VEERING away from trade integration, re-shoring production and boosting self-sufficiency may not essentially translate to economic resilience, the World Trade Organization (WTO) said.
In its World Trade Report 2021, the intergovernmental organization said that reducing trade and promoting national self-sufficiency can hurt the economies in the long term as these will lead to price increases of goods and services. In addition, such moves are seen to limit their access to products, components and technologies.
“While national supply chains can reduce exposure to risks emanating from other countries, they increase domestic vulnerability to supply cut-offs and demand shocks resulting from domestic disasters,” it explained.
After all, the WTO said economic self-sufficiency is an “illusory goal.”
For example, it noted that modern production of technology requires inputs from different countries. The same is for food production, which depends on imports of fertilizers and farm machinery, among others.
“Export restrictions adopted to secure national supplies in response to a crisis can often lead to trade retaliation from other countries, as well as dwindling imports and escalating conflicts, leaving all those concerned less well-equipped to cope with and recover from the shock that motivated the trade restrictions in the first place,” WTO said.
These restrictions may adversely affect investment in essential goods in the long run, WTO said, noting that lower price increases during heightened demand may discourage the producers.
What the countries should strive for instead is trade diversification to boost cooperation and reduce macroeconomic volatility, the WTO said.
The international body explained that promoting further trade integration and diversification both helps countries to have additional sources during domestic supply shortage and manufacturers to have more options for sourcing inputs.
“Diversification across different trade routes and across different available modes of transportation also play an important role in economic resilience,” it explained, citing the current bottlenecks with shipment deliveries due to the shortage of vessels in pandemic.
WTO explained that trade diversification can be further adopted given the supporting policies, citing transparent and predictable business regulations and investment rules that can bring down costs and risks.
“Lowering tariffs and other barriers to trade and improving the efficiency of trade facilitation can reduce trade costs and boost diversification,” it added.
Limiting trade restrictions, in addition, can improve the quality of the product offerings, the intergovernmental organization said.
“Creating policies to foster competition can spur innovation, ultimately leading to more export diversification via increases in firm productivity,” it continued.