Excellencies, ladies and gentlemen, good morning! It is a pleasure to share this panel with Vice-President Dombrovskis and Deputy Secretary General Lapecorella.
Let me begin by thanking the organizers for inviting me to this conference and to your beautiful city, particularly as it celebrates its 700th anniversary this year. I very much look forward to discovering more of the rich history and culture of Vilnius during my stay.
I would like to make a few points today. My first point is that in the past few years, we have been living through a trifecta of crises: the COVID-19 pandemic, the war in Ukraine, and the climate emergency. Throughout these crises, trade has been an important shock absorber and enabler of resilience in the global economy. In short, trade is an essential part of how the world addresses crisis.
In the first half of 2020, COVID-19 pandemic sent the world’s 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 all 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. Of course, it’s been much easier in the developed world than in many developing countries, which are still in the throes of the crisis – but no matter the level of development, trade has been indispensable to recovery.
The billions of COVID-19 vaccine doses that made normal economic life possible again in so many parts of the world were manufactured in supply chains cutting across as many as 19 countries. There is no doubt that without trade, the economic and health recoveries would have been much slower. And more trade is needed to boost that recovery in less developed countries.
In 2022, hot on the heels of the pandemic came the war in Ukraine, which has been a shock to the global trading system and the WTO. Ukraine’s GDP contracted by almost a third in 2022, and its exports have collapsed due to the disruption of Black Sea shipping.
But the economic consequences of the war reverberate far beyond Ukraine’s borders. Ukraine and Russia together account for barely 2% of global GDP and only 2.5% of merchandise exports. However, before the war, the two countries exported nearly 12% of food calories traded globally and were among key suppliers of energy, fertilizers, and certain metals. The disruption of shipping in the Black Sea is intensifying the food crisis in many parts of the world. Therefore, it was very disappointing to see the Black Sea Grain Initiative terminated, which is generating instability in markets and threatening the supply of vital humanitarian aid to some of the hardest hit corners of the world.
In addition, integrated and diversified international markets are necessary to help countries cope with disruptions in their access to food and energy from their traditional suppliers. Let me give you a few examples. Ethiopia used to source nearly a third of its wheat imports from Ukraine. The war ended those imports, but Ethiopia was able to replace them with wheat from the US and Argentina. By the same token, imports of LNG from the United States, including through the port of Klaipeda have helped Europe adjust to the loss of piped Russian gas.
The lesson is clear: with respect to food as well, the free flow of trade is vital to global food security.
And then there is climate change, the single biggest existential threat facing humanity. The IPCC’s latest Report on climate change mitigation has been seen by many as the “last warning” before key Paris Agreement goals fall out of our reach. It is now widely recognized that trade is the missing piece of the puzzle in climate change mitigation and adaptation. Trade can help countries reduce emissions by increasing the availability and affordability of environmental goods, services, and technologies, such as solar panels and wind turbines. In fact, our research at the WTO shows that reducing tariffs and non-tariff measures on environmental goods could increase exports of such products by 5 percent by 2030 and reduce global emissions by 0.6 per cent.
Furthermore, trade helps countries recover from extreme weather events. When crops fail due to drought, heat, cold, or flooding, the ability to switch quickly to imports is vital, without cumbersome procedures at home or restraints imposed by others.
Although the evidence of the benefits of trade abounds, we have witnessed in the last couple of years a drive by many to “onshore”, “nearshore”, or “friend-shore” supply chains and sensitive technology. As governments and business seek resiliency in supply chains, we can all certainly understand, to a degree, the push to do business only with friends and neighbours given global uncertainties, even if it increases costs a little — or even a lot. But the consequences of taking this too far will be counterproductive — less resilience, more vulnerabilities, and greater exposure to shocks. This is especially true given increasingly frequent and more intense natural and man-made disasters — extreme weather events and climate change, armed conflicts, and pandemics.
Our economists estimate that if the world were to decouple, real GDP loss would be at least 5% on average, and more for developing and least developed countries. And the opportunity cost of decoupling as opposed to further economic liberalization is 8.7% of real income at the global level. By contrast, reinvesting in multilateral trade liberalization can create significant income gains compared to fragmented trade scenarios. Deconcentrated and more diversified global chains, and those that include countries and communities that are now at the margins of the global economy, are key to better resilience, especially in times of crisis. In short, the world needs to re-globalize instead of de-globalizing.
At the WTO, we have a vision for such re-globalization: it will be green, digital, services-based, and inclusive. Last year, global trade in services grew by 15 per cent and reached $6.8 trillion, or just over one-fifth of total world trade in both goods and services. We estimate that the share of services in world trade grow further to reach one-third by 2040. The share of Lithuania’s GDP covered by services has doubled since 2005, which means there is tremendous potential for more growth.
In 2012, digitally delivered services trade constituted 8% of global trade, but today it is 12% and is worth $3.8 trillion. Digital trade has the potential to spur economic growth of smaller economies, particularly in Eastern and Central Europe. Recent research suggests that Lithuania has made significant progress in digitising its economy, with much scope for further work, which would boost innovation and productivity., According to some estimates, digital growth may bring Romania’s digital economy to almost €52 billion by 2030, which amounts to 15 percent of the country’s 2021 GDP. Digital trade can also allow more MSMEs, women, and youth to participate more effectively in regional and global trade and make it more inclusive — better for them, and better for their economies and societies. It can also be a lifeline for countries affected by natural disasters or conflict, and with limited access to infrastructure. For example, in 2022, IT services was the only growing area of exports of Ukraine, reaching the historic high of $7.34 billion.
Technological developments can unlock new opportunities for businesses and individuals around the world. To realize this potential, we need to understand how to harness new technologies so that they translate into job creation and economic growth, as well as help deliver UN Sustainable Development Goals in line with the WTO’s stated mission to improve living standards. We also need new rules that would reflect current technological and business realities and address the digital divide faced by developing countries as well as underserved communities within the developed world. Many of our Members are actively working on these questions at the WTO as part of the Joint Initiative on E-Commerce.
An open and predictable multilateral trading system, with an effectively functioning WTO as its guardian, are prerequisites for re-globalization. That’s why strengthening the WTO and keeping it fit for purpose is so important to economic health and resilience.
Last year, we had a very successful Ministerial Conference (MC12), reaching outcomes on pressing issues related to the pandemic response, food security, and extension of the moratorium of customs duties on e-commerce. Most importantly, our Members added a new agreement to the WTO rulebook — the Agreement on Fisheries Subsidies, which is the first WTO agreement with environmental sustainability at its core and only our second new multilateral agreement since 1995. We are now actively working to have 2/3 of WTO Members deposit their instruments of acceptance of the Agreement to the WTO so that it can officially enter into force. I would like to thank the EU and its member States, including Lithuania, for being among the first to ratify this historic Agreement and deposit the instrument of acceptance.
The MC12 outcomes were achieved in the midst of a war, a global pandemic, and a food crisis. This success shows that consensus is still possible, even at times of deep geopolitical rifts, and that the WTO plays an essential role for its Members.
But the WTO must do more. All of our Members agree that we need to reform the WTO across all three of our functions — negotiating, monitoring, and particularly dispute settlement, as we approach our 30th anniversary. We need to arrive at a common understanding of what kind of reform we want to achieve and establish a plan to attain it, knowing that different areas of focus will require different action and timetables. Members are actively working on this goal in Geneva. The EU is an active participant, focusing the discussion on reforms to improve the WTO’s deliberative function and address trade-related environmental and inclusivity issues, as well as distortions caused by industrial subsidies and other practices.
Reform of the dispute settlement function is particularly vital to the future of the WTO. As you may know, our second level of review — the Appellate Body — is not functioning due to divergent views among our Members about its role. As a result, Members that lose at the initial panel stage can appeal into the void of a non-functioning Appellate Body, resulting in a lack of finality. But to give teeth to the WTO’s rulebook, we need strong enforcement tools, making the need for reform even more acute.
At MC12, our Members agreed “to conduct discussions with the view to having a fully and well-functioning dispute settlement system accessible to all Members by 2024”. Our Members are engaged intensive and promising discussions to this end. All eyes are on our 13th Ministerial Conference, which will take place in February in Abu Dhabi, and we hope that Members can agree on meaningful outcomes in this area.
At the same time, our Members continue to use the existing system to enforce the rules and bring about results. For example, the EU has brought a case against China, challenging restrictions imposed by China on Lithuania concerning its recognition of Chinese Taipei, as it is officially named at the WTO. This case is currently pending before a WTO panel.
In addition to dispute settlement, at the 13th Ministerial Conference, we need to achieve outcomes in other important areas at our upcoming Ministerial Conference:
- First and foremost, we need to complete the second wave of negotiations on fisheries subsidies.
- Members also need to decide on how to address the treatment of COVID diagnostics and therapeutics under intellectual property rules and on extending the Moratorium on e-commerce duties.
- We must also make progress on agriculture, especially issues related to food security.
- And finally, we need workable solutions to concerns raised by developing countries, such as addressing the digital divide and the risk that developing countries will be left behind in an industrial or green subsidies race, excluded from supply chains in a push to reshore or friendshore, or relegated to extractive role.
I count on the continued active engagement of the European Union and its member States, including Lithuania, in addressing these issues.
To conclude, let me leave you with three brief points:
- The WTO and similar institutions are especially needed in times like these, when the existing global international order is under threat and the temptation for unilateral action is high.
- The WTO remains an important — and sometimes the only — forum to manage and deescalate economic tensions, such as through negotiations and discussion in our specialized committees/councils.
- Negotiating agreements at the WTO is a long game, and consensus is difficult to achieve, but the results prove its value. The WTO is worth investing in and improving. Please help us make sure it continues to be effective and fit for purpose.