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Thriving in a world of fragmented trade

Photo: Pursuing global trade: the challenge of Balkanisation. (Courtesy of © iStockphoto.com/saulherrera)
Pursuing global trade: the challenge of Balkanisation.

There are three developments, in particular, that could see the global trade system become dramatically fragmented or Balkanised over the coming months.

First, and most recently, the G20 grouping of the largest industrialised and developing nations has again failed to take any new initiatives to arrest the further escalation of protectionism. With its annual summit having just drawn to an end in St Petersburg, the closing declaration from the G20 leaders only reiterated their previous commitments and renewed their overall support for those existing initiatives aimed at improving trade transparency.

Secondly, with the World Trade Organization (WTO) set to hold its next Ministerial Conference in Bali this December, there is a distinct danger it will become increasingly irrelevant if – as is widely anticipated – it fails to make a breakthrough on the next Doha round of multilateral trade talks.

Thirdly and more generally, the increasing prominence of the Trans-Pacific Partnership (TPP)1 and other mega-regional trade agreements (RTAs) could further complicate cross-border trade rules and raise the risk of additional regional trade blocs emerging.

In any case, it seems likely that the global trade environment is set to get worse before it gets any better. In terms of its implications for the mainland and for Hong Kong, two distinct challenges arise. In the case of the mainland, it needs to increase its efforts to rebalance its economy, while Hong Kong needs to upscale its competitiveness, especially in the services sector.

G20 Summit – another missed opportunity

As the world's largest economic grouping and a forum for its most influential figures, especially in the years since the 2008 global crisis, the G20 should be the most important potential safeguard against protectionism and the prime defender of the multilateral trade system. Unfortunately, however, the group seems to be moving in very much the opposite direction. Despite repeated pledges to cut trade barriers, in the three years to May 2013, the G20 has added restrictions on 4.6% of its collective merchandise imports.2 The value of the imports affected by these new restrictions amounts to US$666 billion a year – equivalent to the annual imports of France, the world's sixth largest importer.

This is compounded by the fact that, five years into the global crisis, there are few signs of such protectionist measures abating. In the seven months to May 2013, the G20 introduced more than 100 trade restriction measures, covering around 0.5% of the group's imports (or 0.4% of the world's3). The most frequent measures adopted were trade-remedy actions, notably anti-dumping investigations and corresponding tariff hikes. If no new initiatives are taken to counter such practices, these initiatives could very well become the norm rather than the exception.

Rising trade restrictions since 2008 – promises vs reality

'Enhancing multilateral trade' was one of the eight agenda priorities of the St Petersburg G20 Summit. Unfortunately, no new initiative was launched in its subsequent declaration. Overall, it was largely reminiscent of the 2012 declaration, except for an additional call to support the WTO Bali conference and a demand for a WTO-OECD UNCTAD joint report on the global value chain in the first half of 2014. It seems, in all likelihood, that the St Petersburg conference will prove to have been yet another missed opportunity.

With the latest Doha round of WTO trade talks having failed to reach a resolution in over a decade, any expectation of a major breakthrough, in terms of multilateral trade, is almost non-existent. This is exactly why the ninth WTO Ministerial Conference (scheduled to take place in Bali this December) is so important. The conference represents a real opportunity to re-establish the preeminence of a multilateral trade forum, against a backdrop of ever-proliferating RTAs.

According to the current agenda, the Bali ministerial conference is not scheduled to conclude any landmark deals or to address any fundamental issues, notably the internal governance of the WTO. Instead, it is aiming to deliver incremental progress across a number of areas, including trade facilitation, agriculture, aid, IT and trade-related intellectual property rights (TRIPS). Such minor developments, if achieved, would not prove hugely controversial. The true significance of Bali, however, lies in its negative potential – if it fails to deliver even the relatively minor developments anticipated, the wider economic community may see Doha as entirely moribund, with the WTO multilateral platform increasingly considered largely irrelevant when it comes to shaping future trade rules and provisions.

Chart: G20 imports covered by new restrictive measures since 2010
 

Mega-RTAs: a step closer to regionally-protective trade blocs?

The perceived impotence of the WTO and the inertia of the G20 are likely to result in the further proliferation of RTAs. According to the WTO4, there are already more than 300 such agreements in place. The impact of RTAs has long been a controversial issue, with no real consensus as to whether they represent stumbling or building blocks in terms of global trade growth.

On the one hand, RTAs clearly contribute to reducing intra-group trade barriers and promoting trade among the individual signatories. On the other, the growing number of rules and regulations created as a result of various RTAs are difficult for companies, especially small and medium enterprises (SMEs), to navigate. In particular, with the ever expanding number of RTAs providing multiple rules of origin, competing tariff schedules, exclusion lists, rules and standards, the "noodle bowlf of trade regulations has become highly confusing. As noted by Andrew Sheng, President of the Fung Global Institute, in his interview with this edition of Trade Quarterly (for more details, see Can global trade survive protectionism?), while "the TPPs – and [other RTAs] so on – represent one way of moving forward … [however] the more complex the rules and regulations, the tougher it is for SMEs to move into world trade." 

Chart: Rising number of RTAs since 2000
 

The departing WTO Director-General, Pascal Lamy, recently remarked that "none of these bilateral, pluri-lateral, mini or mega [RTA deals] will ever lead to an agreement to reduce trade-distorting agricultural subsidies … [and] the deals seem to be ‘a coalition of the willing'." 5 The real threat is that these ‘coalitions' have been formed primarily to discriminate against non-members. The TPP, for instance, has been criticised by some international commentators as being formed more on geo-political grounds than in line with economic or trade requirements (for more details, see The Trans-Pacific Partnership: the challenges and opportunities for Hong Kong and the mainland).

Leverage on China's rebalancing …

These developments are particularly worrying for the mainland, which has benefitted hugely from an open multilateral world trade system, especially since its WTO entry in 2001. Between 2000 and 2012, the mainland's total trade increased by 715%, making it the world's largest merchandise exporter and the second largest importer (in gross value terms). As a result, its overall share of world trade has grown hugely, rising from 1% in 1980 to 10% in 2011.

Such success, though, has had its costs. Currently, the mainland is the subject of the third-largest number of trade disputes filed with the WTO. There are currently 31 such cases outstanding, mostly filed by the US (15) and the EU (7). With trade barriers increasingly moving from tariff to non-tariff requirements, such as sanitary standards, government procurement, intellectual property rights, and environmental and labour regulations, the mainland is only likely to face still more trade restrictions in the future. Should the current Doha round collapse and further exclusive trade blocs be established, things will certainly become worse, especially if mainland China is excluded from some of the mega-RTAs, most notably the TPP agreement.

Table: Trade disputes filed with the WTO
 

One tactical response for China is to "get inside the bloc". This, though, is of course subject to the consent of bloc members and, as a result, may not be feasible. Another option is to woo or develop competing RTAs in order to dilute, circumvent or counter any potential trade blocs. Neither approach is ideal, however, and both will run the decided risk complicating the "noodle bowl" of global trade rules still further.

This Balkanisation of world trade only increases the urgency for the mainland to rebalance its economy and shift its development strategy from export-driven to domestic demand-led. Accordingly, Hong Kong also needs to adapt both to the new global trade landscape and the mainland's changing development strategy. Rather than facilitating China's exports and channelling investment into the mainland, Hong Kong has to take on the additional and increasingly important role of supporting the mainland's domestic market development. To this end, it needs to facilitate the mainland's extended access to foreign technology, resources and markets through outward investment. 

… and Hong Kong's established and competitive services sector

As a late starter when it comes to RTA-partnerships, Hong Kong has much catching up to do. Among the world's top 10 traders, Hong Kong is, decidedly, the odd man out. Unlike the other leading trade locations, all of which have RTAs in place or under negotiation with at least six or more of the other top 10 players, Hong Kong is a signatory to just one bilateral agreement – the Closer Economic Partnership Arrangement (CEPA), which regulates its trade with the mainland. Outside the world's top 10 traders, Hong Kong only has concluded free trade agreements with the four-member European Free Trade Association (EFTA), which has Iceland, Liechtenstein, Norway and Switzerland as signatories, and with Chile and New Zealand. It has also just entered into a new round of negotiations with the ASEAN bloc.

Given its free port status, Hong Kong may seem at a disadvantage when it comes to negotiating with its trade partners, especially as it has little to offer in terms of tariff cuts. This is not necessarily the case, however, with RTAs now increasingly focussing on non-tariff barriers, services, investment and other economic issues. This development could give Hong Kong a distinct advantage when it comes to RTA negotiation and networking, given the territory's strengths in financial and business services and its widespread global and regional connections, especially in terms of the Chinese mainland.

RTAs among the world’s top 10 traders, 2013
 

Hong Kong's negotiating position has also been strengthened by its rapidly growing bilateral network of investment protection and double taxation avoidance agreements, all of which help to tackle some of the most important issues in service trade and cross-border investment. Currently, Hong Kong has investment promotion and protection agreements (IPPA) with 17 economies, and double-taxation agreements with 30. These agreements currently cover almost all of its major economic trading partners.6

The value of establishing RTAs with Hong Kong will be clear to the many countries interested in accessing the city's sophisticated services market or using its competitive service platform to target the mainland or other overseas markets. In order to navigate the fragmenting global trade system, Hong Kong needs to sharpen the competitiveness of its service sector and seek to better leverage its strategic linkages with the rebalancing mainland economy.

Remarks: 
 

1 Trans-Pacific Partnership currently includes 12 members: the US, Canada, Mexico, Chile, Peru, Japan, Australia, New Zealand, Singapore, Brunei, Malaysia and Vietnam.

 

2 WTO, Report on G20 trade measures, 17 June 2013.

 

3 WTO, Report on G20 trade measures, 17 June 2013.

 

4 WTO, Annual trade policy review report, 29 November 2012.

 

5 Financial Times, ‘WTO chief takes swipe at regional and bilateral talks', 19 July 2013.

 

6 For updated list of IPPA and double taxation avoidance agreements, please refer to the following official websites: www.tid.gov.hk/english/trade_relations/ippa/index.html, http://translate.legislation.gov.hk/gb/www.legislation.gov.hk/table6ti.htm.

 

Content provided by Picture: Nicholas Kwan
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