OECD Ministerial Council Meeting 2023

Economic Resilience: Trade Policies for Resilient and Sustainable Growth

Strengthening global economic resilience to current and future shocks

• Excellencies, ladies and gentlemen, it’s a pleasure to be here. Thank you, Secretary-General Cormann and Minister Badenoch, for the invitation.

I will be making the case that a strong and effective WTO is a vital tool for building resilience in an increasingly shock-prone global economy. I recognize the OECD’s commitment to open, competitive markets and a rules-based international trading system – and that’s why I want to congratulate Mathias and all of you for the new OECD trade strategy.

• Trade as shock absorber through one crisis after another: We have been through some serious shocks. And trade has been an important shock absorber and enabler of resilience in the wider economy.
  • COVID-19: In the first half of 2020, COVID-19 sent the global economy into free fall. In Q2 2020, the value of goods trade fell by 23% and services trade by 30% year-on-year.
  • But trade rebounded strongly after the lockdowns, and by early 2021 global merchandise trade was at all-time highs.
  • Over the course of 2021, merchandise trade grew almost twice as fast as global output, making external demand a key engine of economic recovery for countries around the world.
  • We remember how export restrictions exacerbated medical supply shortages during the frightening first weeks of the pandemic. But we tend to overlook how trade and cross-border supply chains quickly became a means for ramping up production of and access to personal protective equipment, pulse oximeters, respirators – and eventually vaccines.
  • The value of global merchandise trade shrank by 7.6% in 2020, but trade in medical products grew by 16%. Trade in textile face masks nearly quintupled.
  • The billions of COVID-19 vaccine doses that made normal economic life possible again were manufactured in supply chains cutting across as many as 19 countries. Without trade, the economic and health recoveries would have been much slower.
  • Ukraine war: Deep and diversified international markets have helped countries cope with the disruption to food and energy markets.
  • Ethiopia used to get nearly a third of its wheat imports from Ukraine. The war ended those imports, but Ethiopia was able to import wheat from the US and Argentina.
  • Imported LNG has helped Europe adjust to the loss of piped Russian gas.
  • Climate shocks: Trade helps countries recover from extreme weather events. When crops fail, due to drought, heat, cold, or flooding, the ability to import is vital.

• But if everything was fine, we wouldn’t be here: The shortages and bottlenecks of the past three years have exposed genuine vulnerabilities in the way supply chains are organized. Together with rising geopolitical tensions, this has spurred growing calls for re-shoring, near-shoring, and friend-shoring.
  • The question we are looking at is “what kind of policies should countries put in place to support resilience”?
  • Answering it requires us to correctly identify the underlying problems.
  • In light of the overall resilience I just described, it’s hard to argue that the fundamental problems are about trade per se, but rather an overconcentration in some trading relationships for certain vital products.

• Some reshoring looks inevitable. But letting this turn into a wider policy-induced retreat from trade would be costly and probably ineffective:
  • Costly because it would disrupt the $31.4 trillion worth of global goods and services trade in 2022, equivalent to roughly 30% of global GDP.
  • WTO researchers estimate decoupling into two separate economic blocs would reduce long-term real GDP by at least 5% – the IMF has estimated it at up to 7%. In comparison, the 2008–9 financial crisis lowered OECD countries’ real incomes by 3.5%.
  • Re-shoring could make supplies even more concentrated, increasing vulnerability to localized climate, disease, technical or political shocks. It could further reduce competition, pushing prices up and purchasing power down.
    • Entirely domestic production made US baby formula supplies less resilient to a factory shutdown last year. Supply resilience came from airlifting in supplies from abroad.
  • Moreover, reduced cooperation on trade would make it harder to tackle global commons problems – adding risks to growth and sustainability.
    • Food security will be impossible without open trade, especially as climate change lowers farm yields in former breadbaskets.
    • We won’t be able to get to net zero without open trade to move around green technology, components, and raw materials.

• A better path to resilience lies in deeper, deconcentrated, and more diversified global chains, achieved by bringing more countries and communities from the margins of the global economy to the mainstream. At the WTO we are calling this “re-globalization.”
  • Some deconcentration is already happening, as companies add suppliers in places like Southeast Asia, India, and Mexico to reduce costs and manage risks.
  • We need to take this process further, to encompass parts of Africa, Latin America and Asia that are still on the margins.

• Wider reglobalization would serve multiple goals at once:
  • Deeper, more de-concentrated supply networks for goods and services would be more resilient to shocks – and harder for any single country to weaponize. They would be more competitive, ultimately benefiting consumers through lower prices and greater choice.
  • Reglobalization would foster inclusion by boosting productivity and job creation in lagging regions.
  • Enabling more micro, small, and medium-sized enterprises and women-owned businesses to tap into value chains would enhance the socioeconomic inclusion impacts.
  • Fast-growing trade in digitally delivered services offers a lot of potential for women and young people. That’s why I keep saying that the future of trade is digital, services, green, and inclusive.

• In terms of policy frameworks, an open and predictable multilateral trading system is a prerequisite for reglobalization. That’s why shoring up the WTO and keeping it fit for purpose is so important.
  • You and your colleagues took important steps forward last June at MC12. We need to keep this up en route to MC13 in Abu Dhabi next February.
  • And perhaps a bit of the brainpower and financing currently being devoted to re-shoring could instead be put towards the policy reforms and supply side investments that would help bring marginalized places and people into global markets. The ROI in terms of resilience might well be higher.