remain remarkably resilient under our predictions.
So, those are two areas where trade volumes actually decrease compared to GDP changes, and the third one, which is the opposite, is between China and ASEAN countries, where we see very significant increase in trade over and above predicted increases in GDP. Really, as China seeks new regional markets and trade agreements like ARCEP begin to have an impact, as China moves away from global trade, to domestic and regional trade, which it will increasingly see as more resilient.
So, what are the drivers that we’re seeing behind this change? Well, one is reduced cost differentials. Some of the cost advantages of offshoring are now disappearing as labour costs and regulation starts to equalise. As Anabel mentioned, really following COVID, US-China trade disputes and now Russia-West sanctions, increased concerns around supply chain resilience, as global players, particularly in sectors such as manufacturing, seek to improve the resilience and diversification of their supply chains. Sanctions and export controls, things that really were not much of an issue in the global trading system until recently, are playing a greater role.
And also, very interestingly, I’m just back, myself, from COP27, climate regulation and climate incentives. We’re starting now to see a real deterioration in EU-US trading relationships, on the back of the strong localisation provisions within the US Inflation Reduction Act, which the European Union and EU member states fear will drive significant delocalisation of future sectors in the green economy from Europe to the US. And we’ll wait to see how the EU responds to that threat that it perceives to its industries of the future.
And just a final thought from me, as we do our analysis, one sector we really need to keep an eye on and start to, I think, focus on more, is the Global South, so not just ASEAN, but countries like India, Brazil, South Africa. If we see an increased decoupling between the West and the East, which our data suggests we will, what does that mean for the Global South? Will it mean that these countries actually have a new era of opportunity because they can be bridges between both Western and Eastern blocs, maintaining relatively friendly and positive trading relationships with both, or will we see a new era of great power competition evolve, where one or other of these new blocs will try to force the Global South to take sides and say, “The price of trading with us is that you no longer trade with the other side” in this new, potential, decoupled world? So, I’ll end there, Marianne, and pass back.
Marianne Schneider-Petsinger
Thanks so much, Tim, and I guess just picking up the point that you made about trade between Russia and the West disappearing, and also broadening that out, to that context of what economic integration with China will look like. There’s been a lot of fuss around friendshoring, and you were saying that there is the potential, at least in theory, that the West will trade more with itself. So, do you see that as part of this trends towards friendshoring and are there aren’t also, kind of, risks that come with that? I mean, there’s certainly opportunities for trade and economic ties, more broadly, around strategic and sensitive goods, but there are also, you know, downsides from that friendshoring, particularly in a context where there is, as you mentioned, ongoing competition, even between the US and EU, for example. So, how do you manage that and what is your take on friendshoring?
Tim Figures
It’s a very significant challenge. I think friendshoring was a term invented, I think, by the US Trade Representative. I think that’s probably who I heard refer to it first. So, it, kind of, emerged from a US view, I think, of how supply chain resilience should be improved, and I suppose if you look at the way the Inflation Reduction Act is designed, that defines ‘friends’ as “Countries with whom the US has a free-trade agreement,” which of course, excludes both the EU and the UK, as things stand.
I’m not sure I would take such a black and white definition, as the US administration appears to have done, and what we would see is more the focus on diversification. I don’t think companies are looking to wholesale shift production, but they are looking at their supply chains, seeing whether there are single points of failure and looking at some of the future scenarios for what the world might look like by the end of the decade that I discussed, and stress testing their existing operations to see how they might stand up to different scenarios unfolding.
Marianne Schneider-Petsinger
So far both of you have very much focused on the broader geop0litical context and the risk, again, of a fracturing of the global economy and, also, trade. But what about the domestic drivers that are also, you know, pushing trends towards, not necessarily deglobalization, but a slowing down of economic integration and, you know, how do you address concerns around there? Anabel, did you have any thoughts on the, kind of, domestic – we had a – the pushback against globalization, kind of, coming out after the financial crisis and then, with the election of Donald Trump and Brexit? How do you address some of those concerns to perhaps, alongside those efforts for international co-ordination, also address the domestic concerns?
Anabel González
So, thank you very much, Marianne. Before I go there, let me just say – to complement some of the points that Tim was making, which I think it’s important, that friendshoring, or reshoring or, you know, any one of these terms, does indeed, I think, pose significant risks. The first one is that if taken, you know, too far, it could leave countries more exposed to shocks, because one point that we must remember is that trade is a shock absorber, more than anything else.
If you think, for instance, about what happened in the pandemic, leaving aside the initial hiccups, the reality is that trade was critical to, you know, move vaccines from where they were manufactured, to where they were needed, the same from some critical medical goods. And, actually, for instance, in 2020, trade in these critical medical goods were up – was up 16%, whereas global merchandise trade decreased by 7%. So, again, trade is an important shock absorber.
Then, you know, the – if this actual nearshoring or reshoring, etc., would happen, it would be costly. So, I, you know, was reading a very interesting study done by some of our teams – colleagues, at the BCG, which showed that if each region were to become self-sufficient in semiconductors, that would require, you know, over a $1 trillion upfront investment and it could lead to increased price of chips from between 35% to 65%. In addition, sometimes this reshoring is simply not possible. If you look at, you know, some models of the Apple iPhone, for example, it has 1,800 – over 1,800 different components, manufactured in eight countries, crossing three continents, in 84 trading relationships.
So, how do you, sort of, you know, reconfigure a new ecosystem to deal with that? So, it’s not evident even that that is possible, in some of the cases, and of course, needless to say that if it happens, it would be – it could potentially generate a number of trade frictions, derived, in some cases, from overcapacity and other issues. So, I just wanted to, sort of, state these points, because I do think that sometimes, you know, beyond the headlines, there is, you know, there’s a lot of risks that need to be considered when looking into this issue.
Now, I think on your second question, you know, it’s true – I mean, if you look again at the evidence, I think evidence shows that the drive towards economic integration that we saw in the past few decades, what was not only instrumental in reducing extreme poverty in the world, from around 37% in the early 1990s, to less than 10% before the pandemic struck, now the pandemic and Ukraine war have eroded some of these gains. But there were significant gains, in terms of poverty reduction, but also from a decrease in inequality across countries, which is also another important point.
Now, of course, we cannot gloss over the fact that the gains from participating in trade and global value chains have not been shared equally across countries and within countries. And we see, for instance, you know, inequalities between rural and urban areas, in gender inequalities. So, we – there are many different challenges that we face. Much of it, mind you, are in a way, derived by changes in technology, in consumer preferences and maybe trade comes a little bit after that. But the reality is that no matter, you know, what the drivers are, it is – you know, concerns about these issues risk undermining public support for trading, for economic integration, which was the point that you were making.
Now, in my view, the answer to this is not really to turn our backs on trade, but actually to, you know, to do some of this tough work of strengthening some of these domestic policies for inclusion that are absolutely critical. And here we’re talking about, you know, facilitating the mobility of our workers, for example. We are talking, also, about developing new skills. I mean, there are many different programmes that, at the domestic level, are needed.
At the global level, I think we also should strive for making trade more inclusive, reducing trade costs so that small and medium-sized enterprises can participate in trade. Reducing these trade costs so that more women can participate in trade, younger people can also participate in trade, leveraging some of these opportunities, for example, at the digital services trade. So, again, it’s not for us to turn – the answer is not really to turn our backs on trade, but work at the domestic level, it’s very relevant, very challenging, but very important, and then at the global level, as well.
Marianne Schneider-Petsinger
Fantastic. Tim, did you have any additional thoughts on, I guess, that question of the fracturing and friendshoring, in response to Anabel’s very, very helpful remarks on that, as well? But I’m turning to that question of the domestic drivers and potential avenues to, I guess, have a more considered form of globalization and make trade more inclusive, to help make the case, again, for trade going forward.
Tim Figures
Of course, and it’s interesting, isn’t it, from a European con – situation, to see how the European Union, in particular, is trying to promote this notion of values-based trade, which has some difficulty, sometimes, in being reconciled with the, kind of, framework that Anabel and her colleagues at the WTO are there to implement and to safeguard. The European Union has been very clear that it uses access to the EU single market as quite a tool, in terms of promoting its values, whether on things like the environment, climate change, social issues like labour standards and so forth, worldwide, and is increasingly saying, “You can only sell goods into our market if you conform to our values.” And one of the reasons it’s done that very pragmatically is because it knows, following the failure of EU-US trade negotiations a decade or so ago and the prolonged negotiations of a free-trade agreement with Mercosur, that it will only get political ratification of EU trade agreements in the European Parliament if these values-based issues can be guaranteed.
So, I think far from saying that the – I think this is a question of saying the free-trade agreements might be undermining this, it’s very much, from a European perspective, they want to do these deals, but they know politically it’s only going to be possible if they can demonstrate that those deals don’t lead to an undermining of ESG type standards. And it’ll be very, very interesting to see, as some of these new European rules start to bite, for example, the EU Carbon Border Adjustment Mechanism coming into force progressively from next year, which will levy, essentially, an environmental tariff on energy intensive goods coming into the bloc, to what extent that starts to drive behavioural change by the EU’s main trading partners and get them to adopt the, kind of, values that the EU is increasingly going to make conditional of trading with it.
Marianne Schneider-Petsinger
I mean, you just talked about the EU’s appetite, still, for free-trade agreements, which is a, like, perfect segue to one of the questions that participants have started to submit. And, again, at this point, very much encourage those of you that want to ask questions, or also comment, to do that via the Q&A function. One of those questions ask about the “relationship between free-trade agreements and WTO,” and Anabel, perhaps you’re best placed to start us off with that, but what do you see the relationship? Are, I guess, free-trade agreements, a steppingstone or a stumbling block for multilateral efforts?
Anabel González
I think regional trade agreements are complementary instruments to the multilateral trading system. You know, they can help to tackle issues among group of countries that have a greater interest in going forward. They can help innovate, in a number of areas, and we’ve seen this in a number of regional trade agreements. You know, they can also go deeper, go further, in some of the areas. So – and then, you know, some of those innovations can then be brought to the multilateral trading system, as well.
What I think is very important is to make sure that these regional trade agreements remain open and that they – you know, they’re not – they do not turn into a platform for greater fragmentation, because then I think this would become a bit challenging. And this is something that, again, maybe we will see more about this happening in the next couple of years, but if you take, for instance, an agreement like the African Continental Free Trade Agreement, this is an agreement that has the potential for lifting trade within Africa to new levels, to attract new investment, to strengthen Africa’s position to then participate in the world, to foster regional value chains. You know, so from the perspective of the WTO, that is really fantastic.
So, you know, if agreements go in this direction, I think they can really be very positive and make a strong contribution, not only to those members of the agreement, per se, but also to the global trading system, more broadly.
Marianne Schneider-Petsinger
And besides regional free-trade agreements or bilateral ones, you know, do you think there is also very much an appetite to go down the more sectoral approach and have, you know, plurilateral agreements with subgroups of the WTO, particularly looking at eCommerce negotiations? Do you think that that is, for the WTO at least, the way forward, or do you see that there is also pushback from certain countries, India and South Africa, for example, on that front? And how do you see that relationship also play out?
Anabel González
I think that’s a critical question nowadays, because, you know, fragmentation in the digital space can be very costly for firms and it there – and then again, it makes it more difficult for, particularly small and medium-sized firms, to leverage these opportunities of the digital economy. So, at the WTO, some 87 members, including the US, the EU, China and others, are engaged in negotiations in the area of eCommerce. They have made significant progress in some areas, like, you know, digital firms, open government, consumer protection and others. They are tackling some of the most challenging issues and they have identified 2023 at a critical – as a critical year to reach agreement in this area.
So, to me, you know, there are, of course, a number of chapters in some regional trade agreements that include digital trade, or there’s also the – some of the agreements that are being negotiated in the Asia-Pacific, the Digital Economic [means Economy] Partnership Agreement, for example, and others. And again, I think they have open – sort of, been – they’ve been innovative, they are showing the way, but to me, bringing this to the WTO is also quite critical, again, to avoid the fragmentation in the digital space that can only, you know, add to trade costs and makes it more difficult for firms to participate in digital trade.
Marianne Schneider-Petsinger
Tim, I see you nodding there. What are your thoughts on the relationship between bilateral, regional, but also plurilateral agreements, and the WTO? And perhaps to add onto that, what we’ve seen recently is more ad hoc informal mechanisms being set up, the Indo-Pacific Economic Framework, for example, by the US, or the US-EU Trade and Technology Council. There’s also these, now, new, more, you know, flexible mechanisms, co-ordination mechanisms, rather than negotiation forums, that we see emerge.
Tim Figures
You know, all great questions and firstly, I think I do see a future for free-trade agreements of the classic type. I don’t think they undermine the WTO. Actually, I think they’re a fundamental part of the system that was established in the WTO, that is there to oversee. But I do think we’ll see those agreements become more regional, also, I think more comprehensive, in nature. So, I touched before on some of the values-based issues that the EU increasingly wants to see in its international trading relationships and so, I think we will see those questioned, so climate action and climate change being a classical example, increasingly feature in free-trade agreements.
And if you look at the most recent free-trade agreement the EU signed, which was the UK Trade and Co-operation Agreement, even though that is often described as a “bare bones agreement” in terms of market access, given the historically close relationship between the UK and EU 27 economies, there are a lot of level playing field and values-based provisions in that agreement, which sometimes get overlooked. Including, for example, that the UK commits to maintain a carbon pricing scheme delivering, broadly, equipment outcomes to the EU Emissions Trading Scheme, and various other things like that. So, I think we’ll probably see more of those types of things being put into future FTAs, expanding beyond the traditional market access and anti-subsidy type provisions that we’ve historically seen.
And, also, I think that the WTO is showing its value as a forum for plurilateral agreements. So, in the absence of worldwide consensus on some of these contentious topics, the WTO has got good convening power for groups to – for countries that do want to proceed on things like digital services or environmental goods, just to name two examples, to come together and demonstrate for, you know, a significant part of the global economy, if not 100% of it, there is consensus on what needs to be done. And, of course, these agreements, as they gather momentum, can attract more and more members to join over time.
So, you know, I think that shows the flexibility of the WTO approach and how its adapting to a new era where global consensus, on the need for free-trade, is no longer a given, but there are still substantial groups of powerful and economically significant countries who want to continue to make progress.
Marianne Schneider-Petsinger
And Tim, you mentioned climate-related action quite a bit in your remarks throughout, but how does that link to the question of rare-earth minerals that are needed? And there’s two questions that have come in via the Q&A function and one asking specifically over the move to net zero. “Companies and governments all over the world will require critical minerals very quickly to reach their 2050 goals, many of which, along with the production of net zero technologies, are concentrated in the East. Considering the West’s alliance on these, how did you forecast, or your modelling, what to expect will happen and, you know, how does that link?”
Also, this is another question to this broader debate around “decoupling and friendshoring,” specifically, again, as there is the competitive element, even among those that are, you know, friendshoring, over some of those rare-earth minerals.
Tim Figures
Yeah, and absolutely, it’s – and it – so, I would say critical minerals, so going beyond rare-earths, to include things like lithium, and nickel and so forth. Now, there’s been two key shocks to global supply of those things. Firstly, some of those were heavily exported from Russia and are now subject to sanctions in the West, and we saw the particular volatility in commodity prices of precious metals, such as nickel, as a result of the war in Ukraine.
And then, secondly, the US Inflation Reduction Act very clearly sets targets for the friendshoring of critical mineral supply chains and it sets targets. There’s some debate going on in the US about how achievable those targets are when set against the decarbonisation targets the IRA is also supposed to produce. But the requirement that an increasing proportion of input minerals are sourced and processed in the US or friendly countries will have a significant impact on those supply chains.
What it will, firstly, do is very significantly increase the potential for developing those resources in friendly countries. Canada has significant resources of lithium, for example, which will now become attractive to exploit. But also, it has the potential for quite significant diversion of those flows, we think, from their traditional roots. So, the EU gets most of its lithium from Chile at the moment, but Chile does have a free-trade agreement with the US, so counts as a friendly country for the purposes of IRA incentives. And so, there would be significant pressure for Chile and lithium to flow North, rather than East, leaving the EU to think about, well, how should it develop sources of those minerals closer to home, or should it continue to rely, probably not, on sources that come from further East?
Marianne Schneider-Petsinger
Anabel, did you have any thoughts on that question of rare-earth minerals, or perhaps the broader context, which again, is climate-related action, and also what the role of the WTO is in this regard? But we’ve seen some recent progress with the launch of free ministerial statements. Anabel, please.
Anabel González
So, let me say a couple of comments on the issue of critical minerals, because I think Tim is right in referring to the high concentration of the extraction and processing of these critical minerals. It’s rare-earth, but it’s others, as well. He mentioned lithium, and the same for copper, zinc and others. So, this high concentration, first, I think, you know, sort of, signals that there is a need to look for diversification in this area. But it is also the case that this will take time and again, in some cases, it can be either very costly or not possible at all for other things, like, regulations on the environment, or depending on the location of some of these mines and others.
So, keeping, you know, supply chains open of this critical prod – minerals is absolutely critical to achieve the transition to a low carbon economy, and this is something that sometimes when talking about, you know, decoupling, it’s not necessarily front of mind. But if you’re talking about full decoupling and this encompasses critical minerals, and at the same time, you want to achieve a rapid transition to a net zero economy, well this sometimes may seem as an impossible trilogy, if you wish, and it’s important to look at additional measures, like keeping supply chains open, like providing for transition periods and yes, like looking at diversification efforts, as well.
Now, this brings me to the broader topic of trade and climate change, if you wish, and the role of the WTO, and here, I want to mention that last – not last week, about ten days ago, our Director-General launched our World Trade Report at Sharm El-Sheikh. And there, I think that we, basically, are making the point that the trade can – it’s, sort of like, a critical piece in countries’ efforts to deal with the challenges of climate change. So, on mitigation, for example, trade can speed up and reduce the cost of net zero – of the net zero transition.
It’s true, of course, that trade generates carbon emissions, but trade is also critical in enabling access to cutting edge technologies in the climate area. It can also incentivise investments in low carbon technologies by expanding market size, and it can also foster competition and help drive down the cost of trade. If we look, for example, at what happened to solar and wind energy technologies, you know, price has gone down remarkably in the past few years and, of course, trade has played a critical role in doing this.
Now, of course, more can be done. You know, there are – some members in the WTO think that maybe an agreement on environmental goods and services to reduce TERP and other non-TERP measures to environmental goods and services may be a good idea. It’s also the case that, of course, WTO also can play a significant role in adaptation. It can act as a course multiplier in responding and adapting to climate change by allowing countries, for example, that are in the middle of a natural catastrophe, to have access to critical goods and others.
And finally, there’s one point that I want to make and our report, I think, makes a very strong case for this, which is that the WTO can help minimise trade frictions and reduce uncertainty, because, you know, we see that there are a number of WTO members who are adopting measures that are more unilateral. Those measures are – while they’re – you know, they may be positive for the environment, they risk, also, bringing a number of trade frictions, and you need to have a place to sort out this trade friction, for the benefit not only of trade, but also for the environment.
Marianne Schneider-Petsinger
Excellent point there, which is, I think, directly linked to one of the questions, that have come in on “the WTO’s capacities these days to handle these feuds.” So, you mentioned, you know, there’s – certainly it needs to reduce trade friction and dispute settlement and resolution is certainly part of that. So, given where we are right now, with the Appellate Body still in crisis, what is the outlook, perhaps, to revive it or in a different form to get, at least, a functioning dispute settlement back at the WTO?
Anabel González
So, I would say that one of the most important results of our 12th Ministerial Conference in June was actually to agree that WTO needs to be reformed, but in particular, that WTO members will discuss having – will agree on a – re-establishing a fully functioning dispute settlement system by 2024. And this is absolutely critical, because it is the case, of course, that disputes can be sorted out in many different ways. They can be sorted out, you know, through deliberation, consultation, arbitration and many different ways, but it is also the case that a binding dispute settlement system is something that the great majority of members of the WTO attach great importance. And in my conversations with the business sector, this is also something that business feels is absolutely necessary for a trading system to work properly.
So, a process has already started where members have began to identify what are some of the key concerns that they have in these areas. It’s a process that has been – that is being led by the United States, with the participation of many other members. And the idea of them is to, as I said, identify key issues and begin to have these conversations and I think for the perspective of many members, next year will be a year for the submission of concrete proposals that, hopefully, will lead to the re-establishment of this fully functional dispute settlement system here at the WTO.
Tim Figures
Perhaps I could add that’s critical for businesses, as well. That really, what businesses need, and it was one of the main benefits, historically, of the WTO system, is certainty. Because for them, free-trade agreements and broader WTO principles are the backdrop against which they decide whether they’re going to invest or not invest in production, in facilities, in trade and generating economic activity. And the uncertainty caused by not knowing whether particular preferential trade arrangements, for example, could be relied upon or the potential for people to do things that are clearly against the WTO’s rules, knowing they can never be challenged because the dispute settlement mechanism doesn’t work and so, they can, essentially, get away with that, is not really conducive to having confidence in the global trading system providing the kind of predictability that businesses like when they’re putting together their business plans and investment cases.
Marianne Schneider-Petsinger
Great. Thanks, Tim, for sharing your thoughts and I think very helpful to have the business perspective there, as well. There’s one question on Brexit and the challenges for British industry to restructure their engagement with Europe. If Gordon Persholt is on the line and wants to come in directly, perhaps we can unmute you. Gordon, are you with us?
Gordon Persholt
Yes, I am.
Marianne Schneider-Petsinger
Perfect, please go ahead.
Gordon Persholt
I am with you. Can you hear me?
Marianne Schneider-Petsinger
Yes.
Gordon Persholt
Yeah, one of the things that always intrigues me is that we have the government developing trade agreements and I always say it’s, sort of like, “We may build it, but will they come?” So, will British industry have a capability of leveraging those trade agreements, whether they be in Japan, Korea, Singapore, or elsewhere in ASEAN? Do they have the capacity, the knowledge? ‘Cause they have enough trouble post-Brexit figuring out how to reconfigure for Europe and now we want to take it – you know, that it’s trying to say we need to extend beyond Europe, in terms of our trade policies. Do they have the capabilities, the competencies to do that? Do they understand the cultural differences, the differences in business systems? You know, I heard the famous one, you know, where there was a British pork producer that wanted to get into Indonesia, which is a Muslim country and he – that has – so…
Marianne Schneider-Petsinger
Thanks.
Gordon Persholt
…how do we make British industry capable?
Marianne Schneider-Petsinger
Tim, can I turn to you first for this question and perhaps, Anabel, if you have any thoughts on perhaps that broader question of what role do medium-sized trade players play in global trade these days? But Tim, let’s start with you.
Tim Figures
Thank you, and a great question, Gordon, and you know, before I worked for BCG, I spent quite a lot of my time trying to help manufacturer – British manufacturers, particularly SME manufacturers, address precisely that question. I would say a couple of things. Firstly, I think what I’ve found over the years is the real challenge is working with businesses to help them understand the potential for exporting, full stop. And once a business has understood how exports can help drive their business and got through some of the initial pain of working out how to do that and getting the necessary approvals and understanding the paperwork, and so forth, that you need to export, actually then, you can expand across different parts of the world relatively easily. So, I’d say that’s our first challenge, making sure bus – SMEs, in particular, understand the benefits of exporting and that the benefits often outweigh the disadvantages.
Secondly, and, you know, the – this is a key role of the UK Department of International Trade, is to provide businesses with help, information and support to understand specific markets. The DIT does have an extensive global network and puts quite a lot of resource behind that and tries to make that sort of information available. And there are a range of schemes which help with particular markets. I’m actually involved in when BCG is part of a consortium working with DIT and the FCDO to support trade with Africa, where we’ve identified that there are particular barriers in understanding the opportunities in the markets and the UK Government is resourcing a joint public/private sector consortium to help businesses who want to enter African markets, understand better how they could do so, and what advice and support would be available.
So, I agree with you, it is a challenge, but there are resources out there that are designed to help and designed to focus, in particular, on helping businesses get into more challenging markets globally.
Marianne Schneider-Petsinger
Anabel, perhaps putting aside, you know, specific context of Brexit, but that broader question of what is the role of medium-sized players in, kind of, coming up with new mechanisms for co-operation on global trade? But also, very much linking that to this point of small/medium-sized enterprises and really having to offer them a platform to engage.
Anabel González
Well, you know, the role of medium-sized countries here in the WTO is very important and I’m thinking, you know, the UK, for example, plays a fantastic role, same Canada, Brazil, Australia, Indonesia. I mean, these countries bring, you know, ideas to the system, they bring energy. They also contribute very much by leading some of our negotiating groups and committees. I think, for example, right now, UK leads our discussions on trade and environment, for example. We also have countries like Australia and Singapore and Japan leading the work on eCommerce. We have Korea and Chile leading the work on investment facilitation. So, really, the role of these players is absolutely critical in the system.
Now, of course, another question that is very important is how can we make sure that the smaller and medium-sized firms can also get to participate more in trade? And this is important, of course, because SMEs represent some 90% of all firms in the great majority of countries. So, if you’re talking about making trade more inclusive, this is about bringing more SMEs to export and to import. And to me, here, the critical issue is how do you reduce trade cost? Because larger firms may be able to manage all this cost, you know, to have the advice that they need to do so, but for smaller firms, this is not feasible. So, this is why trade cost reduction is a very important part of the agenda here at the WTO, but also should be a very important part of the agenda at the domestic level of many countries.
Marianne Schneider-Petsinger
We only have about five minutes left and there is more questions that are coming in. So, I’m going to just bundle them and then, hand over back to Tim and Anabel for their final thoughts, as well. One question is around the “inflationary pressures that stem from supply diversification, higher inventory and supply chain risk more generally,” and then, a second question is on “intellectual property right developments and related areas, such as TRIPS, how they are affecting the levelling up in global trade.” And let me then throw in, perhaps, the final question of – in terms of if you had to describe where we’re headed in one word, would you say it is deglobalization, or re-globalization, or slowbalisation? What word, perhaps, describes the situation we find ourselves in, the best?
Tim, let’s start with you and then, Anabel, and again, there was a lot in there, so if you do want to wrap this up in your concluding thoughts, as well, that’d be fantastic.
Tim Figures
Of course, and I’ll probably deal with the first and last of those questions. So, I think it’s undoubtedly true that the era of good deflation, with a significant reduction, real-terms reduction in the price of goods, which was the benefit that the West, in particular, saw from an era of globalization, is coming to an end. So, it is inevitable, whether that is through higher regulatory standards or labour costs in the markets to which activity was often offshored, whether it’s the increased regulation in the West or the cost of diversification, goods price deflation, is probably going to be a thing of the past. There is definitely a cost to be paid for greater resilience and higher trade values and that will be felt throughout supply chains and is already being felt throughout supply chains, to answer that question, and I think that’s inevitable.
What we don’t know is quite how high those inflationary pressures will be. I mean, I think if we look at the medium-term forecasts from the European Central Bank and there’s – they’re looking mainly at the likely energy price inflation and saying, “Well, that will peak over the next couple of years.” Things should return to, sort of, 2/3% inflation, so, higher than usual, but much lower than we see now, by 2024 and beyond.
And then, finally, I’ll just answer your third question, Marianne, if I may, and I’ll leave others to comment on intellectual property and TRIPS waivers and so forth. I think we are heading into an increasingly uncertain world, one where I hope I’ve demonstrated, through my initial remarks, that the past is probably no longer an accurate guide to the future, and we need to think differently about how the world of global trade will shift. I don’t think we will see total deglobalization, but I think we will see a changed globalization, with significant shifts in trade flows and with a much greater emphasis on regional, rather than global trade, than we’ve been used to. Thank you.
Marianne Schneider-Petsinger
Anabel?
Anabel González
Thank you, Marianne. In light of the time, let me just address the issue of globalization, to say that our Director-General, Dr Ngozi Okonjo-Iweala, frequently speaks about re-globalization, talking about, you know, deeper and more diversified markets that would enhance supply resilience in a world, you know, increasingly more exhaustion of shocks. And this re-globalization would open opportunities for a number of countries and firms who have not been able to benefit from trade yet. So, it’s a reconfiguration of globalization that has the potential of helping us to re-globalise and bringing in new actors to benefit from it.
Marianne Schneider-Petsinger
Thank you both very much, Tim and Anabel, for your excellent insights and for a very rich discussion. I’m very sorry that Martin Wolf was not able to join us, but there is still a lot to be covered, and I think barely scratched the surface. Since we talked about primarily trade, but obviously, when we’re talking about globalization, there’s also the movement of capital, the movement of people and perhaps also data and digital exchange to consider. So, we will certainly come back to both of you and others, as we continue these discussions, but thank you both very much and we look forward to having you back at a future Chatham House event.
Anabel González
Thank you.
