Tag Archives: IMF

How Canada Can Help Repair Today’s Global Trading System

The article below (Furthering the Benefits of Global Economic Integration through
Institution Building: Canada as 2024 Chair of CPTPP) was first published by the C.D. Howe Institute by Paul Jenkins and Mark Kruger.

Introduction

Over the last 10 to 15 years, the global economy has become fragmented. There are many reasons for this fragmentation – both economic and geopolitical. A particularly important factor has been the inability of the institutions that provide the governance framework for international trade and finance to adapt to the changing realities of the global economy.

This erosion is reflected in the cycles of outcome-based measures of globalization, such as trade-to-GDP ratios. Research indicates that the development of institutions that promote global integration is highly correlated with more rapid economic growth. To secure the benefits of economic integration, the international community should re-commit to a set of common rules. This should involve the renewal of existing institutions in line with current economic realities.


But institutional renewal alone is not sufficient. Nurturing and growing new institutions are also critical, especially ones reflecting the realities of today’s global economy. Most promising in this regard is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).


The CPTPP is seen as a “next generation” trade agreement. It takes World Trade Organization (WTO) rules further in several key areas, such as electronic commerce, intellectual property, and state-owned enterprises.
Expansion of CPTPP represents a unique opportunity to strengthen global trade rules, deepen global economic cooperation on trade and sustain an open global trading system. The benefits for Canada of an expanded CPTPP are further diversification of its export markets and deepened ties with countries in the Indo-Pacific region.

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The challenge to enabling broad-based accession to CPTPP is geopolitical, reflecting the rising aspirations of the developing world, the associated
heightened contest between democracy and autocracy, and the prioritization of security. Indeed, for many, today’s security concerns are at the forefront, trumping economic issues. We argue that recognition of the economic benefits
of global economic integration must also remain at the forefront, and that research presented in this paper shows that institutional building is at the core
of securing such benefits.


As 2024 Chair of the CPTPP Commission, Canada has an opportunity to play a leadership role, as it did in the creation of the Bretton Woods institutions 80 years ago, by again promoting global institution building, this time through the successful accession of countries to the CPTPP, both this year and over the long run.

  1. Cycles in Global Economic Integration
    Former US Fed Chair Bernanke points out that the process of global economic integration has been going on for centuries. New technologies have been a major force in linking economies and markets but the process has not been a smooth and steady one. Rather, there have been waves of integration, dis-integration, and re-integration.
    Before World War I, the global economy was connected by extensive international trade, investment, and financial flows. Improved transportation – steamships, railways and canals – and communication – international mail and the telegraph – facilitated this “first era of globalization.” The gold standard linked countries financially and promoted currency stability. Trade barriers were reduced by the adoption of standardized customs procedures and trade regulations. The movement of goods, capital, and people was relatively unrestricted.
    The outbreak of World War I frayed global economic ties and set the stage for a more fragmented interwar period. The Treaty of Versailles imposed
    punitive measures on Germany, exacerbating economic hardships. Protectionist policies, such as high tariffs and competitive devaluations, became widespread as countries prioritized domestic interests.
    The collapse of the gold standard further destabilized international finance. In contrast to the cooperation seen before the war, countries pursued economic nationalism and isolationism.
    Protectionism increased in the 1930s as a result of the dislocation caused by the Great Depression. In an attempt to shield domestic industries from foreign competition and address soaring unemployment, many countries imposed tariffs and trade barriers.
    The Smoot-Hawley Tariff Act in the United States exemplified this trend, triggering a series of beggar-thy-neighbour policies. These protectionist policies exacerbated the downturn and contributed to a contraction in international trade that worsened the severity and duration of the Great Depression.
    Mindful of the lessons of the 1930s, a more liberal economic order was established in the aftermath of World War II. The creation of the Bretton Woods Institutions – the International Monetary Fund (IMF), the World Bank and the General Agreement on Tariffs and Trade (GATT) – provided the principal mechanisms for managing and governing the global economy over the second half of the 20th century.
    Building on the GATT, the formation of the World Trade Organization in 1995 provided the institutional framework for overseeing international trade and settling disputes. China became the 143rd member of the WTO in 2001 and almost all global trade became subject to a common set of rules.
    The rise and fall of international economic governance are reflected in the cycles of outcome-based measures of globalization. Looking at trade openness, i.e., the sum of exports and imports as a percentage of GDP, the IMF divides the process of global integration into five periods: (i) the
    industrialization era, (ii) the interwar era, (iii) the Bretton Woods era, (iv) the liberalization era, and (v) “slowbalization” (Figure 1).
    Many factors have contributed to the plateauing of trade openness in the last 10 to 15 years. The fallout from the Global Financial Crisis was severe and the recovery was tepid. Brexit, with its inward-looking perspective, has disengaged the UK from Europe.
    Populist protectionism has led to “re-shoring” in an effort to address rising inequalities and labour’s falling share of national income. There has been far-reaching cyclical and structural fallout from COVID-19.
    And while the AI revolution portends significant opportunities, uncertainties over labour displacement abound.
    Geopolitics has also played a critical role. Security concerns have become more important, trumping economic issues in the eyes of many. This has led to multiple sanctions, along with export and investment controls, being imposed to protect national security interests.
    The IMF has carried out several modelling exercises that estimate the consequences of fragmentation if further trade and technology barriers were to be imposed. The studies employ a variety of assumptions regarding trade restrictions and technology de-coupling. In summary, the cost of further fragmentation ranges from 1.5 to 6.9 percent of global GDP. As with all modelling exercises, a degree of caution is warranted. At the same time, these studies should not be viewed as upper-bound estimates because they disregard many other transmission channels of global economic integration.
  2. De Jure and De Facto Globalization
    In assessing the evolution of globalization, however, it would be misleading to focus too narrowly on outcome-based measures such as the trade-to-GDP ratio depicted in Figure 1.
    The data compiled by KOF, a Swiss research institute, provide a more nuanced view of global economic integration. KOF constructs globalization
    indices that measure integration across economic, social, and political dimensions. Its globalization indices are among the most widely used in academic literature. KOF’s data set covers 203 countries over the period 1970 to 2021. Our focus here is on KOF’s economic indices.
    In terms of economic globalization, KOF looks at the evolution of finance as well as trade. Moreover, one of the unique aspects of KOF’s work is that it examines globalization on both de facto and de jure bases.
    KOF’s de facto globalization indices measure actual international flows and activities. In terms of trade, it includes cross-border goods and services flows and trading partner diversity. For financial globalization, its indices measure stocks of international assets and liabilities as well as cross-border payments and receipts.
    KOF’s de jure globalization indices try to capture the policies and conditions that, in principle, foster these flows and activities. For trade globalization,
    these include income from taxes on trade, non-tariff barriers, tariffs, and trade agreements. De jure financial globalization is designed to measure the institutional openness of a country to international financial flows and investments. Variables to measure capital account openness, investment restrictions and international agreements and treaties with investment provisions are included in these indices.
    The trends in KOF’s de facto and de jure economic globalization indices are shown in Figure 2. Both globalization measures increased rapidly from 1990
    until the Global Financial Crisis. Both measures subsequently plateaued. In 2020, as the global pandemic took hold, the de facto index plunged to its
    lowest level since 2011. In 2021, it recovered half of the distance it lost the previous year. The de jure index has essentially been flat for the last decade.
    There has been a sharp divergence between KOF’s de facto and de jure trade globalization measures in the last five years (Figure 3). By 2020, de facto trade globalization had dropped to a 25-year low. Although it recovered somewhat in 2021, it remains well below the average of the last decade. In contrast, de jure trade globalization levelled off after the Global Financial
    Crisis. It reached a modest new high in 2019 and has essentially remained there since then.
    The trends in financial globalization are almost the reverse of those of trade globalization. De facto financial globalization continued to increase through
    2020 and dipped slightly in 2021. De jure financial globalization has been essentially flat over the last two decades (Figure 4).
    The KOF researchers provide convincing econometric evidence that economic globalization supports per capita GDP growth. Importantly,
    their analysis shows that institutions matter. They demonstrate that the positive impact on growth from trade and financial globalization comes from
    institutional liberalization rather than greater economic flows. Through a series of panel regressions, the researchers show that it is the de jure trade and financial globalization indices that are correlated with more rapid per capita GDP growth. In contrast, there is no significant relationship between growth and the de facto indices.
    KOF’s conclusions are consistent with the work of Rodrik, Subramanian and Trebbi who examine the contributions of institutions, geography, and trade
    in determining relative income levels around the world. They find that institutional quality “trumps everything else.” Once institutions are controlled for, conventional measures of geography have weak effects on incomes and the contribution of trade is generally not significant.
    Thus, to recapture the economic benefits of free trade and open markets, countries need to recommit to finding ways to further de jure globalization; that is, putting in place the institutional building blocks in
    support of enhanced trade and financial integration.
  3. Geopolitical Realities
    Institutional reform, however, requires trust and mutual respect among partners. Many would argue that such trust and respect is in limited supply
    today, especially between the United States and China. The United States is willing to endure the costs of heightened protectionism to purportedly
    strengthen the resilience of its economy and secure greater political security. This has resulted in multiple sanctions, particularly in areas of digital technologies.
    In response, China, amongst other measures, has imposed export controls on critical minerals used in advanced technology in defence of its geopolitical goals.
    Yet, as discussed by Fareed Zakaria in a Foreign Affairs article, The Self-Doubting Superpower, China has become the second largest economy in the world richer and more powerful within an integrated global economic system; a system that if overturned would result in severely negative consequences for China.
    For the United States, its inherent strength has been its commitment to open markets and its vision of the world that has considered the interests of others. In many respects, it remains uniquely capable of playing the central role in sustaining the global economic system.
    Following a recent trip to China, Treasury Secretary Yellen stated that “the relationship between the United States and China is one of the most consequential of our time,” and that it “is possible to achieve an economic
    relationship that is mutually beneficial in the long-run – one that supports growth and innovation on both sides.”
    This means that the United States would need to accommodate China’s legitimate efforts to sustain a rising standard of living for its citizens, while
    deterring illegitimate ones. For China, it would mean a clear and abiding commitment to an open, rules-based global economic system.
    It appears that there is currently no clear path forward for this change in mindset, given what many see as insurmountable geopolitics in both the United States and China. Yet, history shows that achieving and sustaining long-term economic growth is in every country’s best interest, and that such growth is best secured through ongoing global economic integration.
  4. A Way Forward
    Recent discussions at the IMF’s Annual Meeting in Marrakech about IMF quota reform, including quota increases and realignment in quota shares to
    better reflect members’ relative positions in the global economy, are important signals of possible renewal.
    Similarly, calls to revamp the World Bank’s mandate, operational model, and ability to finance global public goods, such as climate transition, reflect a growing consensus that the Bretton Woods Institutions must change in the face of today’s realities.
    But institutional renewal alone is insufficient.
    Broad-based accession to the CPTPP represents a unique opportunity to strengthen global governance overall, and to address common challenges in ways that benefit both countries as well as the global economy.
    The CPTPP sets a high bar, requiring countries to:
  • eliminate or substantially reduce tariffs and other
    trade barriers;
  • make strong commitments to opening their markets;
  • abide by strict rules on competition, government
    procurement, state-owned enterprises, and
    protection of foreign companies; and
  • operate within, as well as help promote, a
    predictable, comprehensive framework in the critical
    area of digital trade flows.
    The United Kingdom formally agreed to join the
    CPTPP in July 2023. Once its Parliament ratifies
    the Agreement, the UK will join Australia, Brunei
    Darussalam, Canada, Chile, Japan, Malaysia, Mexico,
    New Zealand, Peru, Singapore, and Vietnam in the
    trading block.
    Such a diverse membership clearly demonstrates
    that countries do not have to be geographically close
    to form an effective trading block.
    A half-dozen other countries have also applied
    to join the CPTPP, with China’s application having
    been the earliest received.
    Petri and Plummer estimate that joining the
    CPTPP would yield large economic benefits for
    China and the global economy. For the latter, the
    boost to global GDP would be in the order of $600
    billion annually. The United States in joining would
    gain preferential access to rapidly growing Pacific Rim
    markets. Much of the additional market access would
    come from China’s opening of its service sector.
    Industrial policy and state-owned enterprises,
    however, will continue to play a much larger role
    in China than they do in Western economies. The
    key for China is to demonstrate that a socialist
    market economy (i.e., one that has a mixed capitalist
    market and government-controlled economy) can be
    consistent with fair trade.
    The process of China joining the CPTPP will
    undoubtedly be time-consuming. It took 15 years of
    negotiations before China joined the WTO in 2001.
    This was five more years, on average, than it took
    those countries that joined after 1995.
    The challenge for Canada, and subsequent chairs,
    is to ensure that China’s entry maintains the high
    standards CPTPP members have met so far.
    Broad based accession to the CPTPP, including
    the United States and China, however, is best viewed
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    as a long-term goal. China would need to undertake
    unprecedented reforms, involving complex political
    challenges, including Taiwan’s potential accession. For
    its part, the United States would need to step well
    back from its current mercantilist mind set, which
    risks worsening.

Canada as Chair in 2024

While efforts to renew existing global institutions to better reflect current economic realities are important, we see promoting broad accession to the CPTPP as the best means to turn today’s global economic fragmentation around.
At the heart of the global economic system is the open trading framework put in place at Bretton Woods in 1944. Many would see today’s fragmentation as becoming more acute, rather than getting better, due to geopolitical divisions.
But further fragmentation is no way to save the open, rules-based global trading system that has served so many countries so well for so long.


While restrictions reflecting legitimate security concerns are inevitable, an open, competitive trading system remains in the best interests of all countries.
As 2024 Chair of the CPTPP Commission, Canada has an opportunity to contribute to turning around the fragmentation of today’s global trading system and moving the global economy back along a path towards a
more open, rules-based trading system.


An important goal for Canada’s chairmanship would be to clarify the rules of accession. This would be a big step forward in sustaining expansion of CPTPP. While today’s geopolitical realities surrounding the applications of both China and Taiwan represent a particularly challenging area to advance, significant progress in other areas must be made. It should accelerate inclusion of Costa Rica, Uruguay, Ecuador, and Ukraine, all of whom have applied. And it should help move forward discussions with South Korea, Indonesia, Philippines, and Thailand, who have expressed interest in joining.


Over and above all that, however, at a more strategic level, Canada should also champion discussion and understanding of why building towards the long-run goal of broad accession to CPTPP is important. Open and inclusive institutions are at the core of providing the benefits of global economic integration to all countries.


Canada will also be Chair of the G7 Summit in 2025. This, along with the various ministerial and officials’ meetings leading up to the Summit, offers another critical avenue for Canada to take a leadership role in sustaining and promoting an open, rules-based global trading system.

    International Monetary Fund- World Economy Still Recovering

    The IMF announced today (Tuesday, April 11, 2023) in the World Economic Outlook’s press briefing that the baseline forecast for global output growth is 0.1 percentage point lower than predicted in the January 2023 WEO Update, before rising to 3.0 percent in 2024.

    “The world economy is still recovering from the unprecedented upheavals of the last three years, and the recent banking turmoil has increased uncertainties.”

    “We expect global output growth to fall from 3.4% last year to 2.8% in 2023, before rising to 3% in 2024, mostly unchanged from our January projections. Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023. Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained,” said Pierre-Olivier Gourinchas, the IMF’s Chief Economist.

    Much uncertainty clouds the short- and medium-term outlook as the global economy adjusts to the shocks of 2020–22 and the recent financial sector turmoil. Recession concerns have gained prominence, while worries about stubbornly high inflation persist.

    Chart- world economic outlook projections including Canada.

    “Once again, risks are heavily tilted to the downside, they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions. The simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected. These risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries,” added Gourinchas.

    With the fog around current and prospective economic conditions thickening, policymakers have a narrow path to walk towards restoring price stability while avoiding a recession and maintaining financial stability. Achieving strong, sustainable, and inclusive growth will require policymakers to stay agile and be ready to adjust as information becomes available.

    “First, as long as financial stress is not systemic as it is now, the fight against inflation should remain the priority for central banks. Second, to safeguard financial stability, central banks should use separate tools and communicate their objectives clearly to avoid unwarranted volatility. Financial policies should remain laser focused on preserving financial stability and watch for any buildup of risks in banks, non-banks, and the real estate sectors. Third, in many countries fiscal policy should tighten to ease inflation pressures, restore debt sustainability, and rebuild fiscal buffers. Finally, in the event of capital outflows that raise financial stability risks, emerging market and developing economies should use the integrated Policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate,” said Gourinchas.

    Africa without vaccines while Canada doses are wasted

    Canada just moved from having enough doses to vaccinate every Canadian, into a surplus position.

    This also means that Canada reached a new very problematic milestone. Doses are going bad in Canada, while desperate people, including frontline health workers in Africa, are still struggling to get access to vaccines.

    None of us are safe until all of us are safe. We know this pandemic isn’t truly over until it is over everywhere. Canada MUST share more of our excess doses now. Canada MUST resist the urge to offer 3rd dose “boosters” to healthy Canadians (some of whom are getting them in order to vacation in the Caribbean) while nurses in Senegal are still unprotected.

    We have more than enough vaccines, others don’t.

    Africa is facing a COVID-19 crisis, cases are surging and the continent is heading towards a global catastrophe. Over the last month deaths from COVID in Africa have increased 80%. Only roughly 3% of Africans have received the first shot, and the continent is not on track to vaccinate 10% of its population by the end of the year. The WHO’s Bruce Aylward said this should be “a scar on all of our consciences.”

    What can Canada do?

    Meanwhile in Canada, Prime Minister Trudeau announced on July 27th that with 66 million doses received, we have enough to fully vaccinate every eligible Canadian. We have now reached a point where the supply of vaccine exceeds demand, and already Astra Zeneca doses have been thrown away and Moderna vaccines are sitting in freezers nearing their expiry dates.

    Canada is the country that has ordered the most vaccines per person: counting optional purchases, enough to vaccinate each Canadian 5 times. Unless the excess doses are shared right now, we could end-up throwing away millions of doses while most of the rest of the world remains unvaccinated. This is a scandal that we cannot let happen.

    Vaccines being discarded is not a theoretical concern. In addition to the 300,000 doses from Johnson and Johnson that were discarded due to a manufacturing issue, thousands of Astra Zeneca doses have already been wasted in Canada because they could not be used before their expiry dates. With this vaccine barely been used in anymore, there may be thousands more sitting in freezers or the garbage, and provinces are coy about how many they may be throwing away.  The same is starting to happen with Moderna, with pharmacists unable to put some of the doses they have in arms.

    Figure 1: A tale of two pandemics
    While Canada is in a very good position, some African countries are seeing an increase in cases with a very small share of their population vaccinated.


    Canada has so far committed to share 30.7 million doses with COVAX, the global vaccine distribution mechanism, including a recent pledge to donate the remainder of our Astra Zeneca orders. But there has been no confirmation of when these donated vaccines might reach countries in need.

    In addition, new analysis by the ONE Campaign based on data from analytics firm AirFinity shows that at the current rate, Canada will end-up with between 16 and 42 million more vaccines piling up in freezers or thrown away by Christmas, while the pandemic continues raging on in Africa and the developing world.

    We not only have a moral obligation to share doses, it is in our own best interest to stop the global spread and emergence of new variants. Until then, more preventable deaths will occur and Canada’s own recovery will be threatened by a shaky global economy. According to the IMF, failing to help the developing world defeat Covid-19 could cost the global economy US$4.5 trillion.

    The time to donate more doses is now. Lives depend on it.

    Africa is experiencing an increasingly urgent COVID crisis and needs at least 200 million vaccine doses by the end of September to slow the spread and prevent more needless deaths. Canada should immediately transfer all incoming vaccine orders to COVAX, beyond ensuring that there are enough for every Canadians to be fully vaccinated. This should mean at least 12 million more doses shared before the end of September, and in total 16-42 million vaccines donated before the end of the year if we want to end the pandemic and avoid unimaginable waste.

    Vaccines being discarded is not a theoretical concern. In addition to the 300,000 doses from Johnson and Johnson that were discarded due to a manufacturing issue, thousands of Astra Zeneca doses have already been wasted in Canada because they could not be used before their expiry dates. With this vaccine barely been used in anymore, there may be thousands more sitting in freezers or the garbage, and provinces are coy about how many they may be throwing away.  The same is starting to happen with Moderna, with pharmacists unable to put some of the doses they have in arms.

    It may be tempting for the Government to keep vaccines stockpiled just in case boosters may be needed. But the evidence so far on the need for boosters is far from conclusive, and many experts have warned that it would be counterproductive to start giving third doses to healthy people in rich countries while at-risk populations have not yet had their first shot in developing countries. Stockpiling a product with a short shelf life will inevitably lead to a lot of waste. In any case, Canada has already ordered up to 60 million more doses of Pfizer a year for the next 3 years in case boosters are needed.

    The excess doses we have coming in the next 5 months must urgently be shared with countries in need to stem the pandemic globally. Variants spreading around the world pose a threat to Canadians. The longer we wait to vaccinate the world, the more variants we will see and the longer this vicious cycle will continue. The time to donating more doses is now. Lives depend on it.

    Up to 42 million doses could go unused in Canada by Christmas

    By December 2021, Canada will have received at least 92 million doses of the four vaccines currently approved by Health Canada (Moderna, Pfizer, Astra Zeneca and Johnson & Johnson). If Medicago and Novavax post positive Phase 3 results and are also approved, total supply could increase to 117 million doses. [1]

    To fully vaccinate every Canadian, including children under 12 should vaccines be approved for them, 76 million doses will be required in total. These are highly optimistic projections of actual demand, since it is unlikely that 100% of the population will want to be vaccinated.

    This means that between 16 and 42 million excess vaccines risk being stockpiled or wasted in Canada by the end of the year. The higher scenario means our excess vaccines would be enough to fully vaccinate everyone in a country like Burkina Faso this year. Right now, 0.01% of people are fully vaccinated in Burkina Faso. For the Silo, Justin McAuley.

    Figure 2: A growing stockpile
    Even accounting for the already-announced donations, Canada will have millions of excess vaccines

    [1] This excludes the 30 million doses already donated to Covax.