World Economy

Rising Protectionism Will Disrupt Economic Bridges

Christine Lagarde says multilateral trading system needs to be updated as health of global economy depends on trade
Services trade has been growing relatively fast and now accounts for one-fifth of global exports.
Services trade has been growing relatively fast and now accounts for one-fifth of global exports.

IMF Managing Director Christine Lagarde warned that a surge in trade protectionism could sap the momentum of the global economic upswing.

“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,” Lagarde said Monday, according to the prepared remarks of a speech in Portland, Oregon. “And yet, rising protectionism could stop this positive momentum in its tracks,” Bloomberg reported.

Her remarks come as the US and China continue talks aimed at defusing a trade dispute between the world’s two largest economies. President Donald Trump has threatened to slap tariffs on as much as $150 billion in Chinese goods, while China has vowed to retaliate on everything from American soybeans to airplanes.

“We at the IMF are keenly aware of what could happen when trade gets interrupted, when economic bridges are damaged,” she said, noting the International Monetary Fund was founded more than 70 years ago “precisely to help prevent a return to the self-defeating policies of the Great Depression" such as protectionism.

The IMF last month predicted the world economy’s strongest upswing since 2011 will continue for the next two years. But it warned that growth will fade as central banks tighten monetary policy, and it cautioned that the expansion could be derailed if countries resort to tit-for-tat trade penalties.

Lagarde recommended several steps to improving the global trading system, including expanding trade in services, increasing productivity and protecting people hurt by trade and technology.

“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,” she said.

Services Trade

Services trade can unlock the full potential of "mini-multinationals", Lagarde said, underlining that by reducing trade barriers and increasing digitalization, trade services could become the main driver of the global trade.

Noting that services trade has been growing relatively fast and now accounts for one-fifth of global exports, she said that 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%, she said. "We believe that by reducing these barriers and increasing digitalization, services could become the main driver of global trade," Lagarde emphasized.

Among the main beneficiaries would be 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," she said.

Unlocking Potentials

"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," Lagarde said.

Today, service providers of all kinds are benefiting from a world that is becoming more interconnected and smaller, Lagarde said noting that she believes that the Wealth of Nations in the 21st-century could be built on trade in services.

She identified higher productivity, and greater inclusiveness as other building blocks of better trade and called for adapting the multilateral trade system.

"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," she said.

Following WTO Rules

"In other words, even as we fix the economic bridges, we must stick to the basic principles of engineering," she said. This means steering clear of protectionism, because import restrictions hurt everyone, especially poorer consumers. It means eliminating unfair trade practices—and leveling the playing field. It means trading by the rules—the WTO rules that all 164 members agreed upon, Lagarde asserted.

Observing that many governments are struggling with major issues that do not currently fall squarely within WTO rules like various state subsidies, restrictions on data flows and the protection of intellectual property, Lagarde said to address these issues, one 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, she observed.  

Lagarde said the new 21st-century trade deals should be designed to facilitate data flows while protecting data privacy, promoting cyber security, and ensuring that financial regulators can access data as needed without stifling innovation.


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