International Investment Dynamics
Global foreign direct investment flows declined by 50% during the first half of 2020 compared with the second half of 2019 as a result of COVID-19, according to the Organization for Economic Co-operation and Development - reaching the lowest half-year level since 2013.The pandemic decimated a large portion of global foreign direct investment flows.
Inflows to the OECD area specifically fell by 74%, driven by lower flows to the US and disinvestments from Switzerland, the Netherlands, and the United Kingdom. Debates about international investment have played out at the United Nations Commission on International Trade Law, which has focused on reforming the system in which investors may sue countries, and at the World Trade Organization, which has focused on investment facilitation.
Since late 2017, a working group has been entrusted to work on the possible reform of “Investor-state dispute settlement,” and it has agreed to consider the establishment of an advisory centre, a code of conduct for adjudicators, and the regulation of third-party funding. It has also been expected to consider reforms specifically focused on treaty interpretation, though it is not yet clear how they would be implemented.
WTO members have sought out a multilateral framework on investment facilitation for development, or MFIFD, for example. Within individual member states, investment debates have focused on national responses to the pandemic. Several governments have implemented measures that limit foreign investment directed at hostile takeovers and aimed at profiting from COVID-19-related economic weakness. Countries including Spain, Germany, Australia, India, and Canada have focused related efforts on strategic sectors like finance and insurance, or on types of foreign investors (like state-owned enterprises).
Meanwhile countries like China, Myanmar, Serbia, and Sri Lanka have implemented measures aimed at reducing the administrative burden for foreign investors, the faster delivery of much-needed goods during the pandemic, and the facilitation of remittances.
Multilateral discussions about investment facilitation have gained traction. Internationally, is not yet clear which instruments will be used to reform legal accountability related to foreign investment and the facilitation of investment - though much work needs to be done to not only help the global system recover, but to help put it on a path to a more sustainable and equitable future.
Trade and the Environment
Trade and investment flows plummeted as a result of COVID-19, as lockdowns limited its spread but led to a global economic recession. COVID-19 has created opportunities for trade governance reform and environmental action. Due to decreases in economic activity and mobility, there were also noticeable declines in carbon dioxide emissions and other pollutants - resulting in better air quality in many places. Still, the pandemic does offer opportunities to focus on trade governance in ways that rebuild the global economy in a more resilient and environmentally-sustainable way.
Yet, even as these instances captured media attention, global CO2 levels continued to climb. In addition, COVID-19-related disruptions to supply chains have limited the availability of technologies and raw materials necessary to promote renewable energy, and to establish a low-carbon economy.
Efforts at environmentally-beneficial trade governance reform, such as plans to launch a World Trade Organization plastics initiative, or further discussions on fossil fuels subsidies, have largely been postponed. Impending trade negotiations will mainly focus on global economic recovery, making it uncertain whether momentum established previously for environmentally-oriented trade reform can be maintained. In addition, a post-COVID economic recovery would likely be followed by lobbying in opposition to environmental regulation.
The global economic recovery could be aided by reducing trade barriers for environmental goods designed to provide cleaner, renewable energy.
Estimates suggest that a tariff reduction on these goods could reduce CO2 emissions by nearly 10 million tons by 2030, while increasing global trade by up to €21 billion.
Environmental provisions have increasingly been included in preferential trade agreements, and along with environmental sustainability and product standards they can help reduce the risk of leakage - and mitigate consumption-based environmental footprints that are often significantly larger than production-based footprints. They may also supplement the environmental border tax adjustments that figure prominently in the European Union’s climate policy.
Many existing sustainability standards lack important elements, and attempts to develop best-practice guidelines for standard-setters have been unsuccessful. In addition, the availability of information about the actual environmental impact of such standards is often limited, and it is often controversial. Methane emissions in particular have recently gained increased attention from researchers, because their treatment within aggregate greenhouse gas baskets has been a stumbling block for negotiations about rules for international greenhouse gas markets.
TRADE AND INVESTMENT
The very legitimacy of the current global trading system, with the WTO at its core, has been in focus - as policy-makers try to respond to mounting risks and general geo-economic upheaval.
A number of declarations that commit us to ensuring that trade and sustainable development are mutually supportive. The Marrakesh Agreement Establishing the WTO reads:
“Recognizing that their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.”
Similarly, the Doha Ministerial Declaration launching the Doha Development Round reads:
“We strongly reaffirm our commitment to the objective of sustainable development, as stated in the Preamble to the Marrakesh Agreement. We are convinced that the aims of upholding and safeguarding an open and non-discriminatory multilateral trading system, and acting for the protection of the environment and the promotion of sustainable development can and must be mutually supportive.”2
The UN Framework Convention for Climate Change has language aimed at the same sorts of ends:
“The Parties should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties, thus enabling them better to address the problems of climate change. Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”3
The same sort of language appears repeatedly in other trade, investment and environmental treaties. The global community is committed to ensuring harmony between trade and sustainable development.
At a deeper level, however, it bears asking why states have undertaken those commitments. The answer is that trade and investment flows are not ends in and of themselves, but rather are means to an end: enhanced human well-being.
Global trade and investment had already been in flux prior to the pandemic and outbreak of war in Europe, as major initiatives were either formed or renegotiated.
Following Russia’s invasion of Ukraine and COVID-19-related lockdowns in China, the World Trade Organization lowered its expectation for global merchandise trade volume in 2022 to 3% growth compared with the prior year (down from 4.7%).
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According to a report published by the World Trade Organization, trade costs - everything incurred while getting goods from producers to consumers - may increase due to the COVID-19 pandemic. Easing the burdens on trade is particularly important during a global health crisis.
Government efficiency is always a key factor in a world where goods are likely to cross multiple borders several times just during their assembly. In particular, transport and travel costs (which account for as much as 31% of all trade costs in manufacturing) have been seriously impacted by travel restrictions and border closures, according to the report, and will increase substantially as long as such restrictions remain in place. The WTO’s Trade Facilitation Agreement (TFA), which focuses on streamlining, harmonizing, and modernizing customs procedures, has had a major impact on reducing trade costs.
It entered into force in 2017 and contains a range of obligations to provide more transparency on rules and a streamlining of clearance procedures. It also includes provisions requiring WTO members to accept e-payments and electronic documents. Paperless customs, in combination with a “single window” system that collects trade documentation in one place, can reduce inefficiency and delays.
The agreement provides for greater cooperation between customs and other authorities - and a means for developing countries to modernize and harmonize their procedures.
A TFA Facility was established to help developing and least-developed-countries benefit from the agreement, through technical assistance and training and project preparation and implementation grants.
The World Bank has supported the effort by providing financing to developing countries, collecting data, and developing indicators and analytic tools relevant to trade facilitation. Meanwhile, the United Nations Conference on Trade and Development has developed and disseminated a system for customs data and management, the Organisation for Economic Co-operation and Development (OECD) has developed trade facilitation indicators, and the Global Alliance for Trade Facilitation (GATF), a public-private partnership co-led by the WEF, has supported implementation.
Developing countries could benefit the most. While roughly two-thirds of members have committed to implementing the agreement, the WTO estimates that full implementation could increase global trade by up to $1 trillion per year, and the OECD estimates trade costs could be reduced by as much as 17.5%.
Global Value Chains
Companies spread operations around the world in ways that create serious policy challenges. The declining costs of communication and transportation have encouraged companies to progressively expand the assembly and delivery of goods and services around the world. The World Trade Organization and the Organisation for Economic Co-operation and Development have played important roles in facilitating these global value chains - which pose policy challenges to these same institutions in relation to sustainability, tax structures, and labor markets.
They also raise thorny issues when economies turn to protectionism, and in the wake of weighty decisions like the Brexit vote. The complexity of medical supply chains in particular has raised serious concerns amid the COVID-19 crisis, as countries in need have sought goods in times of perceived shortage and amid occasional bidding wars. In the early days of COVID-19, trade was disrupted by export bans, the seizure of goods, and other hiccups in ways that effectively violated commitments under both the WTO and regional structures including the European Union’s single market. The ownership of intellectual property (like vaccines) has also come under heightened scrutiny, in a world where different stages of medical research and related data often cross-national borders.
Global value chains can help facilitate the integration of developing countries into global markets, by enabling them to specialize in services and semi-finished goods rather than entire products. Some have suggested that trade negotiations should no longer be pegged to a particular geographic area and should instead focus on trade along a specific supply chain - and even address a single industry, such as clean energy or textiles. They also provide a means to spread knowledge and standards, and can propagate more sustainable practices (a report published by the United Nations Global Compact in 2015 called supply chains one of the most important levers for business to create positive impact in the world).
However, there is a risk that companies will simply opt to route supply chains through areas where sustainability standards are the lowest; it remains unclear whether the self-regulation of sustainability standards is sufficient to achieve the United Nations’ Sustainable Development Goals. There are also concerns about financial dimensions - value chains have been used to manipulate corporate tax burdens in less-than-equitable ways by reporting profits only in low-tax geographical areas, for example.
Global Trade Architecture
The global trade architecture is being shaped by insecurities stemming from COVID-19 and worsened tension between China and the US. Intensified superpower rivalry and other serious challenges emerged amid COVID-19. The pandemic has slowed the work of international economic organizations, and efforts to negotiate preferential trade agreements. While there has been an increase in calls for reform to better coordinate trade policy amid health crises, the US has continued its criticism of the World Trade Organization (though that is expected to abate after a change in administration).
The WTO Appellate Body was rendered defunct due to the US position and a lack of quorum, and a group of WTO members sought an interim solution by working through a two-tiered system of panels and appeals. The resignation of former WTO Director-General Roberto Azevêdo in August 2020 caught WTO members by surprise. The approval of his successor was postponed, likely to allow time for the incoming US administration to weigh in. As this process has dragged on, however, it has created more challenges as WTO members had difficulty coming to an agreement on an interim successor to bridge the time.
The United States-Mexico-Canada Agreement, which replaces NAFTA, entered into force in July 2020. While the European Union and Mercosur (a South American trade bloc) have concluded trade agreement negotiations, political will remained lacking for ratification on the EU side. The African Continental Free Trade Area (AfCFTA), a common market effort, kicked off with the official commissioning of its Secretariat Building in Ghana in August 2020.
Amid the pandemic, a number of countries have introduced export bans for certain products related to the health sector - and the competition for developing a COVID-19 vaccine threatened to undermine the multilateral cooperation needed to ensure fair distribution. It is essential that vaccines be fairly distributed, and that nationalist impulses are subordinated to multilateralism.
Meanwhile the United Kingdom continued to negotiate its exit from the EU while trying maintain access to important export markets. The UK agreed to a new trade deal with Japan in September 2020, and it has explored joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), one of the largest free trade áreas in the world.
Trade and Development
The least-developed countries have been hit hardest by the pandemic-related economic slowdown. Trade has been recognized for its potential to reduce global poverty. However, the World Trade Organization estimated in October 2020 that global trade volumes would decline by 9.2% for the year compared with 2019, as a result of COVID-19 - and the economic slowdown caused by the pandemic has hit developing countries particularly hard.
While there is a rebound projected for global trade in 2021 (a 7.2% increase, according to the WTO), that will likely be insufficient to make up for previous losses. There has also been a sharp decline in the remittance payments that are so important for low- and middle-income countries.
The top destinations for merchandise exports from least-developed countries are almost entirely countries impacted significantly by the pandemic; garment manufacturers in Bangladesh, for example, have seen order cancellations in billions of dollars. In addition, many least-developed countries are dependent on tourism, which has been decimated. A number of these countries have also imposed restrictions in imports of medical products and basic foodstuffs, and most do not have the manufacturing base necessary to provide their health workers with all the tools necessary to fight the pandemic.
Hundreds of countries have committed to or expressed interest in the COVAX Facility, an international effort to pool resources and ensure access to COVID-19 vaccines in low-income countries. However, some countries including the US opted to not join, and many participating countries aim to first secure preferential access for their populations before taking further steps to vaccinate the less fortunate. In the meantime, food security is a pressing issue, as most least-developed-countries are net food importers.
In addition, the preservation of the multilateral trading system and a strengthening of its commitment to developing countries are more necessary than ever. It is hoped that after what promises to be a disastrous 2020, things will start looking up for both the developed and developing worlds in 2021. As a result, these countries have asked WTO member states to abstain from imposing export prohibitions and restrictions on not only medical supplies but also basic food products. In order to avoid a total erosion of decades of economic growth and poverty reduction, increased efforts to address the economic needs of developing countries in the wake of COVID-19 will be of the essence.
Unfettered data flows and e-commerce are vital for the health of the global digital economy. Some have called data the “new oil,” because so much modern economic activity relies on it. The analogy is not perfect, however; the Organisation for Economic Co-operation and Development has noted that unlike oil, data is not scarce and it can be distributed at virtually no cost.
The advent of the Internet of Things and increasingly-sophisticated artificial intelligence has boosted data demand, though some governments view the free flow of data across borders as a threat to sovereignty and their citizens’ right to privacy. Cross-border data flows have grown dramatically, now that more than half of the world is believed to be online compared with just 20% only about a decade ago. This has led to the erection of barriers, or “data localization.” China and Russia in particular have sought to regulate content and to suppress any deemed to pose a security threat. Meanwhile the European Union has implemented the General Data Protection Regulation to give people more agency over the use of their personal data - which places a burden on foreign companies hoping to engage online with EU residents.
In a bid to avoid the negative impacts of restricting data flows, an increasing number of countries have included provisions on the free flow of data in trade deals - and prohibitions on data localization. Examples include 2018’s Comprehensive and Progressive Agreement for Transpacific Partnership, the updated Singapore-Australia free trade agreement, and the United States-Mexico-Canada Agreement. These deals have also addressed other means to enable digital trade such as a permanent moratorium on custom duties on electronic transmissions, electronic contracts, electronic payments, and paperless trading.
The EU has taken a relatively cautious approach to regulating digital trade, reflected in negotiated deals with Australia, New Zealand, and Tunisia. After many years of negotiation, the Regional Comprehensive Economic Partnership was signed by Asia-Pacific nations in November 2020 - it includes a chapter on electronic commerce that might be a good indication of the kind of related agreement we can expect at the World Trade Organization (should there be one). The RCEP’s signatories include the 10 member states of the Association of Southeast Asian Nations (ASEAN) as well as Australia, China, Japan, New Zealand and South Korea.