© Springer International Publishing Switzerland 2015Christoph Herrmann, Bruno Simma and Rudolf Streinz (eds.)Trade Policy between Law, Diplomacy and ScholarshipEuropean Yearbook of International Economic Law10.1007/978-3-319-15690-3_8
Trade in the XXI Century
International Trade Centre, 54-56 Rue de Montbrillant, 1202 Geneva, Switzerland
Trade Era: A World of Transformation and Permanent Rebalancing
If some Rip Van Winkle1 with a penchant for geopolitics had gone to sleep in 1989—about halfway through Horst Krenzler’s tenure as the European Commission’s Director-General for External Relations—he would awaken today to a startlingly different world.
While security tensions on Europe’s eastern fringes might seem reassuringly familiar, he would no doubt be astonished to learn that the United States’ only real rival for political and economic pre-eminence was not Japan, a reformed Soviet Union, or even the European Union, but China.
Having known a world economy dominated by the traditional industrial powers, he would be told that developing countries last year produced the majority of the world’s goods and services for the first time since the nineteenth century. To his astonishment, he would notice that many of these goods and services were produced not within individual countries, but across multiple nations and even continents.
A heartening development would be the improvement in life prospects for much of humanity. Where lives free of deprivation and preventable disease once seemed achievable only for a fortunate minority, he would see that decent living standards are now within view for the majority of the world’s population. Extreme poverty could be virtually eradicated within decades.
A key enabler of this extraordinary transformation has been the open global economy.
As our flabbergasted Rip Van Winkle learned more about the new economic landscape, some of the changes would start to make sense. Even before his long sleep, he would have noticed how trade opening and shipping containerisation had dramatically reduced the costs of moving merchandise from one place to another. South Korea, Hong Kong, and some other East Asian countries were successfully using export markets to emulate Japan’s rapid industrialisation. China, too, had been experimenting with market-oriented policies for just over a decade, with increasing success.
The continuation and spread of these two trends—the adoption of market-oriented policies; and using world markets as a source of demand, technology, and ideas—have driven the fastest growth and poverty reduction in human history.
As we look further at how the exchange of goods, services, and ideas has transformed our world—and how our evolving world has transformed the way we trade—it makes sense to look back at what has remained constant.
Trade Is as Old as Humankind
Trade is only slightly younger than civilisation itself. Not without reason did Adam Smith write that “the propensity to truck, barter and exchange one thing for another is common to all men”2: the archaeological record suggests that as soon as our ancestors managed to accumulate surpluses beyond subsistence needs, they sought to trade them for something that brought them greater utility or pleasure.
Ancient Mesopotamian tablets register early commercial exchanges. Nearly 5,000 years ago, the Sumerians were making bronze, which would have required them to import tin to mix with locally abundant copper. The Mediterranean basin is scattered with remnants of Greek amphorae, which bear witness to the active Bronze Age trade in precious oils, wines, and spices transported in the oval, two-handled clay storage jars. As the writer William Bernstein recounts in A Splendid Exchange, his tremendously entertaining history of trade and our world, intrepid Greek sailors were riding the Indian Ocean trade winds from the Red Sea to southern India and beyond more than 2,000 years ago.
Even the multi-continental value chains that have become a hallmark of modern manufacturing production are not really new. The journalist Nayan Chanda tells us that a thousand years ago, a regular triangular trade had already evolved in which African ivory was shipped to India, where skilled craftsmen carved it into jewellery that was exported through the Middle East, ultimately to adorn members of the courts of Europe.
To grasp the extent to which trade reshaped our world long before we became reliant on electronic gadgets manufactured in far-flung locations, we need look no further than our dinner plates. Horst Krenzler would surely have struggled to picture German tables without Kartoffelsalat or potato dumplings. Nor can we easily imagine Italian cuisine without tomatoes, Indian curries without chillies, English breakfasts without tea, or American food without the bread and beef combination known as a hamburger that has proven so popular around the world. Yet each of these foods was transported from one continent to another within the past 500 years.
At its best, this is what trade has always been about: enhancing our living conditions, reaching out to new frontiers, interacting with each other to establish common references about what we share and what we value.
To be sure, trade has had its dark sides as well—none darker than the slave trade, which for over two centuries in the Atlantic region was closely intertwined with commerce in sugar, rum, and other merchandise. The example of the slave trade demonstrates the importance of the terms and rules under which trade is conducted. It also underscores the fact that civil society engagement with the governments and companies that have dominated trade and trade policymaking is critical to ensure that these rules continue to reflect evolving notions of justice and human dignity.
Trade Changed the World, and the World Changed Trade
Today’s open global economy is no accident. It was painstakingly rebuilt from the wreckage of the years between 1914 and 1945, and entrenched in an institutional foundation through successive rounds of multilateral trade liberalisation under the General Agreement on Tariffs and Trade. The “most-favoured nation” principle meant that trade access was not conditioned upon political considerations. Coordinated tariff reductions constrained beggar-thy-neighbour trade policies, and made it harder—though not impossible—for governments to protect influential domestic interest groups.
The multilateral trading system has been successful on a scale that its creators could not have fathomed. Global trade increased 27-fold between 1950 and 2008, three times more than the growth in global gross domestic product (GDP). The value of world trade in goods and services passed the US$22 trillion mark in 2013. Trade has become part of the fabric of economic activity. The trade to GDP ratio for the world as a whole was 60 % in 2012, up from some 25 % in the 1960s. Nearly half of world merchandise trade is in intermediate inputs, rather than in finished products.
Great Convergence in Rebalancing the World Economy
With an end of “the great divergence” with China, to use the terms of Kenneth Pomeranz,3 explaining the reasons why industrial revolution spurred in Europe and not in Asia, East Asian countries have then sustained the highest rates of real growth since the mid-1960s, which has been followed by the emergence of other new powers denominated as BRICS and now as MINTs (Mexico, Indonesia, Nigeria and Turkey). Since the mid-1960s, the average per capita incomes in the Asia region have been growing at 5 % in constant US dollars. Incomes per capita in the last 20 years have tripled, with great impact on poverty alleviation at a global level.
This has led to a new situation, where the multipolar world is not a slogan anymore but a reality in reshaping and rebalancing the influence of each nation on the global stage, and offering for the first time in human history the chance to eradicate extreme poverty at a global level.
Developing countries are trading more overall and trading more with other developing and transition economies. High-income countries have decreased steadily as export markets, as South–South commerce expands. Nearly half (45 % in 2012) of merchandise trade (exports plus imports) is between developing and transition economies. This can be explained by more trade in new markets with new products and with the support of new services.
Open Global Economy Enabled Rise of Global Value Chains
The fall in transport and communication costs has offered many opportunities to split and spread the production process across different countries as a function of their comparative advantage. This is how supply chain trade is born; having products processed and services performed in multiple countries, counting each step to add value, making it dependent on cross-border movement and even more interdependent with investment. Investment has then become a key factor to sustain trade more for transfer of knowledge and technology rather than for transfer of capital. This has led to a major shift in trade patterns, making supply chain processes associated with huge amounts of FDI the main factor for expanding networks of production, distribution and consumption throughout the world, the so-called “global value chain” phenomenon. This situation is likely to prevail, although its nature and extent may change.
Nowadays imports make up an increasing and often an indispensable share of the total value embodied in a given product, ranging from 30 to 50 % in world average and sometimes much more for small open economies that are connected to supply chain. This trend has been very well summarised as “made in the world”, which is now much more than making, including designing, marketing, sharing knowledge and ideas in conceiving what the world is producing, and constantly pushing to aggregate more services to supply chains in to the “servicification” of manufacturing.