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Can global trade survive protectionism? video

Photo: Sheng: “Sooner or later, we will need to sit down together and agree on a multilateral system and then preserve it.”
Sheng: "Sooner or later, we will need to sit down together and agree on a multilateral system and then preserve it."

SMEs, emerging economies, China and Hong Kong all have a vested interest in the World Trade Organization surviving and global trade returning very much to the fore, Andrew Sheng, President of the Fung Global Institute, tells Nicholas Kwan, HKTDC's Director of Research.

Nicholas Kwan: With the current Doha round of talks seemingly in danger of collapsing and with the growing levels of protectionism fostered by the global financial crisis, many are now saying that the World Trade Organization (WTO) is in danger of becoming irrelevant.

In light of the regional trade agreements, both bilateral and multilateral, being signed across the Pacific as well as the Atlantic, to what extent is the WTO no longer a relevant institution? With this in mind, how do you see the world trade regime evolving?

Andrew Sheng: You need to take an historical perspective. Over the last 50 years, certainly since World War II, trade has grown spectacularly. Globalisation has become a reality and a lot of that is clearly thanks to the WTO.

The WTO provides a very important set of rules. It is a transparent system of trading that is confined largely to physical trade and, to a lesser extent, services and investments. This rules-based regime, however, has created the most glorious period of global trade and prosperity ever.

It is totally understandable that the Asian crisis, and then the global financial crisis – which is now nearly five years old – have shocked people. Trade has suffered. It dropped for the first time in 2008, partly due to the collapse of trade finance and the related settlement issues.

Since then, despite the efforts of the G20 – who all spoke out against protectionism – different types of trading agreements, such as the TPP [Trans-Pacific Partnership] and the RCEP [Regional Comprehensive Economic Partnership], have proliferated. This, coupled with the failure to conclude the Doha rounds, has led people to ask whether the WTO is in danger of collapsing. Personally, I don't think that is the case. History is never simply a straight line.

By and large, though, the good news is that everybody now understands that trade is very important and that it's about jobs. All of these TPPs and RCEPs are alliances that will, hopefully, create more jobs and secure domestic markets. That really is the bottom line. The rest is politics.

The fundamental issue is really ensuring prosperity, ensuring the jobs situation. The old model, under which the East supplied the advanced markets of the West, is changing. Since 2008, those advanced markets have slowed down in terms of their GDP growth and in terms of their trading capability. At the same time, there's been spectacular growth in South-South trade or between East and South, however you want to term it. Intra-emerging market trading has grown and, to some extent, that has provided a cushion against the global slowdown in trade.

In the last year or so, we have begun to see some softening and this is largely because the emerging markets cannot entirely decouple from the advanced markets. So, as Europe is still slowing down and there is no strong recovery in the US, the emerging market trade is beginning to flatten out and, in some cases, starting to reverse. This is because the financial markets are not doing as well, particularly in the light of potential interest rate increases.

The bottom line is that this meeting in Bali [the Ninth WTO Ministerial Conference, 3-6 December] is very important. Hopefully, the event will resuscitate Doha or at least come to some conclusion about the proceedings there. I'm not an expert on the current state of negotiations, but I see the December event as a very important landmark. I hope they will at least resolve the issues they agree on and then move on.

Overall, though, is the multilateral trading system at risk? Yes, there is bound to be some risk. Instead of just reducing tariffs or having arbitration under WTO rules, people are now imposing safety standards, technical standards, macro prudential rules, regulations. All of these things that are non-tariff related will have some barrier impact on trade. The very fact that more and more people are going for bilateral PTAs, makes the rules much more complicated.

Some people, particularly the initiators of the TPP, believe that, eventually, when everything is bilateral, they will genuinely become multi-lateralised – that they will, in effect, at that point, flatten the "spaghetti" and make "lasagne".

Of course, it ultimately depends on how you interpret the whole thing. My view is that the TPPs – and so on – represent one way of moving forward. It may not necessarily be the most ideal way, however. There is another thing we clearly need to recognise here – the more complex the rules and regulations, the tougher it becomes for SMEs to make the move into world trade.

At the moment, world trade has grown because it's not just about multinationals trading through global supply chains, although there has been spectacular growth there. What it's really about, though, particularly in terms of the South-South trade, is the SMEs in the South suddenly plugging into the global supply chain. That has primarily come about thanks to the rules laid down by the WTO. The fact that they are multilateral means that, by satisfying one set of rules, you can go anywhere. You are free to trade in the global markets. If you have to satisfy six different TPPs, all with different rules, though, you can't necessarily afford it. You won't be able to meet some of these ever more complex standards that have been appearing and the whole world will be very much the poorer as a result.

We need to recognise that, sooner or later, we will need to sit down together and agree on a multilateral system and then preserve it. The emerging markets, which have been major beneficiaries of the multilateral system, should support that system. While there may be some advantage to being in this arrangement or that arrangement, ultimately the world will be poorer if we add too many barriers to the system.

Kwan: One of the largest emerging markets is China, which has enjoyed significant benefits from the growth in world trade over the last 20 years. For China, then, it is very important for the multilateral regime to continue and to prosper. With multilateralism being diluted or even disrupted, what should China do in the short-term? In the long-term, if the multilateral system is not going to work as effectively as before, what are the very real possibilities that China should be preparing for?

Sheng: People should ignore the noise – although you can't completely ignore it – and focus on the signal. Before it joined the WTO, people within China said China would be the biggest loser when it became a member. All of the other existing international signatories said: "Look, here are all of the requirements that you need to meet."

Preparing for WTO entry was painful for China, but there is no doubt – to the surprise of many – that China has been the biggest winner under the WTO. In that case, China should be a very major partner [in the WTO] and I believe it is. It is a supporter of the multilateral system, in the same way that Hong Kong is.

If you understand China's 12th Five-Year Plan, then the official policy is very clear. The future growth in global exports to the advanced markets – the East-West trade – will grow much more slowly than either South-South trade or internal trade. China, India, Brazil, Indonesia, South Africa – all of these have very large populations and therefore very large domestic markets, and that's where growth needs to occur.

In order for this growth to take place, however, you really need better standards in place, better distribution systems, better tax systems, less domestic barriers, non-tariff barriers and improvements in trade within the emerging markets. If you really understand the 12th Five-Year Plan and its strategic policy for growth, then you will see it's concerned with moving away from exports and rebalancing towards a domestic engine of growth. This means a new emphasis on domestic consumption, and that requires higher income levels. This should act to balance the inequality issues and to promote sustainability, which is increasingly important not just for China, but also globally. International supply chains must meet global sustainability standards and green standards, as well as addressing a number of ethical issues, such as the exploitation of labour.

The game is changing and this is fundamentally because the larger emerging markets are increasingly looking more inward. Despite this, there is also a need for the global trading system to act as an engine of growth. That global system, however, will apply less to the advanced markets. This is not because the less advanced markets are protecting themselves, but because, as mature markets, their capacity for growth is limited. I believe that the future of trade, production, income and consumption is in the emerging markets.

The leading emerging markets, such as China, will be increasingly setting the standards for production domestically and, hopefully, making the goods that Indonesia wants, Brazil wants, Africa wants, and Central Asia wants. Chinese production will change accordingly and maybe it will change because, in the future, it meets the standards in a very different manner.

There are a number of very significant trends that are changing the whole ball game, but the WTO still has a major role to play in all of this. We can clearly see some major changes in negotiations with regard to the investment pact, maybe in terms of the value added or in the services area. Hopefully, all of this will be beneficial for global trade and investments.

Kwan: With China currently switching its growth strategy from exports to domestic demand and focussing to a far greater extent on the emerging markets than the mature markets, what are the implications for Hong Kong?

Sheng: Hong Kong has been a very major beneficiary of the opening up in China trade. People tend to forget, though, that Hong Kong's real strength is that it has long been the entry point for the rest of Asia. It has been, for many years, a major player in the financing and logistics of trade between Asia and the US, Latin America, Africa and the rest of the world.

This is a role that Hong Kong should never forget. Hong Kong has boomed through its associations with China, but there is equally great potential in trade throughout the rest of Asia. Hong Kong should now look to play a similar role there. Hong Kong has obviously moved away from manufacturing and into high value services and that is an area where China and the rest of Asia are increasingly moving up the curve.

Now either Hong Kong provides services in that sector or somebody else will. Hong Kong needs to appreciate that it needs to be a knowledge centre that meets the requirements of both China and the rest of Asia.

The services sector is an area where it genuinely can be a case of a win-win situation, but it is highly skills-based and highly knowledge-based. Hong Kong can be the R&D centre, it can supply the distributions, supply chains, data analytics, back-up centres, data centres and the support services that many other areas are not yet ready to provide. This means that Hong Kong will increasingly move up the value chain, integrating data skills not just within Hong Kong, but within the region and the rest of the world, all of its trading partners. Hong Kong is at the cusp of a very major change. Either it seizes that white space, that new opportunity, or somebody else will. Hong Kong has never been afraid of competition and, I guess, Hong Kong will meet this challenge.

Kwan: Thank you for your time and insight.

Andrew Sheng talks to Nicholas Kwan, Director of Research

Content provided by Picture: HKTDC Research
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