The consequences of all the changes summarized in Chapter 3 for the Fund’s engagement in trade policy have been both diverse and far-reaching. They have prompted new and increasing demands for research, surveillance, policy advice, advocacy, and technical assistance. In response, there has been a particular effort to scale up the Fund’s multilateral work on trade, in order to analyze the global consequences of trade tensions, highlight the benefits of open rules-based international trade, identify the costs of restrictive trade practices, and to champion multilateral approaches to trade. The Fund also has strengthened assessments of how trade affects domestic economies and employment patterns and revisited the issue of how changes in exchange rates affect trade prospects. All of these tasks have required the Fund to strengthen capacities to model both sectoral and aggregate impacts of bilateral trade policy changes and their spillover effects at bilateral, regional, and multilateral levels. There has also been increasing attention to ensure effective collaboration with international partners and to improve access to reliable data that adequately captures evolving trade patterns.
Mandate and Guidance
While there has been no change in the legal mandate of the Fund since 2009, the 2012 Integrated Surveillance Decision (ISD) brought about significant changes to the framework for how surveillance is conducted in Article IV consultations, with implications for work on trade policies (IMF, 2012).7 The ISD strengthened the integration of bilateral and multilateral surveillance in Article IV consultations by acknowledging the increasing importance of trade and financial interconnections and the potential benefits and risks of spillovers across national borders. In doing so, it provided greater scope to factor members’ actions on trade in Fund surveillance.
In bilateral surveillance, the ISD provides that the Fund will focus on members’ policies that can significantly influence present or prospective balance of payments or domestic stability, enabling trade issues to be discussed when there are serious trade distortions that hamper the prospects of stability and where balance of payments are vulnerable to adverse trade developments.
In multilateral surveillance, the ISD provides that the Fund will focus on issues that may affect the effective operation of the international monetary system (IMS), including: (i) global economic and financial developments and the outlook for the global economy, and (ii) spillovers arising from policies of individual members that may significantly influence the effective operation of the IMS, for example by undermining global economic and financial stability. In these cases, trade policies may be reviewed and analyzed either in Article IV consultations or in other products under the umbrella of multilateral surveillance when they meet either of the above tests. Although the Fund does not have the jurisdiction to require a member to change its policies in the interests of the effective operation of the IMS, it can discuss the impact of members’ policies on the effective operation of the IMS and suggest alternative policies that, while promoting the member’s own stability, better promote the effective operation of the IMS.
Guidance to staff
In response to the 2009 recommendation to establish guidance on PTAs and trade finance, staff quickly prepared two reference notes: (i) a “Reference Note on Trade in Financial Services” (IMF, 2010a), to help inform the advice that country teams provided in the context of surveillance, program negotiations, and technical assistance; and (ii) a “Reference Note on Trade Policy, Preferential Trade Agreements, and WTO Consistency” (IMF, 2010b), which introduced guidance on PTAs and consolidated and updated existing guidance in other trade-related areas, including on trade policy reforms, WTO consistency, and on the WTO Committee on Balance of Payments Restrictions. A third reference note on the Trans-Pacific Partnership (TPP) assessed the TPP´s contents and impact and considered the implications for the role for the Fund, derived from the TPP and the associated “Joint Declaration” on macroeconomic and exchange rate policies. These notes were circulated to the Board for information. In addition, a series of papers have been issued over the past decade, providing information and indirect guidance to staff on trade policy matters (Gregory and others, 2010; IMF, 2011; IMF, World Bank, and WTO, 2017; 2018).
The 2015 Review provided a broad review of IMF work on trade policy issues. It concluded that (i) multilateral surveillance of trade policy issues, while of high quality and policy relevant, had not been directly usable, given the difficulty to tailor its implications to country-specific conditions; and (ii) coverage of trade issues in bilateral surveillance remained limited and failed to sufficiently analyze the macroeconomic impact of trade developments and policies. Looking forward, the 2015 Review identified several key issues for surveillance and analytical work: (i) the contribution of trade integration to growth; (ii) understanding the policy and non-policy components of trade costs; (iii) managing risks and spillovers from trade policies through collaboration at the multilateral level; (iv) monitoring patterns of trade; (v) assessing the impact of PTAs and their eventual multilateralization; (vi) furthering traditional trade liberalization; and (vii) monitoring protectionism. The Executive Board agreed with the findings of the 2015 Review, noting that trade is an essential component of the Global Policy Agenda (GPA) and that the Fund should address trade issues judged to be macro-critical and taking into account resource constraints and limited trade expertise. It stressed the importance of prioritizing and collaborating with other international institutions. Executive Directors also considered it important to regularly review the role of trade in the Fund’s work but did not provide specific guidance on future steps (IMF, 2015b).
Aside from periodic informal update sessions on trade policy issues, the 2015 Review discussion represents the only major occasion on which the Board has met formally to discuss trade policy issues in the past decade, which is striking given the substantial changes witnessed in global trade. This also contrasts with the period prior to the 2009 evaluation, when the Board engaged more regularly on trade policy issues.
In interviews for the current update, Executive Directors appreciated the extent to which Fund staff had stepped up its work on trade policy issues in recent years and observed that this work was generally well aligned with the Fund’s mandate and comparative advantage. Nevertheless, some Directors suggested that Board guidance continued to be too little or too vague and called for greater clarity regarding the Fund’s role and objectives in the trade policy area. The periodic discussion of the Managing Director’s GPA did provide some opportunity for the Board to provide input to the role of trade in the IMF’s work program, but this forum did not allow for an in-depth discussion on trade policy. Some Directors were open to the development of an institutional view on trade, which would help integrate different workstreams, allocate resources, determine priorities, and clarify the Fund’s stance in specific issues. Interviewed staff had mixed views on the value of an institutional view on trade: while some defended it as necessary, others were concerned about the need to preserve flexibility.
Most Directors emphasized that the IMF should continue to focus on its comparative advantages in shaping its role on trade policy. They emphasized that assessing the implications and costs of current international trade tensions, based on the IMF’s well-established modeling capacity, and strong advocacy for a rules-based multilateral trading system, should remain the IMF’s immediate priorities. Many stressed the importance of the Fund continuing to clearly signal that commitment to liberalization and free trade raised growth and productivity prospects in the long run while, at the same time, highlighting the potential for adverse distributional consequences from trade. They also emphasized that responsibility for several areas of trade and trade policy, including negotiating trade agreements and specific aspects of trade policy related to trade negotiations, rested with other international organizations, particularly the WTO.
Overall, then, there seems to be broad support for the current framework for the IMF’s trade policy work and its recent focus, but also recognition that a broader review of the priorities for the Fund on trade could be useful to guiding the Fund’s work in this area going forward.
Trade Policy Issues in Surveillance
Attention to trade policy in multilateral surveillance has increased very substantially since the 2009 evaluation, particularly since 2015. The World Economic Outlook (WEO)8 has been the flagship report most focused on trade issues. In analyzing the short-term outlook in Chapter 1, it has used global modeling to assess the quantitative implications of trade tensions and develop alternative scenarios to illustrate the possible consequences of escalation of trade barriers. At the same time, attention to trade in the WEO analytical chapters has grown markedly; from just one chapter during the first five years of the update period, to 51 between 2015 and 2019, including three occasions in which the WEO devoted a full chapter to trade.9 High-quality analysis of trade-policy-related issues in recent WEOs include: (i) GVCs and their relationship with exchange rates, their distributional impacts, and their effects on the evolution of labor share; (ii) the factors behind the global trade slowdown; (iii) the importance of reducing trade costs; and (iv) the relative importance of overall trade balances and bilateral balances in external adjustment. Similarly, External Sector Reports, which draw on area departments’ inputs, have paid increased attention to the evolution of international trade. The 2018 report analyzed the impact of trade costs on external balances (IMF, 2018a), while the 2019 report provided a careful analysis of how dollar invoicing and GVCs have reduced trade elasticities and altered the role of the exchange rate in external adjustment (IMF, 2019a).
Text analysis10 of WEO documents confirms the substantial increase in coverage of trade policy issues since 2015 (Figure 2). Attention to trade remained at a low ebb in the years immediately following the global financial crisis but has risen sharply since then, returning to the degree of attention seen in the early 2000s. While coverage of more traditional areas of trade policy has remained fairly stable, there has been increased focus on trade tensions, developments in the GTS, and GVCs.
The IMF has also contributed extensive trade-related multilateral work under the aegis of the G20. Since May 2016, the IMF has prepared, either on its own or in collaboration with the WTO and World Bank, three high-profile documents on the importance of trade as an engine for inclusive growth and the need for a well-functioning rules-based multilateral trading system, which are seen by external experts as providing valuable support for multilateral approaches to trade in the international community (see Box 2).
The IMF’s trade policy work has contributed to the Fund’s work on jobs and growth issues and on inequality (IMF, 2013a). For jobs and growth: (i) in G20 countries, the Fund’s analysis has emphasized that improved domestic policies, including early action to improve labor mobility across firms and industries, social protection and complementary policies in education, housing and credit, can mitigate the adjustment costs that can arise from trade (IMF, World Bank, and World Trade Organization, 2017); (ii) in advanced countries, the Fund has urged reinvigorated trade integration to boost economic growth (IMF, World Bank, and World Trade Organization, 2018); and (iii) in low-income countries (LICs) especially in Africa, the Fund has shown that factors related to trade openness can constrain sustained growth (IMF, 2013a). Surveillance of trade policy developments has also informed the Fund’s work on inequality, with trade liberalization and export growth, for example, found to be associated with lower income inequality, especially in developing countries (Jaumotte, Lall, and Papageorgiou, 2013).
Turning to internal products, staff have produced abundant briefings for management on trade-related issues from a multilateral perspective. These memos have grown both more frequent and more substantive in recent years. They are produced on average once a month, covering a variety of current topics: from trade policy measures in individual countries to regional trade agreements (RTAs); and from multilateral trade consultations to relevant threats to the GTS. Moreover, in the aftermath of the 2009 evaluation, the Trade Monitor was launched as a vehicle to provide staff with information and data on the latest developments in goods and services trade. Twenty-seven issues were produced between March 2010 and May 2013, when distribution was interrupted. Production was resumed in April 2017, in a shorter format (three–four pages), using standardized, readily-updated tables and charts.
Since the 2009 evaluation, there has been a modest yet appreciable increase in use of REOs as a channel for regional trade policy surveillance, although attention has been uneven.11 Most importantly, REOs have begun to bridge multilateral and bilateral dimensions of Fund surveillance in trade by linking developments assessed in recent WEOs with their impact on regional and country growth and investment prospects. The 2018 Fall REO for the Western Hemisphere Department (WHD) (IMF, 2018b), for example, addressed regional spillovers from ongoing trade tensions. REOs have also been used to assess impacts of spillovers and as a mechanism to draw lessons from policy experiences across regions. The 2019 Spring REO for the African Department (AFR) (IMF, 2019b), for example, considered potential for further regional trade integration in Sub-Saharan Africa, cross-referencing analysis in the Fall 2018 Asia and Pacific Department (APD) REO (IMF, 2018c), which highlighted how trade integration has helped propel development in Asia. REOs have covered a diverse range of issues including detailed analysis of the growth and impact of GVCs, opportunities for LICs to diversify through trade, assessments of effects of inward and outward spillovers through trade channels, attention to wide sharing of gains from trade, and regional integration as a catalyst for global trade integration, some of which were explicitly requested by Executive Directors during the 2015 Review.
IMF Work on Trade in the G20 Context
In response to a request by the G20 Framework Working Group,1 IMF staff put together in May 2016 a “path forward” to reinvigorate trade integration as a means to boost global growth. The report underscored the high potential of “new” areas such as improving regulatory cooperation, exploiting complementarities between investment and trade, and removing barriers to services trade and pointed to the importance of strengthening the multilateral trading system. In doing so, it focused on the need for flexibility in negotiations and coherence in the face of growing complexity (IMF, 2016).
As background for the March 2017 Meeting of G20 Sherpas, the World Bank, the WTO, and the Fund presented “Making Trade an Engine of Growth for All: The Case for Trade and for Policies to Facilitate Adjustment” (IMF, World Bank, and World Trade Organization, 2017). Basically a “guide” for countering the growing skepticism about open trade and the uptick in protectionism, the paper argued that, after a period of slow growth and inadequate attention to those left behind by trade and globalization, a better explanation and sharing of the benefits of trade were critical to exploit trade’s potential to support strong, inclusive global growth. It argued for a combination of domestic policies (e.g., labor market policies, education, housing, and regional policies) and further trade integration supported by an open, rules-based global trade system (GTS) with the WTO at its center.
Collaborating again with the World Bank and the WTO, the Fund produced, in September 2018, “Reinvigorating Trade and Inclusive Growth” (IMF, World Bank, and World Trade Organization, 2018), following the G20 leaders meeting in Hamburg and amid growing concerns about trade tensions. Building on previous work, the paper reiterated the criticality of reforms to achieve a strong and flexible GTS, the potential of trade as an engine of economic growth,2 and the need for complementary policies to ease adjustment costs. The paper also dug deeper into how trade reforms could contribute to reduce poverty, help marginalized sectors of the population, enhance the participation of small and medium enterprises, and empower women.1 The G20 Framework for Strong, Sustainable, and Balanced Growth was launched by the leaders at the 2009 Pittsburgh Summit, giving the IMF a prominent role (including through the Mutual Assessment Process launched at the June 2010 Toronto Summit).2 The paper identified five areas with high potential: services trade, regulatory cooperation, e-commerce, investment, and market access.
Overall, 7 percent of all REO chapters over 2010–19 have focused on trade policy issues with considerable variations across regions and over time. For example, between 2010–19, APD REOs included a total of 53 trade policy chapters, WHD REOs included 5 chapters, while EUR REOs included just half of a chapter on trade policy issues.12 Attention to regional surveillance of trade policy was particularly concentrated in 2015, with a quarter of all trade policy chapters written for the Spring and Fall 2015 REOs. To some degree, IMF working papers have served as an alternative vehicle for regional trade policy analysis, for example, in analyzing the impacts of shifts in intra-regional trade in Sub-Saharan Africa on growth (Arizala and others, 2019); consequences of trade policy uncertainty on investment in the euro area (Ebeke and others, 2018); and the impacts of the Trans-Pacific Partnership on Latin America and the Caribbean (Cerdeiro, 2016).
Text analysis shows that since 2015 coverage of trade policy issues in REOs has been substantially higher than before, including in the early 2000s (Figure 3). In particular, attention to GVCs and other emerging issues, trade tensions and spillovers, as well as the GTS have all risen very significantly. In comparison with the period 2010–14, references to these issues more than quadrupled from 2015 to 2019.
For the update, three exercises were conducted to assess coverage of trade policy issues in bilateral surveillance since 2009: (i) a desk-based overview of Article IV reports and SIPs for the period 2010–19, for China, the euro area, Japan, the United Kingdom, and the United States, economies that accounted for 62 percent of global trade in goods; (ii) a textual analysis of all IMF Article IV reports for the evaluation period; and (iii) a textual analysis of SIPs for 20 advanced and other systemically important countries and for the euro area, which accounted for over 75 percent of global trade in goods and services in 2018.13
Five major economies
The review of Article IV reports for 2010–19 for China, the euro area, Japan, the United Kingdom, and the United States found that coverage of trade policy issues has risen substantially across all five economies, particularly since 2016 (see Annex 2). The number of paragraphs focusing specifically on trade policy rose from an average of 0.9 paragraphs per Article IV report in 2014, to 8.8 paragraphs per report in 2018. While the 2019 Article IV reports for Japan and the United Kingdom were not available at the time of completion of the update, the average for the 2019 Article IV reports for China, the euro area, and the United States alone increased to 11 paragraphs per report in 2019, with an estimated average for all 5 economies of 8.9 paragraphs per report (Figure 4).
The update examined coverage of trade policy issues in Article IV staff reports based on five themes emphasized by Executive Directors in interviews as meriting particular attention: (i) staff advice and recommendations; (ii) the underlying factors that had caused changes to the country’s trade policies; (iii) the impacts of a country’s own trade policies on its trade potential and trade competitiveness; (iv) discussion of inward spillovers; and (v) discussion of outward spillovers.14 As shown in Figure 5, since 2018 there has been a very sharp increase in references to spillovers, particularly outward spillovers, with staff reports for China, the euro area, and United States strongly emphasizing the adverse trade impacts and consequences arising from unilateral tariff increases on the imposing and target countries, on third countries, and on global trade. In 2019, this emphasis has further increased, illustrating that staff’s concern to highlight and analyze the impacts of outward spillovers from trade has become by far the most urgent priority for trade policy coverage in Article IV reports in these economies. The frequency of attention to other themes has also increased since 2016, although in comparison with the focus on outward spillovers, the increase has been less dramatic.
Over the review period, staff reports for the five major economies covered an impressively diverse range of trade policy issues, typically supported by a more detailed analysis in accompanying SIPs. The U.S. staff report for 2019 provided an in-depth analysis of the impacts of ongoing trade tensions with China, and considered the outward spillovers, from higher tariffs on Chinese imports on trading partners, including trade diversions and impacts through these countries’ participation in global supply chains. Other recent U.S. staff reports have examined the influence of trade-related factors in explaining a decline in labor’s share of income since 2000; potential gains from more ambitious trade agreements; and impacts of a successful renegotiation of the North American Free Trade Agreement. The 2019 staff report for China examined outward trade spillovers from recent U.S. and Chinese trade actions and considered the impacts of a managed bilateral trade deal between the two trading partners, including potential new distortions, trade diversions, and impacts on Asian and European gross exports. Other recent China staff reports have analyzed factors causing a slowdown in imports; analysis of implications of trade reforms for China’s rebalancing, reform of state-owned enterprises in the context of expanding foreign market access, and value chains, while recent SIPs included analysis of the Belt and Road initiative and medium-term sectoral impacts. Recent euro area staff reports emphasized the need for ongoing modernization of intra-EU trade in goods statistics and for more ambitious trade agreements and emphasis on new issues in bilateral trade policy and trade policy surveillance. For Japan recent reports considered the impacts of production offshoring on exports and consequences of trade policy changes for GVC-reliant exporters. The 2018 U.K. staff report assessed the risk, costs and spillovers of the United Kingdom’s decision to leave the European Union (Brexit) under a baseline and other progressively disorderly exit scenarios, with the accompanying 2018 SIP estimating the long-run economic impact of Brexit, including the impact of higher trade barriers. Other recent U.K. staff reports examined uncertainties associated with—and emphasized the need to limit disruptions and global spillovers and minimize barriers to—trade, services, and labor flows.
Trade policy surveillance also included several common strands highlighted in most or all of the five economies. This included analysis of the gains from more ambitious trade agreements; impacts on growth from tariff escalation and from a global retreat from cross-border integration; analysis of regional supply chains; and opportunities and challenges arising from new trade policy issues including e-commerce. Common policy recommendations consistently highlighted in staff reports included avoiding protectionist measures, removing trade restrictive measures, encouraging trade openness, continuing to support the multilateral trading system, promoting policies to support adjustment to trade, and ensuring that the gains from trade are evenly and widely distributed.
Text analysis of trade policy coverage in Article IV staff reports for all IMF members for the period 2000–19 suggests that attention to trade has shifted less dramatically than with multilateral surveillance but has followed a similar pattern (Figure 6).15 Overall references to all trade policy issues reached their highest level in 2018 (2,690 references) since 2000. More conventional trade policy issues—goods and services trade together with tariff and non-tariff measures—have continued to constitute the major focus of these reports. Nevertheless, from 2011, attention to all other issues, notably assessment of trade tensions and spillovers and to GVCs and emerging trade policy issues has risen steadily.
The update also looked at bilateral analysis of trade policy issues beyond Article IV reports. A desk review of SIPs for 20 advanced and other systemically important countries and the euro area for 2000–19 found that 4.8 percent of all chapters in SIPS focused on trade issues in the period 2010–19, a tick higher than 4.7 percent between 2000–09. The number of chapters wholly or mainly devoted to trade policy issues rose from 233 chapters in 2000–09, to 271 chapters between 2010–19.16 Countries with the largest number of SIP chapters focused on trade policy since 2010 include China (9 chapters), Japan (4), Canada (21), and Indonesia (21). Text analysis of SIPs since 2000 for the full membership highlights a discernible decline in trade policy coverage in these documents in the decade from 2010, in comparison with the previous decade (Figure 7). In part, this decline reflects a more economical approach to writing more generally (the average number of pages per SIP has declined from 76 pages (2000–09) to 47 pages (2010–19)), although even after accounting for this, trade policy coverage in SIPs has declined. To some degree, the decline in coverage of trade in SIPs is balanced by rising coverage in Working Papers prepared by area departments (see discussion below).
Staff have worked to address the data concerns raised by the 2009 evaluation. Staff responded quickly to weaknesses with PTA data and data on trade restrictiveness by initiating closer collaboration with the World Bank and WTO in 2010; and in the same year provided a detailed list of information sources available to Fund staff for trade policy work. Detailed information on PTAs and RTAs are now maintained by the WTO, addressing the gap highlighted in the 2009 evaluation. From 2010, the Fund has regularly collaborated with and utilized data provided by international partnerships as an Associate Member of the Global Trade Policy Analysis Consortium; it utilizes data from the consortium’s extensive trade policy database and collaborates with its members to compare results on the macroeconomic impacts of tariff changes generated by the IMF’s Dynamic Stochastic General Equilibrium (DSGE) and Computable General Equilibrium (CGE) models.17 Staff developed new time-series estimates of export quality in 201318 and new trade policy indicators in 2018.19 Since 2016, the coverage and timeliness of the Fund’s Direction of Trade Statistics (DOTS) database has improved significantly. In 2019, the IMF released a new index of effective exchange rates that for the first time includes new weights for trade in services; and has expanded analysis of the factors influencing the currency of trade invoicing, drawing on recent work in this area.20
Issues and concerns
All stakeholders, internal and external, interviewed by the update team concurred on the high quality, relevance, and timeliness of the Fund’s multilateral work on trade policies, particularly in the WEO and in contributions to the G20. They welcomed the Fund’s increased attention to trade issues which preceded the recent surge in trade tensions, and highlighted the substantive analytical contribution, the useful scenario analysis of trade-related risks and the delivery of strong and clear messages to the international community in general and to policymakers in particular— for example, on the need to avoid protectionism and to reinforce the MTS. At the same time, some observers stressed the need for continuing work on the links between trade, exchange rates, and external adjustment (as done in the 2019 External Sector Report); on the consequences of rising share of services both in GVCs and in global trade; on implications of rising levels of e-commerce; on the impact of rapidly increasing digitization of trade; and on the inter-linkage between reduced trade opportunities and rising migration flows.
Interviews with Executive Directors highlighted a wide range of views on the quality, purposes, and coverage of bilateral trade policy surveillance. While Directors acknowledged the Fund’s increased attention to trade, many felt that the Fund’s bilateral trade policy work in recent years had not received the prominence devoted to the issue in multilateral surveillance. Perceived gaps included limited country-specific staff advice on the policy choices available to members and a lack of granularity in country-specific advice, including on how countries can mitigate the negative effects of trade tensions and protectionist measures by others. Several Board members also recommended more attention to assessing the macroeconomic implications of plurilateral agreements and differing international models and approaches to trade in an increasingly plurilateral trade landscape, more advice on how barriers to trade could be broken down, and on diversification strategies.
A particularly challenging task has been the translation of multilateral surveillance messages into bilateral advice. Several Executive Directors considered that the coverage of trade policy issues in multilateral surveillance, for example, the increase in trade tensions and unilateral tariff increases, has not translated sufficiently into specific, well-tailored advice to countries. More generally, a number of Directors saw a disconnection between the plurilateral/multilateral agenda and the impact of trade policies on the ground. Directors suggested that multilateral surveillance should draw more on country experiences and that better interdepartmental coordination would not only help translate multilateral surveillance into concrete bilateral advice but also reduce inconsistencies and increase the accuracy and credibility of recommendations.
The 2009 evaluation raised specific concerns regarding the evenhandedness of the IMF’s treatment of trade policy issues, pointing to uneven quality in the treatment of these issues across individual countries and over time. Directors interviewed for the update seemed more satisfied with evenhandedness, recognizing that the size, weight of trade within the economy, and specific circumstances of each member warranted different levels of attention to trade policy. They were pleased that the Fund had consistently been willing to champion the benefits of trade openness and warn against the risks in raising trade barriers, across bilateral and multilateral surveillance. However, a few concerns about evenhandedness were raised. First, several Directors suggested that the Fund’s advice on trade liberalization had sometimes been more direct or pointed for LICs and smaller members, suggesting, for example, that the Fund had been less forceful and specific in bilateral surveillance of the United States and/or China in giving advice on the need to address sources of recent trade tensions. Some Directors also highlighted a perception that comparing the coverage across major economies, staff discussion of barriers to trade and economic distortions had been addressed with more emphasis in bilateral surveillance of China than in the advanced economies in this group.
Trade Issues in Other Fund Activities
Continuing the trend identified by the 2009 evaluation, trade-policy-related conditionality has virtually disappeared from Fund-supported programs during the update period. According to the MONA database,21 only one arrangement approved since 2010 included trade-related conditionality, although conditionality on customs-related measures to improve revenues was not uncommon.22 Several factors may have contributed to the sustained absence of trade-policy-related conditionality.23 First, persistent trade liberalization efforts across developing countries have reduced tariffs and quotas and dismantled protectionist barriers to the point where criticality to the program may have become hard to justify. 24 Recent staff analysis comparing average regulatory liberalization by country group and across reform categories, including trade, supports this argument.25 In fact, during interviews, neither staff nor EDs could recall instances of arrangements that failed to include macro-critical trade policy conditionality that would have been warranted. Second, an increasing trend towards members’ participation in free trade agreements (FTAs) and regional trade agreements (RTAs) has shifted direct and indirect control of some aspects of trade policy away from members, reducing the possibility of including such conditionality.
Evidence suggests that the advisory role on trade policy issues in the context of Fund-supported programs has not been strong as recommended by the 2009 evaluation. The MONA database identifies in its “Program Goals and Reform Strategies” table those programs that include trade among their “program strategies.” Of the 197 programs that were active at some point between January 2010 and July 2019, 13 percent were classified as including these types of goals or strategies, down from 25 percent between 200526 and 2009. Desk review of these 25 program documents—7 PRGF (including 1 PRGF-EFF), 7 ECF (including 1 ECF-EFF), 2 SBA, 4 EFF, 3 PSI, 1 FCL, and 1 PLL—reveals wide variation in the focus on trade policy issues and the kind of treatment given to them, ranging from constituting an explicit pillar of the program strategy with a discussion of concrete measures, to tangential references in the context of wider structural reforms, with several cases with no mentions of trade policy issues at all. In all cases, the treatment of trade policy issues was descriptive rather than analytical, and typically focused on trade liberalization, the reduction of protectionism and distortions, and the improvement of the business climate. Achieving greater regional integration, in most cases in the context of RTAs, was also a recurrent objective. In 6 out of the 25 cases, it was explicitly mentioned that trade policy measures were adopted with the collaboration, or under the leadership, of the World Bank, and in only two instances accession to the WTO was brought up. Text analysis of program documents reveals that, on average, trade policy work focused mainly on traditional areas such as exports and imports of goods and services.
Most Executive Directors considered the absence of trade conditionality in Fund-supported programs to be appropriate and in accordance with the principles of criticality and parsimony supported by the Board. A number of them argued that, even if not included as part of conditionality, trade issues are often discussed in program negotiations and/or included indirectly in programs through balance of payments competitiveness or efficiency-related measures. A few Directors considered the use of trade policy conditionality to be problematic from a political economy and policy sustainability perspective. Other Directors, while not concerned by the absence of trade policy conditionality in recent years, opposed its elimination altogether as a matter of principle, arguing that in some cases its use may be (or might have been) warranted by the specific situation of the economy in question. Some even noted that conditionality about less relevant policy areas has been included in programs where trade-related conditionality would have been more compelling.
The IMF’s Trade Integration Mechanism (TIM)27 has not been used since 2006 and the operational guidelines for its application have not been updated since the creation of the instrument in 2009. According to staff, design flaws and the existence of more appealing alternatives within the Fund’s toolbox may lie behind this lack of interest.
Beyond analytical work to directly support bilateral and multilateral surveillance, the Fund has continued to produce broader research on trade policy issues. Between 2010–15, a Research Department (RES) program focused on trade and diversification, yielding several research papers and a new data series on diversification and an index of diversification at the country level, which is now widely used to assess countries’ progress in diversifying including by the World Bank and other partners. The Fund has constructed a new dataset on trade in services for 192 countries. The dataset has been used to highlight that services exports are gaining strong momentum and have potential to catalyze a new wave of trade globalization; and has introduced opportunity for new research applications for Fund work on structural transformation, resilience, labor allocation, and income distribution (Loungani and others, 2017). Most recently, the Fund has developed a new Index of Trade Uncertainty, finding that global trade uncertainty is rising sharply, having been stable at low levels for about 20 years. Research has also been conducted on trade finance data (Van Wersch, 2019); on the influence of size and income level on export diversification in LICs and small states (Lee and Zhang, 2019); the macroeconomic costs and impacts of overall tariff increases and continued trade tensions (Furceri and others, 2019); the impact of trade costs on the current account (Boz, Li, and Zhang, 2019); and on estimated gains to welfare from the African Continental Free Trade Agreement (Abrego and others, 2019). Moreover, trade developments over the last few years have led to an increase in the amount of trade-related work embedded in other workstreams, including growth, productivity and jobs, including the impacts of trade in improving productivity (Ahn and others, 2016); and the role of external factors including the terms of trade on growth accelerations and reversals in emerging market and developing economies (Gruss and others, 2018); the respective roles of trade and technology in explaining declining labor share in global income (Dao and others, 2017); and on the potential implications of tariffs or other forms of barriers to trade, including for the international allocation of production/value chains.
Looking at working papers on trade-related topics, there has been a pickup in use of this outlet since 2017, led by the Research Department (Figure 8). There has also been some recent increase in area departments, which together authored the majority of Working Papers that included trade policy as a subject descriptor (153 of 349 Working Papers since 2010). The largest number have been produced by the Asia and Pacific Department and the Western Hemisphere Department. Text analysis shows that the recent rise reflects substantially increased focus on GVCs and emerging issues, trade tensions, and spillovers as well as the GTS, with references to these issues comprising over 60 percent of all references to trade policy issues from 2017 (Figure 9).
Led by RES, the Fund has reinforced its capacity to model the macroeconomic consequences of changes in trade and in trade policies in response to concerns about rising trade tensions. From 2010 staff have introduced tariffs—and subsequently non-tariff measures (NTM)—as variables within the IMF’s DSGE macroeconomic model, enabling the Fund to model the macroeconomic impacts of these changes. Since 2018, staff has developed a CGE model, in collaboration with external partners including Purdue University, to capture the sectoral impacts of changes in tariffs and non-tariff measures. In addition, a new research program within the Macro-Structural unit in RES has begun to examine the effects of structural reforms on trade, tracing the effects of reforms among countries at different stages of development, the costs of reforms, and how countries can learn from each other.
Board members, staff, and external stakeholders all considered the Fund’s trade policy research to have been of high quality and, in the context of rising global trade tensions, appropriately focused on estimating their macroeconomic consequences. They encouraged staff to broaden research to focus on the opportunities to restore dynamism in trade as an engine for global growth, including through more detailed assessments of potential to expand global trade through e-commerce, digitization, and through as yet untapped gains from services trade, including in financial services.
Both the Fiscal Affairs Department (FAD) and the Statistics Department (STA) provide capacity-building support to members related to trade policy issues. FAD technical assistance on trade is largely related to tax and customs administration to support tax revenue mobilization and strengthened tax administration, including customs and excise taxes, working closely with the World Bank. Interviews with staff highlighted that both demand for and the complexity of Fund technical assistance in this area have increased, reflecting the growth of digitization of trade and e-commerce, countries’ progress in trade liberalization and tariff reduction, and the shift in attention to regional integration. In addition, FAD has launched work on mainstreaming coverage of these issues and organized a series of tax treaty workshops.
STA provides support to member countries in compiling statistics on international trade in goods and services (ITGS), an important component of both balance of payments statistics and national accounts; promotes the development of ITGS statistics through headquarters-based training and through regional courses, including a new course on ITGS in 2018; and has developed joint training programs, including, for example, with EU-Eurostat to support six Western Balkan countries.
Communications and Advocacy
With growing intensity and strength, the IMF has advocated for a reformed rules-based MTS and a “new multilateralism” since at least April 2015, with the former Managing Director Christine Lagarde playing a prominent role (Lagarde, 2015).28 This advocacy role has been supported by the Fund’s research and modeling work and shows clearly in the Managing Director’s speeches and Global Policy Agendas (GPAs); text analysis reveals a marked increase in the attention to trade policy since 2014, with the developments in the GTS and trade tensions drawing most of the attention (Figure 10).
All stakeholders interviewed by the IEO—Executive Directors, national authorities, representatives of international organizations, academics and think tanks, and staff—strongly appreciated the Fund’s leading role in defending the multilateral trading system, and very specially the part played by the former Managing Director. They saw the Fund’s advocacy as critical to raising awareness of the importance of multilateralism and open trade for global growth and stability, which they saw as a public good and as part of the mandate of the Fund. Indeed, many outside observers emphasized that among the international organizations, the Fund had been particularly effective in championing multilateralism, building on its surveillance mandate across the full membership and its macroeconomic skills set. It was also appreciated that the Fund’s messages had grown in strength and sophistication over time as the challenge to multilateralism and the threat of trade tensions to the global outlook have mounted.
Several factors were identified as supporting the effectiveness of the Fund’s advocacy, including the ability to underpin the headline messages with detailed analytical work on the macroeconomic consequences of trade, the perceived independence and balanced approach of the Fund, the use of clear and plain language, the Fund’s overall reputation for providing balanced and impartial advice, and the personal skills and authority of the former Managing Director. Staff also emphasized the internal collaborative effort behind the Fund’s advocacy on trade issues, involving multiple departments, that leads to succinct and sharp messages in the Managing Director’s speeches and widely publicized reports.
Relations with Partners
Since 2009, effective cooperation among international organizations in the trade policy area has grown even more important in the face of the current threats to multilateralism. For the IMF in particular, cooperation is key for its effectiveness, as it has limited technical capacity on trade issues per se and a bounded mandate in the trade policy domain. However, while many core trade policy aspects fall squarely within the mandate of other institutions—for example, multilateral negotiations at the WTO, structural policies at the World Bank, and developmental issues at UNCTAD—the Fund has a well identified role and comparative advantage. It is widely regarded as the international institution best placed to quantify and analyze the macro-economic effects of trade policies, both at the national and international levels.
World Trade Organization
Recent years have seen a substantial increase in collaboration between the Fund and the WTO, a trend highlighted by senior WTO officials, Executive Board members, staff, and external stakeholders. This re-engagement was generally ascribed as responding to the growing populist antagonism to globalization and multilateralism, global trade tensions, and rising stress in multilateral trade governance, including at the WTO. Interviewees emphasized a strong sense of IMF-WTO complementarity as a factor underpinning this good relationship. They considered it paramount that the Fund continues to provide policymakers and the international community with high-quality evidence-based analysis of the macroeconomic consequences of trade policies.
The IMF-WTO relationship seems good across institutional levels. Former Managing Director Lagarde and the WTO Director-General are perceived as having had a strong working relationship, which sent a clear signal to lower organizational levels. Trust is well established among staffs and the mechanics of communication are effective. SPR serves as the main interlocutor, but other departments including RES, area departments, and resident representatives also have frequent direct contacts. The good relationship is mutually beneficial in avoiding inconsistencies, clarifying doubts, and sharing information. According to staff, the 1996 institutional cooperation agreement between the WTO and IMF has provided a clear legal and institutional basis for cooperation. The agreement has not been updated in over twenty years, but this is not seen as a concern because it incorporates sufficient flexibility.
Cooperation has been most intense on high-profile occasional joint products rather than on day-to-day engagement. As well as seminars and events, there have been two high-profle documents produced jointly by the Fund, the WTO, and the World Bank (see Box 2). These papers were appreciated by Executive Directors, the staff in the three institutions, and outside stakeholders alike for their analytical rigor and their effectiveness communicating a joint institutional view to country authorities and the broader international community. On regular activities, both IMF and WTO staff reported a good working relationship in the context of the WTO’s Trade Policy Reviews, Trade Monitoring Reviews, and countries´ accession processes, and the Fund’s bilateral surveillance and multilateral flagship reports, although there is scope to deepen collaboration, specially at the country level.
Notwithstanding its overall soundness and effectiveness, there are a number of challenges and potential risks to the IMF-WTO relationship:
► First, there is a generalized concern at the WTO that the Fund’s overall interaction with the institution has decreased over time, notwithstanding the recent period of intensified cooperation and despite the greater role of trade in the global economy and increased linkages between trade and other policies. The closure of the IMF Geneva office, open between 1965 and 2008, has meant that regular collaboration (with the WTO and other Geneva-based organizations) has become inherently more difficult. In parallel, the shift in the focus of the IMF’s trade work from country level to multilateral and systemic economies level has reduced opportunities for mutual collaboration.
► Second, the different character of the two institutions could lead to misunderstandings. Several stakeholders emphasized that the complexity of negotiations and accession processes and the “member-driven” nature of the WTO were not well understood at the IMF—which they considered better able to speak truth to power—leading to potential frustration or unreasonable expectations.
► Third, there is a strong personal component in the IMF-WTO relationship. In practice, the relationship is largely channeled through a limited number of staff members, whose efforts, knowledge, background, interests, and personal connections currently provide the basis for the maintenance of a productive cooperation. In their absence, the relationship could become less close, suggesting a “key person risk” when these individuals move to other roles.
While neither IMF staff nor Executive Directors expressed strong views regarding the possibility of reopening the Geneva office, staff observed that should a decision be made, there were several options to achieve this in a cost-efficient manner. More generally, a strategic decision on the future of the Fund’s collaboration with the WTO would need to take into account not only cost-benefit considerations, defined in a broad sense, but also how the resolution of the current crisis in the WTO affects the potential for such collaboration.
The IMF–World Bank relationship on trade issues has also intensified in recent years after a period of weaker momentum. Interviewees emphasized the relevance of the seven trade conferences that have been co-organized by the IMF, the World Bank, and the WTO, between 2011 and 2019 with the three institutions taking turns to host the event. The World Bank does not have a multilateral surveillance mandate and in general it has been less vocal on global trade issues, and its large team of trade experts are mainly devoted to country work or to deeper research. Two minor concerns were expressed by Bank staff. First, at the country level, it was mentioned that occasionally the Fund had approached tariffs reform from a revenue perspective, instead of focusing on the long-term fundamental benefits of freer trade. Second, Bank staff opined that a closer coordination of both institutions’ work on trade agendas would help efficiency.
Collaboration with the OECD, which undertakes extensive analysis of structural and sectoral reforms, is considered to work well on a largely informal and unstructured basis. Interactions occur at the staff level and, for the most part, in the sphere of the G20, although there are contacts in the bilateral surveillance context as well. In a mutually beneficial fashion, the OECD benefits from the IMF’s universal membership and presence, while the IMF has periodically utilized the specific knowledge of the OECD, including OECD data on trade in value added.
IMF support for the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries (EIF) is highly appreciated, although the Fund’s involvement has diminished over time. As a founding member, the Fund contributes to the chapter on the macro-economy of the EIF’s Diagnostic Trade Studies, reports its technical assistance activities periodically to the EIF, and is represented on its board. Beyond those activities, EIF representatives noted that due to geographical distance, collaborative work with the Fund is limited and less intense than with other agencies based in Geneva and Paris. In an attempt to reboot the relationship, joint workshops have been organized recently.
The Fund maintains an active relationship with the International Trade Centre (ITC). Collaboration happens both at the head and staff levels and in a number of contexts, including the G20, the UNCTAD project, and the ITC’s own annual report, which is provided to the IMF for peer review. ITC representatives explained that while their institution has a triangular cooperation with the WTO and UNCTAD, there is plenty of room to deepen ITC-Fund collaboration. A niche for this collaboration would be, in their view, supporting and encouraging the participation of developing countries in global trade negotiations.
UNCTAD currently has the least active working relationship with the IMF, which was characterized as minimal outside the MAST project. Looking forward, UNCTAD representatives saw potential for reviving the relationship and strengthening technical collaboration. They offered several suggestions, including closer joint collaboration in the context of developing countries, to leverage both UNCTAD’s close engagement with these countries and the Fund’s analytical capacity. The identification of concrete joint deliverables, particularly in the context of the Sustainable Development Goals, was also seen as an important potential opportunity to deepen collaboration. From the organizational perspective, they saw the introduction of UN Resident Coordinators as an opportunity to engage with the Fund on the ground.
Structure and cooperation
Trade policy work in the IMF continues to be conducted in a decentralized fashion with responsibility spread across different functional and area departments. Staff considered that this approach had provided the necessary flexibility to adapt quickly to changes in the global trade landscape and handle trade issues at the country level when warranted.
SPR plays the coordinating role; area departments are responsible for interactions on trade policy at the country level; RES provides research, modeling, and data support, as well as preparing multilateral inputs; and LEG analyzes the legal aspects of trade agreements as well as specific country trade law developments. Within SPR, the External Policy Division (SPRXP) brings together the complementary aspects of trade work produced by other departments and ensures the consistency of the institutional messages on trade. This division seeks to champion trade policy work at the Fund, identifying and initiating the strategic exploration of emerging issues, keeping management and other departments aware of global developments, and, more generally, contributing to a better institutional understanding of trade policy. SPRXP also channels and facilitates most of the Fund’s relationships on trade with other international organizations and gathers trade intelligence in international fora.
The current structure of SPRXP—involving exchange rate and capital account issues as well as trade—leads, according to staff, to substantive synergies and works well as a means to develop a holistic view of the external sector, covering and integrating, inter alia, capital controls, trade tensions, external imbalances, and currency developments. During interviews, staff noted that the 2009 evaluation had a strong influence on the thinking behind the creation of SPRXP and, more generally, the organization of trade work within the institution. Still, staff devoted to the trade leg in SPRXP are relatively few, which limits analytical capacity and makes the relationship with other departments important. Most Executive Directors and staff members agreed that there is no pressing need for the re-creation of a full trade-devoted division, although they remained open to the possibility.
According to interviewed staff, coordination among departments is working well and is mutually beneficial, although there is room for deeper cooperation. SPRXP, RES, and country teams meet frequently and have an established network for mutual support and exchange of information. The type of coordination depends very much on the product that is being developed. For the preparation of WEO chapters and research papers, RES takes the initiative, keeping SPRXP involved from an early stage. By contrast, G20 work is led by SPRXP. For surveillance and programs, the preferred approach has been to assign primary responsibility for the work on trade to area departments, with the necessary support from SPR, RES, and FAD. SPRXP supports country teams in understanding developments in the multilateral trading system and, when applicable, through preparation of policy notes and trade policy questions for authorities. SPRXP also reviews trade policy work of area departments in the context of Fund-supported programs and surveillance in selected countries.29
While there is no precise measure available of the resources specifically devoted to trade as opposed to other issues, evidence on the overall number of trade-focused studies in bilateral surveillance and the organization of trade work suggests that there has been no particular increase in such resources during the update period. Instead, the increased attention to trade policy issues observed particularly in multilateral surveillance and the bilateral surveillance of the largest trading economies has been achieved by flexible shifting of work priorities within the existing allocation of resources across the institution.
Staff acknowledged that the need to address the stresses in the MTS has imposed difficult trade-offs. For example, both SPRXP and RES have had to abandon, postpone, or adjust certain streams of trade-related work to address more urgent priorities. Similarly, staff in country teams indicated that over the last two years the need to respond to growing global trade tensions has drawn resources from other areas of work—including the correction of global imbalances and the monitoring and analysis of financial crises. Some staff members pointed to the lack of specialist trade policy expertise among staff, a concern shared by a few Executive Directors. To alleviate shortages in expertise, staff suggested continuing to work temporarily with external consultants, an approach that they indicated has been successful in the past, hiring macroeconomists with some experience in the field, and intensified coordination with partner agencies.
Most Executive Directors suggested that before dedicating more resources to trade work, other alternatives, such as increasing the efficiency in the use of current resources (e.g., through training), enhancing internal and external collaboration, and clearer prioritization, should be exhausted. A number of them saw value in conducting an assessment of the adequacy of resources devoted to trade, taking into account resource constraints and competing priorities. In that respect, some Directors emphasized that such a review would need to first clarify the role and objectives the Fund should adopt in the area of trade.