Creating a better global trade system

I would like to thank Derrick Olsen for the kind introduction and thank WorldOregon for hosting this wonderful event today. 

I am grateful for the opportunity to talk about the future of trade, especially here in Portland—which I think is a fitting venue. 

Why? Because global trade has a lot in common with the famous bridges across the Willamette River. Some are old and some are new. Some are in good shape, while others are creaking. Some are nondescript, while others are exceedingly beautiful. 

Despite their differences, all these bridges are getting the job done—connecting communities and businesses and encouraging the flow of products, capital and ideas. This is, in many ways, the story of global trade. 

Over the past generation, building economic bridges between countries has helped reduce by half the proportion of the global population living in extreme poverty. It has reduced the cost of living and has created hundreds of millions of new jobs with higher wages. 

In the United States alone, one in five jobs today is supported by international trade in goods and services.

In that respect, trade is exceedingly beautiful—but there are challenges. We know that trade has not worked for everyone and that some parts of the multilateral trade system are creaking. The current trade tensions are, in fact, a symptom of these underlying challenges. 

Addressing these issues is one of the key challenges of our time. 
The stakes are high, including here in Oregon where one in five jobs is supported by trade. Think of big companies such as Intel and Nike. And think of the thousands of small businesses that thrive in the global marketplace thanks to e-commerce and other forms of digital trade. 

The stakes are high because the health of the global economy depends on healthy trade flows. The rebound in trade has recently contributed to stronger global economic growth. And yet, rising protectionism could stop this positive momentum in its tracks. 

We, at the IMF, are keenly aware of what could happen when trade gets interrupted, when economic bridges are damaged. 

More than 70 years ago, the IMF was set up precisely to help prevent a return to the self-defeating policies of the Great Depression—including protectionism. 

A key part of our mandate is to “facilitate the expansion and balanced growth of international trade”. 
That is why we are deeply engaged in promoting international cooperation and dialogue on this very issue. 

The new era 
Of course, what is often lost in the current discussions is the fact that we are entering a new era of trade—a world in which data flows are becoming more important than physical trade. 

Think about it: between 1986 and 2008, global trade in goods and services grew at more than twice the rate of the global economy. In recent years, however, growth in this more traditional type of trade has barely exceeded global gross domestic product (GDP) growth. 

At the same time, digital flows have been booming. According to Cisco, the amount of cross-border bandwidth used grew 90-fold between 2005 and 2016, and is expected to grow an additional 13-fold by 2023. 

This is not just about video streaming, Skype calls and social media posts. 

It is about the role of data in boosting other flows, especially by making services more tradable–—from engineering, to communications, to transportation. 

It is also about greater efficiency. McKinsey estimates that companies can cut losses on goods in transit by about a third with tracking sensors on shipments. 

In many ways, the future of trade is the future of data. 

This is a huge opportunity for policymakers to build new economic bridges, to create a better global trade system. 

With this in mind, I would like to touch on two issues: 

• What are the key building blocks of better trade? 
• And how can we adapt and improve the multilateral trade system? 

1. Key building blocks of better trade 
Let me start with the building blocks of better trade. 

a) More trade in services 
One is the expansion of global trade in services. 

The good news is that services trade has been growing relatively fast. It now accounts for one-fifth of global exports. And according to some estimates, half of the global trade in services is already driven by digital technology. 

That said, this is an area where trade barriers are still extremely high—equivalent to tariffs of some 30 to 50 percent. 

We believe that by reducing these barriers and increasing digitalization, services could become the main driver of global trade. Who would be the main beneficiaries? 

• Certainly the US and other advanced economies—because they are globally competitive in many service sectors, especially financial, legal and consulting. 
• But also developing economies such as Colombia, Ghana and the Philippines—because they are promoting growth in tradable services, such as communications and business services. 

Above all, services trade can unlock the full potential of the “mini-multinationals”. 

These are the millions of small businesses that are seeking to expand into the global marketplace. It also includes individuals who are using digital tools to leverage their skills and opportunities. 

Think of a Portland-based doctor who remotely monitors her patient in Panama City or the piano teacher in Moscow using Skype to teach students in Montreal. 

All this would surprise Adam Smith, who questioned the economic value provided by “lawyers, physicians, musicians and men of letters of all kinds.” 

Today, service providers of all kinds are benefiting from a world that is becoming more inter-connected and smaller. 

Indeed, I believe that the Wealth of Nations in the 21st century could be built on trade in services. 

b) Higher productivity 
This growth potential shows the importance of higher productivity—another building block of better trade. 

We know that by making services more tradeable, digitalization can boost productivity and living standards. 

We also know that digital technology can lift manufacturing productivity. 
For example, increasing automation is making it easier for companies to repatriate some of their operations—effectively, reversing some of the “outsourcing” and “offshoring” of the past two decades. 

3-D printing could also prompt companies to move production closer to their customers, so they can take advantage of rapid prototyping and customization. 

These shifts could make supply chains shorter, more productive and—importantly—less carbon-intensive. 

They could also help rejuvenate manufacturing industries in many advanced economies, holding out the promise of more domestically-based factories with higher-paying jobs. 

But that is not the whole story. 
Digitalization will also intensify competition in global trade, pushing companies to boost their investment in new technologies and more efficient business practices. 

New IMF analysis [vi] shows that greater competition accelerates the diffusion of technology across countries and even the rate of innovation itself. This, in turn, helps lower prices for companies and consumers. 

One of my favourite examples is the 1971 edition of the Sears-Roebuck catalogue. One analyst simply compared the products listed in its pages with comparable modern-day items. 

He found that, after adjusting for inflation, products are significantly cheaper today—including an air conditioner that is more than 80 percent cheaper than its 1971 counterpart. 

Gains like that show the enormous benefits of building economic bridges. And yet, too many people continue to live in the shadow of these bridges. 

c) Greater inclusiveness 
That is why we need a third building block of better trade— greater inclusiveness. 
Consider the US manufacturing sector. Its share of GDP, adjusted for inflation, has been fairly constant since the 1940s. 

But its share of employment has significantly declined—largely because of technological change and to a lesser extent because of overseas competition, including from China. 

Of course, the digital revolution in trade will likely bring its own challenges—putting further pressure on those workers who are less well-equipped to compete —whether in advanced, emerging or developing economies. 

So what can governments do? 
They can better support those who are most affected by technology and trade. 
Many countries already offer various forms of unemployment insurance that could be combined with other tools. 

In the US, for example, there is scope to offer temporary income assistance as workers upgrade their skills. There is also room to increase mobility by providing relocation assistance and portable pension benefits. 

Meanwhile, most countries can do more to expand and improve their worker training programmes. For instance, experiences in Canada and Sweden show that on-the-job training is more effective than classroom learning. 

Good labour-market policies are important—but they are not enough. 

All countries need to reinvent their education systems for the digital age. This is not just about adding a few more coding lessons. 

It is about fostering critical thinking, independent problem-solving and life-long learning that can help people adapt to change. It is about investing in human capital. 

How can IMF help? 
At the global level, we analyse exchange rates and monitor global economic imbalances. 
And at the country-level, we work with all our 189 members on policies to help remove trade and investment barriers—encouraging more open economies where the private sector can thrive and create jobs. 

We strive every day to help our members gear up for the new era of trade. And we believe that for trade to improve, it needs to be more productive, more services-based and more inclusive—so that everyone can benefit. 

To achieve these objectives, trade also needs to be more internationally cooperative and more multilateral. This is the final way we can build better economic bridges. 

2. Adapting multilateral trade system 
Over the past 70 years, countries have worked together to create something that is truly remarkable—a system of rules and shared responsibility that has transformed our world. 

Over the past three decades alone, this multilateral system has been instrumental in lifting hundreds of millions of people out of poverty, while boosting incomes and living standards in all countries. 
Today, governments have an opportunity to build on the progress made so far and to adapt the system in this new era of trade. 

In other words, even as we fix the economic bridges, we must stick to the basic principles of engineering! 

This means steering clear of protectionism because import restrictions hurt everyone, especially poorer consumers. 

It means eliminating unfair trade practices—and levelling the playing field. It means trading by the rules—the WTO rules that all 164 members agreed upon. 

It also means being open to fresh ideas. What do I mean by that? 
We have already seen new or expanded WTO agreements in recent years—including on government procurement, information technology and trade facilitation. 

But many governments are struggling with major issues that do not currently fall squarely within the WTO rules. These include various state subsidies, restrictions on data flows and the protection of intellectual property. 

To address these issues, we could use “plurilateral” trade agreements—that is, deals among like-minded countries that agree to work within the WTO framework. 

There is also room to negotiate new WTO agreements on e-commerce and digital services. 
On these issues, one can take encouragement from the new comprehensive and progressive Trans-Pacific Partnership—or TPP-11, as it is called. For the first time in a broader trade agreement, TPP-11 countries will guarantee the free flow of data across borders for service suppliers and investors. 
Likewise, new 21st-century trade deals should be designed to facilitate data flows while protecting data privacy, promoting cybersecurity and ensuring that financial regulators can access data as needed without stifling innovation. 

The new deals should also take account of labour and environmental concerns. 

These challenges can only be addressed in a multilateral setting— where rules are respected, where countries work in partnership, where everyone is committed to fairness, where countries are accountable to each other and where disputes can be heard and settled efficiently. 

Conclusion 
On that note, let me conclude with something that the French philosopher Montesquieu said more than 200 years ago: 
“Trade is the best cure for prejudice. It is an almost general rule that, wherever there is good citizenship, there is trade, and that, wherever there is trade, there is good citizenship…Trade naturally leads to peace.” 

This continues to be true today. By building new economic bridges, by shaping a new era of trade, by removing barriers, we can foster more prosperous and more peaceful communities—here in Portland and across the world. 

(Above is a speech by International Monetary Fund Managing Director Christine Lagarde made at a WorldOregon event recently)