Trade policy, supply difficulties and inflation

This week in Geneva, the new Director General of the World Trade Organisation, Ngozi Okonjo-Iweala, did her best to energise and repurpose the organisation. Nevertheless, an unfinished agenda from past years remains.

| 6 min read

Some four years passed without a ministerial meeting to carry forward the free trade cause at the World Trade Organisation (WTO). Covid-19 got in the way of physical meetings. It also turned government minds to complex interventions in their economies which were not in the spirit of opening-up markets and leaving more to competitive business.

This week in Geneva, the new Director General of the WTO, Ngozi Okonjo-Iweala, did her best to energise and repurpose the organisation. There was an unfinished agenda from past years, as the conference wrestled with the need to cut fishing subsidies and regulate illegal fisheries, reduce agricultural subsidies, create more vaccines and initiate WTO reform.

The aim of its work is to “negotiate reduced support and protection” whilst allowing for a differentiated regime for lesser developed and developing countries. It reaffirmed the Marrakesh Agreement, which originally established the WTO, promised member-driven reform and promised to get the dispute procedure fully functional by 2024.

The conference decided to waive patent rights over vaccines for Covid-19 to permit a country to produce the necessary medicine at lower prices for home consumption. It set out a new regime for controlling fishing subsidies. It agreed that government policies required to secure food supplies should “minimise trade distortions as far as possible; be temporary, targeted, transparent and proportionate”. It encouraged food aid for the lowest-income countries and expressed a wish for countries to release surplus stocks to trim price rises. It is setting up initiatives to tackle fossil fuel subsidies, sustainable development, and plastics pollution.

Overall, the WTO reminded the world of its values and its belief that freer trade and fewer subsidies are the answer for greater prosperity. It also reflected the agenda of our time, with much debate about how far it could go in freeing agriculture and controlling subsidies for fishing at a time when countries are wanting to intervene more and export less to buttress their own food supplies. The two-tier approach to freer trade with different approaches for lower-income countries, understandably, remained entrenched in its thinking.

President Biden sets out his views

Meanwhile, US President Joe Biden recently stepped out into the fresh air of Los Angeles port to make a speech about his priorities. The scripted speech concentrated single-mindedly on inflation. He explained how important it is to keep the costs of shipping low and reminded his audience of his wish to force the costs of China-to-US transit down, targeting the nine main, large foreign-owned shipping companies that dominate the routes.

He frequently talked of the need to get on top of food and energy prices and ease the squeeze on family budgets.

He praised his union audience for their work in shifting the container backlog and explained how the cross-party Infrastructure Bill would facilitate more investment in port capacity, electrification and efficiency. He frequently talked of the need to get on top of food and energy prices and ease the squeeze on family budgets. He also mentioned plans to cut drug prices substantially as he thought the drug companies had far too high a mark-up on their products.

The most interesting thing he said were some remarks at the end after the official text had been read. He launched into an attack on US oil giant ExxonMobil. He accused it of failing to use drilling licences to find more oil and gas and said it was not investing as it should. He criticised buying back its own stock and wanted it to pay more tax. It reminded the wider audience that he is no friend of big business – and he thinks some large companies operate against the public interest as he sees it. Anyone looking on from the Federal Reserve would take the hint that this President wants to get inflation down more than anything else, and does not mind if Wall Street valuations take a hit.

Graph 1: Shipping rates

The world’s supply chains remain under difficult pressures. It is true the extreme freight rates of last autumn have receded, and true some of the shipping backlog has been moved. It is also the case that the world’s main manufacturer, China, is still subject to unpredictable interruptions to production and shipping from Covid-19 lockdowns. The shortage of computer chips is persisting for longer, as the leading companies rush to put in more capacity. The world shortages of grains, fertilisers, oil and gas will continue all the time the west needs to impose sanctions on Russia and all the time the Ukraine war continues to disrupt output and the movement of goods from that area.

In a world where supply is in difficulties, a counter inflation strategy comes to rest more on cutting demand and higher interest rates. Recovery of supply from covid has been patchy, some capacity has been lost during the lockdowns, and world trade faces new barriers. More countries want to give priority to domestic production, more sanctions are being imposed as part of a wider conflict between states and trading blocs, and more companies use the leverage that scarcity brings them.

Graph 2: World trade volumes since 2019

It is no wonder that against such a background the WTO needs to speak up. The US wants it to get better at imposing its rules on China – and China wants it to act as a resistance to US assertions of extra-territorial authority. Reform will be a complex task. The immediate need is for a stronger adjudication system. Meanwhile, the other means being used to get on top of inflation are spooking markets as they entail higher rates and lower demand.

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Trade policy, supply difficulties and inflation

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