The loss of multilateral co-operation in trade could result in global exports falling by more than a quarter, according to a report from the World Trade Organization (WTO).
In its annual World Trade Report, the WTO outlined three scenarios for the future of global trade that could play out between now and 2050, and urged WTO members to adapt the current rules-based trading system rather than move away from it.
The current multilateral trading system has been in place for just under eight decades and is based on the principle that governments usually benefit if they co-operate and keep markets more open, rather than impose restrictions such as tariffs.
The most-favoured-nation (MFN) system ensures countries don’t discriminate between trading partners by offering better terms to just one country, because these terms must be extended to all 166 WTO members.
Yet the system has been tested in recent years due to shifts in economic power, an increase in government interventions, changes driven by digitalisation and climate change, and geopolitical tensions, the report said.
In one scenario modelled by the WTO, dubbed a “free trade agreement (FTA) world”, where a range of FTAs for specific country groups replace multilateral co-operation, exports and GDP could decline by 26.9% and 6.9% respectively, the WTO found.
A “geo-fragmented world”, where “trade co-operation is organised around geopolitical blocs”, could trigger decreases of 18.6% in exports and 5.1% in GDP worldwide.
By contrast, a stronger multilateral framework could increase global GDP by 2.9% and global exports by 17.9%. In this scenario, there would be “broader market-opening commitments”, multilateral rules for digital trade, a larger WTO membership and a framework that addresses how trade openness can coexist with security concerns.
This option would be the most beneficial one for least-developed countries, the WTO added, providing up to 7.7% growth in GDP due to reductions in tariffs and other trade costs.
High-income economies could also see gains in GDP of around US$ 1.7tn in 2023 dollars thanks to lower trade costs for services.
“The challenge for WTO members is to adapt rules-based co-operation to a more integrated, multipolar and diverse global economy while preserving the openness, predictability and fairness that have underpinned the system’s success,” the organisation said.
It highlighted other benefits of multilateral co-operation, which include limiting dispute escalation and protecting smaller economies “from the full force of unilateral trade measures and power-based bargaining”.
The report also noted that around 72% of all global merchandise trade still uses the MFN tariff terms for all WTO members.
While members have broadly agreed that reforms to the current system are necessary, they are yet to agree on what this would look like.
The WTO said the report was not a “blueprint” for reform, but a way to flag areas where adaptation was likely needed.
These include better co-ordination on digital trade and AI policies, as well as on the interoperability of environmental measures and on finding “flexibilities to protect national security, while preserving the benefits of the rules-based trading system”.
The WTO’s director-general, Ngozi Okonjo-Iweala, said: “The global trading landscape has changed significantly but the founding logic of the system, that all economies are better off co-operating rather than acting unilaterally, remains as relevant today as ever.
“WTO members are now engaging actively on reform in full recognition that the status quo is not an option. The multilateral trading system has been repaired and renewed before, and I believe it can be again.”
Discussing the report, James Reynolds, group chief executive of credit insurance broker BPL, said: “Critically, in what the WTO describes as a more ‘geo-fragmented world’, we may not simply see a slowdown in trade, but that trade becomes more concentrated among those able to absorb the additional risks.
“At a time when the global economy urgently needs levers to facilitate trade and growth, the priority should be finding ways to manage these complex risks efficiently across borders.”
The launch of the report took place on the first day of the WTO’s Public Forum, which is being held this week in Geneva and brings together thousands of participants to discuss the future of trade.
Earlier this month, economists from the WTO and the International Finance Corporation found that market volatility and uncertainty tend to reduce the availability of bank-led trade finance, with the effects particularly acute in developing regions.
