Review of the Role of Trade in the Work of the Fund

Abstract

This review follows the Board-endorsed recommendation by the IEO in 2009 to have an assessment of the Fund's work on trade every five years. In addition to reviewing past work, this paper discusses key issues going forward towards a future trade agenda for the next five years. This reflects the need to operationalize the implications of the changing trade landscape, including the changing drivers of trade-such as global value chains (GVCs)-and the movement of the fulcrum of trade policy from multilateral rounds to regional and plurilateral deals. Growth in global trade has slowed as the benefits of past reforms and integration trends have matured and new reforms have languished. Trade grew more rapidly than global growth in the last few decades, contributing to higher growth and productivity by allowing countries to integrate and specialize in what they do best. But over the last few years global trade has slowed down as momentum has faded and GVCs in several regions have matured. Trade is an essential component of the global policy agenda to bolster growth. A new momentum is needed in policies amid heightened risks to global growth and concerns over a "new mediocre." At a country and global level, trade reforms can complement and augment the benefits of other structural reforms, are an important element of infrastructure investment, and support the strengthening of policy and institutional frameworks. These reforms would enable countries to participate in GVCs. There are potentially important gains to be made from further trade integration and expansion of global supply chains. These gains come from traditional liberalization in many countries (in particular low-income countries and many emerging market economies, for which applied and bound tariffs remain about five times higher than advanced economies on average) and sectors (e.g., agriculture) including via unilateral efforts; from lowering barriers in new trade policy frontiers (services, regulations, investment); and from additional expansion of global supply chains, particularly to regions and countries that have missed out on these opportunities in the past. Reigniting global trade integration would require an open architecture that allows different speeds and depths, but also coherence among preferential and multilateral February 2, 2015 REVIEW OF THE ROLE OF TRADE IN THE WORK OF THE FUND 2 INTERNATIONAL MONETARY FUND efforts. The finalization of the Bali agreement is welcome, but earlier impasses as well as the longstanding difficulties to advance the Doha Round have emphasized the need to buttress the governance of the multilateral trading system. With the fulcrum of trade policy moving to regional and plurilateral deals, new trade liberalization initiatives should seek to avoid fragmenting trade, even as renewed efforts are made to prop and retool the governance of the multilateral system, with the WTO at its center. Heightened and coordinated vigilance will also be needed to avoid new forms of protectionism as well as, in some cases, traditional tariff protection. Better embedding macro-critical trade issues in the work of the Fund will require a concerted effort. This will involve clearer institutional views on trade and trade policy issues; continued analytical work; enhanced efforts to translate key implications of the trade and trade policy landscape, particularly for bilateral and regional surveillance; prioritizing bilateral work on macro-relevant areas specific to various country groups; revising guidance; and the review process. The Fund's work on trade will need to take into account resource constraints and limited trade expertise, thus requiring careful prioritization and continued collaboration with other international institutions. The focus of surveillance in advanced countries, emerging market economies and low-income countries going forward should respond to their distinct macro-critical nature and differential needs.  For most advanced countries a key issue will be the implications of their efforts to pioneer and advance the new trade policy frontiers, opening services markets and making their regulatory systems more coherent (i.e. better aligning domestic regulations through dialogue among regulators, mutual recognition and, in some cases, harmonization), with potential gains to themselves and to others if these initiatives minimize fragmentation and are eventually multilateralized.  Many emerging market economies, for example in South Asia and Latin America, can still benefit greatly from integrating via traditional liberalization, including on a unilateral basis, and by anchoring their economies to GVCs, moving away from import-substitution policies that have failed in the past and avoiding protectionism through the use of non-tariff barriers. Trade liberalization complements and augments the benefits of structural reforms and supports the strengthening of policy and institutional frameworks.  Low-income countries need trade and integration to GVCs as a central plank of their development and growth strategy, for which trade facilitation is critical. They can benefit by removing forms of protectionism that hinder job creation and export growth. For these economies, addressing traditional trade barriers, such as upgrading poor trade infrastructures, and improving economic institutions are still crucial. Technical assistance could be needed to support integration, including on how to adapt to a less protected environment (e.g., fiscal implications of lower tariffs); sequence, pace and coordinate reforms; and take advantage of improved access to advanced economies' markets.