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Trade

COVID-19 and the ‘zoom’ to new global value chains

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One World Trade is seen behind a sign that flashes an emergency alert, as the coronavirus disease (COVID-19) outbreak continues in New York City, 23 March 2020 (Photo: REUTERS/Mike Segar).

Author: Christopher Findlay, ANU, Fukunari Kimura, Keio University and Shandre Thangavelu, University of Adelaide

COVID-19 has sent shock waves running up and down global value chains (GVCs). Social distancing and high levels of uncertainty have caused a significant drop in demand for goods, with GVCs carrying the economic shock through supplier countries.

Recovery from the shock is anticipated once COVID-19 cases fall below a certain level, but financial fragility are likely to linger from the large negative wealth effects caused by the pandemic. Several stages of fiscal and monetary policy stimulus are likely to be introduced over the coming months across many countries.

On the supply side there are significant disruptions to GVCs in the immediate term caused by lockdowns, suppliers shutting down and more restrictive border controls. The breakdown of the logistics sector has led to disruptions spreading across countries. Disruption to regular shipping channels has led to a surge in demand for air freight.

GVCs have made important contributions to employment, productivity and incomes for both developed and developing countries. They have provided for greater knowledge sharing and supported the growth in innovation that we have experienced over the past two decades. GVCs continue to benefit the global community.

In the longer term, a heightened perception of vulnerability to disruption will lead to changes in GVCs. Responses include duplication and higher levels of stockpiling. There could also be architectural changes including redesigning products to reduce the specificity and raise the substitutability of inputs in sourcing and having fewer complex loops, where input suppliers use final products from downstream as inputs. The addition of new services, such as vulnerability analysis and chain management, is also highly likely.

All of these changes are particularly difficult in the current environment as they require time and funding. But a rolling pandemic creates the scope for China, now emerging from their pandemic, to lead the way in time for the return of demand in the rest of the world.

Currently there is also a drop in demand for services as people stay home and businesses shut down. The lockdown on movement directly and most deeply affects sectors that involve GVCs including tourism, hotels, restaurants and air transport. This is not likely to be made up for by larger later purchases. But substitution to new forms of services is possible through the application of digital technology — health services providers now offer more telemedicine, for instance.

On the supply side, more people are now working from home, schools and universities are being delivered online, and business meetings are shifting to video conferences. Firms are learning how to do things differently. In a digital environment, it is a short step to organise procurement across borders. Trade in services will increase as this continues to develop, creating new opportunities for suppliers in developing countries.

Given the dynamic nature of GVC networks, it is possible that a transformation of GVC activities in goods and services will lead to both greater opportunities and resilience. But policy reform supported by regional cooperation will be critical to the realisation of stronger GVCs. This reform must centre around free trade, developing digital infrastructure and creating international regulatory coherence in digital trade protocols and tax to encourage the use of digital supply networks.

A joint commitment to avoid protectionist responses — including export controls and tariffs, particularly in medical equipment — may greatly increase the ability of nations to respond to the pandemic, as affirmed by a group of APEC Trade Ministers.

The capacity and connectivity of digital infrastructure across borders is important. Digital infrastructure capacity includes the soft skills required for its application. The first step is to use the databases on digital restrictiveness that are currently available to determine digitally-constrained economies and consider them against others that have been extremely successful in digital infrastructure investment.

Virtual platforms or ‘digital supply networks’ will become more important for matching providers and users and providing assurance to both parties. In this respect, accelerating progress on agreements on digital trade protocols and taxation is critical to support these transformations.

Tackling unnecessary policy impediments to value chain operations, such as a lack of alignment…

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Trade

Fixing fragmentation in the settlement of international trade disputes

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Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.

Fragmentation in Global Trade

Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.

Challenges with WTO Dispute Settlement

The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.

The Path Forward for Global Trade

Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.

Source : Fixing fragmentation in the settlement of international trade disputes

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Trade

WTO ministerial trading in low expectations and high stakes

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The WTO’s 13th Ministerial Conference is set to focus on e-commerce transparency, investment facilitation, and admitting new members. However, progress may be hindered by disputes, especially regarding fisheries subsidies.

The World Trade Organisation’s 13th Ministerial Conference

The World Trade Organisation’s (WTO) 13th Ministerial Conference is set to take place in Abu Dhabi on 26–29 February, with expectations of deals on electronic commerce transparency, investment facilitation for development, and the admission of Timor Leste and the Comoros as WTO members. Despite these positive developments, the expectations are relatively modest compared to promises made at the 12th Ministerial Conference, which included addressing fisheries subsidies and restoring a fully functioning dispute settlement mechanism by 2024.

Challenges in Dispute Settlement and Agricultural Trade Reform

However, challenges remain, especially in the deadlock of dispute settlement since December 2019 due to a US veto on the appointment of Appellate Body judges. Progress in restoring the dispute settlement mechanism has stalled, and discord continues regarding India’s grain stockholding policy as a potential illegal subsidy. Restoring a fully functioning dispute settlement mechanism hinges on addressing US concerns about perceived bias against trade remedies in relation to China’s state subsidies.

Geopolitical Tensions and the Future of Trade Relations

The likelihood of reaching agreements amid geopolitical tensions between Western democracies and China appears slim, with issues surrounding subsidies and global supply chains causing rifts in trade relations. As nations focus on self-reliance within the global value chain, opportunities for trading face obstacles. Advocacy for open markets and addressing protectionist sentiments remains crucial for fostering resilience to external shocks and promoting economic growth.

Source : WTO ministerial trading in low expectations and high stakes

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Trade

Getting Vietnam’s economic growth back on track

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Vietnam’s economy grew 8% in 2022 but slowed in 2023 due to falling exports and delays in public investments. The economy’s future depends on structural reforms and reducing dependency on foreign investment.

Vietnam’s Economic Roller Coaster

After emerging from COVID-19 with an 8 per cent annual growth rate, Vietnam’s economy took a downturn in the first half of 2023. The drop was attributed to falling exports due to monetary tightening in developed countries and a slow post-pandemic recovery in China.

Trade Performance and Monetary Policy

Exports were down 12 per cent on-year, with the industrial production index showing negative growth early in 2023 but ended with an increase of approximately 1 per cent for the year. Monetary policy was loosened throughout the year, with bank credit growing by 13.5 per cent overall and 1.7 per cent in the last 20 days of 2023.

Challenges and Prospects

Vietnam’s economy suffered from delayed public investments, electricity shortages, and a declining domestic private sector in the last two years. Looking ahead to 2024, economic growth is expected to be in the range of 5.5–6 per cent, but the country faces uncertainties due to geopolitical tensions and global economic conditions.

Source : Getting Vietnam’s economic growth back on track

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