Risks and opportunities seen in trade fragmentation

BANGKOK, Thailand – While some opportunities are seen for the Southeast Asian region brought by fragmented trade arrangements, the World Trade Organization (WTO) emphasized the need to be mindful of the risks brought by the fragmented arrangements.

“In terms of your specific region, there’s an opportunity also in the sense that one industry is moving out of China, you know, some of that kind of naturally, simply, as a natural cause of things,” WTO chief economist Ralph Ossa said during the outreach for Southeast Asia and Pacific journalists organized by the WTO in Bangkok, Thailand.

“I mean that’s what happens if countries get richer and their wages survive and so on. And some industries move out to other destinations. So in that sense, that’s an opportunity,”he added.

Ossa, however, pointed out that there are risks to fragmented trading arrangements looking at the bigger picture.

“I think we’re all relying on an open and non-discriminatory that also (are a)rules based trading system, and specifically smaller countries that cannot really assert themselves in a power based trading system. I think, well, it could benefit from that... you can perhaps take the small gains, but you’re mindful of the big risks. And so the big value that I think the multilateral trading system provides (is to) particularly to economies that are not huge,” he said.

WTO director-general Ngozi Okonjo-Iweala earlier emphasized the risks of trade fragmentation amid the rise of conversations on re-shoring and friend-shoring, saying that fragmentation would be costly for all economies, specifically poorer ones.

“WTO economists estimate that if the global economy decouples into two self-contained blocs, long-term global GDP (gross domestic product) would decrease by at least five percent – worse than the damage from the financial crisis of 2008-09. The IMF (International Monetary Fund) has found that some developing economies would in fact face double-digit welfare losses.

“Your region, where global supply chains are an important contributor to its economic success, would no doubt be also impacted,”she said, referring to the Southeast Asia and Pacific region.

Iweala stressed the need for strategic cooperation as strategic competition is a reality

Ossa explained that the five percent global GDP decline forecast was based on a simulation conducted by the WTO.

“What we really looked at (was) the worst case scenario of a kind of global fragmentation, fragmentation of the world economy into two rising blocks, like an Eastern bloc, and a Western bloc. And that’s the worst case scenario.

“It’s not it’s not that we’re predicting that you know, GDP is necessarily going to fall by five percent. We’re just kind of putting a number on the table to illustrate, I think, what’s at stake,” he added.

Further elaborating on the fragmentation issue, Ossa explained that there has been a drastic change in the narrative surrounding globalization, with economic interdependence being questioned.

“We do increasingly see policies put in place that are kind of accelerating this fragmentation. But then when we look at the actual data, and what has happened so far, we don’t see that much,” he added.

Iweala earlier emphasized the important role of the Southeast Asia and the Pacific region in global trade, especially in dealing with certain issues the world is facing today.

“Your region is an important player in global trade and central to some of the issues which we are now grappling with at the WTO,”Iweala said in a pre-recorded message at the Outreach for Southeast Asia and Pacific journalists organized by the WTO in Bangkok, Thailand.

“As the world navigates the polycrisis of climate change, pandemic, economic slowdown, inflation, food insecurity, and depletion of the oceans’ resources, we need multilateral cooperation and solidarity more than ever,” she added.