The World Trade Organization and the insurance industry are in much the same business -- the reduction of risk.  The industry seeks to soften the impact of events that are beyond the control of its customers -- the insured.  The WTO largely seeks to prevent harm to the trade interests of its Members.  Both utilize contracts to do so —the industry’s members with their insured, the WTO through international agreements. 

Both are on the whole successful.

It took centuries to develop the modern insurance industry.  While trade rules and agreements of various sorts have existed for millennia, the multilateral trading system is much newer.  It was created in 1947.  The WTO itself, the organization that is synonymous with that global system, is only 24 years old. 

For nearly three-quarters of a century, the world has benefitted enormously from trade.  The existence of agreed rules making markets more open, accompanied by advances in technologies and deep international sources in finance, created vast opportunities for enterprises large and small to compete in world markets.  It has sped the creation of global value chains.  As a result:

• The volume of world merchandise trade has tripled since 1995, the year the WTO came into existence.
• In dollar terms, the value of world merchandise exports quadrupled, from about $5 trillion to $20 trillion.  And,
• The value of world GDP also nearly tripled, from $31.00 trillion to $84.74 trillion. 

This upward trajectory is not guaranteed.  Estimates of growth in world trade have been revised steadily downward -- from 4% growth in 2017, to 3% in 2018, and the most recent WTO forecast, which preceded the latest announced tariff escalations between the United States and China, put growth in trade in 2019 at 2.6%.  Weaker overall economic growth in China and Europe, increases in trade restrictions, a rise in economic uncertainty affecting investment decisions and rising consumer costs, all contribute to downward pressure on trade flows.

 

War and Peace

Meeting here in the Salon Versailles, it is worth recalling that in 1919 U.S. President Woodrow Wilson proposed that trade become a path to a sustained peace following the Great War.  Point III of his Fourteen Points provided:

The removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.

All of the participants agreed to Wilson's proposal.  None implemented it.  Within a decade, they constructed the largest tariff walls in history, which deepened and lengthened the global economic depression, and inadvertently planted the seeds for another world war.

No international agreement has ever prevented a war when signatories are intent upon making war.  This is all too evident in trade relations now.  The world's two largest exporting countries are engaging in what the press terms a “trade war”.  The WTO’s rules cannot prevent them from doing so. 

While economic agreements are unreliable in preventing wars, the history of the last three-quarters of history gives strong testimony regarding the important contribution of global economic agreements to help in maintaining peace.  The creation of the multilateral trading system and the World Bank and the International Monetary Fund, and for that matter, the European Union (and its predecessor organizations, starting with the European Coal and Steel Community), was all part of a strong belief that there is a distinct relationship between trade under agreed rules and peace.  Compelling and eloquent witness to this linkage is regularly affirmed by officials the last two countries to join the WTO, Liberia and Afghanistan, in 2015.  Liberia has suffered both a civil war and Ebola.   The problems in Afghanistan do not need to be elaborated.

Many among the 22 countries now seeking to join the WTO -- East Timor, Sudan, South Sudan, Somalia, Ethiopia, Iraq, and Bosnia-Herzegovina -- are conflict-affected.  They share with the founders of the post WWII international economic order -- the liberal trading system we now have -- a basic belief that raising the standard of living of their peoples through integration into the world economy enhances the possibilities for maintaining peace.   

Trade can move across borders in large quantities because of a number of factors.  The four that are most basic are

• agreed international rules,
• the availability of finance (including prominently insurance),
• suitable infrastructure (especially modern ports able to accommodate super container ships) and
• modern-day communications.  

Of these, when all works well, the rules pillar that makes trade possible is invisible, and was, until recently, taken for granted.  Macroeconomic policies can and do outweigh these factors in creating demand for traded goods and services, with central banks affecting the aggregate level of demand with monetary policy and governments setting fiscal policies.  But once the demand is created, trade flows only to the extent that the four factors just set out allow.

The enormous accomplishments of the multilateral trading system over the preceding decades gives insufficient comfort as to how emerging risks will be dealt with.

 

Risk factors

Uncertainties for world trade stem from a variety of sources.  Three at the top of the list are:

• The FIRST and largest cause of uncertainty is the growth in trade restrictions, the most prominent of which are those imposed by the United States and China on their bilateral trade. 

  There is no exact parallel in recent world history that can give a reliable indication of how the course of the China-US economic relationship will evolve.  In my U.S. government service and in private law practice, the issues in which I was principally involved often centered on the trade frictions between Japan and its trading partners accompanying the economic rise of Japan.  There were many differences but there are some parallels with current events.  

  It took three decades (roughly the 1960s to the mid-1990s) for the trade issues between the United States and Japan to be largely resolved. It is unrealistic to anticipate a full resolution of the commercial issues involved in the US-China economic relationship in anything like the near term.

  The restrictive measures taken by each affect more than the two protagonists.  Other trading countries have an interest in how the bilateral issues are resolved.   Sourcing patterns are changing.  Global value chains are being restructured.   There is an impact on investor confidence.  

  While the WTO cannot prevent the two largest trading partners from exchanging salvos of restrictive trade measures, there could be some at some point positive WTO involvement.  Some of their differences have already been submitted for WTO dispute settlement.  As important, when the two countries reach elements of an agreement, if some of these involve creation of obligations that are suitable for general application, the two parties can choose to refer them as proposals for adoption by all WTO members.  That neither party may be considering this as an option at present is not decisive.  It may be a course that appeals to both at a later stage. 

  In a development that could assist in reaching this outcome, this last week in Paris, the trade ministers of the European Union, the United States and Japan, meeting as a trilateral group, continued their process of discussing a series of specific matters of common concern.  The proposals on which they have been working relate to a number of subjects that reportedly are involved in the current U.S.-China trade conflict.  These include levels of industrial subsidies, the manner in which state-owned enterprises compete, and a rule against some forms of measures said to be imposed on inward investments.  This trilateral group, along with other WTO members, has already tabled in the WTO a proposal for the enforcement of reporting requirements to provide greater transparency. 

  If all four of the largest trading WTO Members agree to support proposals that would benefit the trading system generally, the chances for the adoption at the WTO are reasonably high. This positive, multilateral outcome could just be wishful thinking.  At this point, there is no solid public information on what solutions the U.S. and China are considering. 

• The SECOND major source of uncertainty is a decline of trust. Adherence to and conformity with international agreements has become less sure.  The increasing instances of the imposition of trade measures by major countries, together with the threat of further measures, and their departure from expected norms cannot avoid having a cumulative effect.  This has not only a serious adverse impact on global economic growth but is likely to impair the prospects for future cooperation within the WTO.  The degree of commitment to the multilateral trading system is called into question. 

  That said there is no evidence in Geneva that any of the 164 current WTO Members plans to withdraw from the organization.  The costs for any who did so would be literally incalculable – with no assurance that its trade would be treated fairly by any country with whom it did not have a very comprehensive bilateral trade agreement (and none are sufficiently comprehensive).  

  Not only has no country withdrawn from the WTO, on the contrary, the line at the door of those wishing to join the organization continues to grow.      

  The decline in trust cannot be accurately measured. It will occur in unpredictable ways and at unpredictable times.  

• A THIRD major element of risk is caused by an apparent gap in the consensus as to the future direction of the WTO -- a lack of a common perception of how all Members’ interests are best served.  This is most prominently displayed in a threat that has recently emerged:  the two-year moratorium on levying customs duties on electronic transmissions, created in 1998, and renewed every two years, may finally expire in December. 

  Services provided across borders have largely not been subject to tariffs.  The imposition of import duties on cross-border data-flows would dramatically affect the economies of all major services exporting countries.   The adverse impact would be felt by the global insurance industry. 

  In the modern world of E-commerce, the levying of customs duties on the content of cross border data flows could be catastrophic.  Policy space for national governments, which means the absence of coverage by international agreement, which exists and can be healthy in many respects, if misapplied to curtail trade will be decidedly damaging for the world economy.

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In the background, are four other, less obvious but nevertheless serious, challenges:

The first is the shortfall in multilateral leadership.  The United States, the chief champion of the multilateral trading system for seven decades, has, under the current U.S. Administration, declared that it favors bilateral agreements rather than regional or multilateral arrangements.  This change in policy affects the nature of its economic leadership.  The gap opened by the loss of traditional U.S. leadership at the WTO has not been filled fully by others.  A number of WTO Members are becoming more active, making enormous efforts on issues of importance to world trade, but they have yet to coalesce around a single approach (that the United States might later join) to carry the multilateral trading system broadly to a new level of achievement. 

Second, rising populism and nationalism has changed domestic politics in many countries, largely eliminating enthusiasm among WTO Members for the traditional negotiations for trade liberalization.  There is a discontinuity from the trade negotiations that characterized the first five decades of the existence of the multilateral trading system. 

Third, the lack of a complete consensus of all WTO Members, the means by which agreements are normally to be reached in the WTO, inhibits and can prevent rule-making, a central purpose of the WTO.

Fourth, WTO dispute settlement as it has existed since the organization was founded, considered by many to be a crowning achievement of the multilateral trading system, appears to be headed for extinction, with no clear replacement.

The news is not all negative.  Potentially offsetting many of these risks are also a series of positive developments: 

• The G20 leaders meeting in Buenos Aires on December 1, 2018, declared their support for the WTO and called for its reform. 
• There are a series of Joint Initiatives of interested countries representing three-quarters of global GDP who are actively engaged in drafting new rules for E-Commerce and to facilitate investment, to improve market access largely for professional services, and to make the benefits of trade more accessible to small firms and to all, regardless of gender. 
• The EU, Japan and the United States have tabled a proposal on transparency, and as noted, have indicated that they plan to table at the WTO a series of other proposals for reform. 
• Canada is leading a group of twelve other WTO Members (“the Ottawa Group”) which is examining how to improve the existing work of the WTO. 

Success in these endeavors, including particularly assuring that new rules governing E-commerce are put into place, could reduce tensions and increase co-operation in the international trading system.  Progress in the WTO and in its predecessor, the GATT, has historically been glacial.  However, the world is evolving, in part due to the rate of technological change, and glaciers are not a good analogy as they are retreating not advancing.  To succeed in the near and medium term, efforts need to be taken to a higher level.

 

What you can do        

A wise management consultant, Peter Drucker, a half-century or more ago, concluded that one of the chief responsibilities of corporate CEOs is to manage the external environment.  The fact that the WTO covers services at all and that it protects intellectual property, was the result of efforts by business leaders to educate negotiators, law makers and the public on the need for new rules.  Prominent in this effort was Hank Greenberg, then CEO of AIG.  The effort was intense and took years. His tenacity, and those of peer CEOs who worked with him, ultimately delivered results.  In public policy, being right, making the intellectual case for action, combined with persistence and endurance, can create a high probability of success. 

The need for action is greater today than ever before.  You  can reduce the risks that your industry and your companies currently face.  Your companies depend on the health of a liberal international trading system.  You can press for its preservation and improvement.  And, more specifically, you can advance the specific commercial interests of your companies through expanding the coverage of that system.

There are two aspects of the industry’s commercial interests at the WTO that deserve your immediate attention.  They are of enormous importance. 

 

Immediate action items

A new threat that did not exist when the WTO was created nor even when its first major negotiation (the Doha Development Agenda) was at the peak of activity, is

FIRST, requirements for data Localization:  Insurers need to be able to send some types of personal data out of one territory for processing and/or storage in another.  They cannot afford to be forced to establish local servers in specific countries or be forced to use locally-owned data servers or storage facilities.  This growing area of government regulatory interest can make use of data substantially more costly, less efficient and less secure.   

A central element in the E-commerce negotiations, conducted within a Joint Initiative convened by Australia, Japan, and Singapore beginning in December 2017, and in which 77 countries representing three-quarters of global GDP are participating, will be the extent to which there is the free movement of data across borders.  What the participating WTO Members ultimately agree to can assure that your businesses can be conducted with greater or less regulatory interference.  Your active involvement is, I believe, in your companies’ interest.  In addition, the Geneva Association's analyses can contribute substantially to an informed debate. 

SECOND, the potential expiration of the moratorium on customs duties on electronic transmissions.

What the expiration of the moratorium would mean for trade is unknown, but it could be extremely negative.  Data moves across borders.  It is carrying with its insurance contracts, accounting services, consulting reports, inventory, results of R&D, music, video, technical assistance -- in short all of the information that makes the modern world economy possible.  Could all of these cross-border transmissions after December 2019 be subject to tariffs in any amount, whatever any government chooses?  Clearly not, as other existing trade commitments would be impaired.  But much of this is uncharted territory, and the risks of the unthinkable, what would be tantamount to a tariff war, would increase. 

 

Industry-specific interests

There are a welter of barriers and burdens on the provision of insurance internationally that are not targeted for reform at present but should be re-visited. 

It is difficult to assess what proportion of the world insurance market has been liberalized. The commitments are more than 20 years old. On the positive side, during this period, most Members have pursued further liberalization either autonomously or in the context of free trade agreements (FTAs).  However, the industry's assessment of commitments at the WTO has always been that they fall short of what they should be.

Among the WTO's 164 Members, while 113 made commitments in the insurance sector, many Members have retained market access and national treatment limitations. Typical examples include restrictions on foreign equity ownership, restrictions on the form of establishment and scope of business, and restrictions on cross-border supply and consumption abroad.  Mandatory cessions on reinsurance and/or insurance, when a country requires that a certain percentage of every reinsurance or insurance transaction be placed with a domestic insurer, continues to be a common market access barrier.

Information that the WTO has been given on the current needs of the insurance sector is dated.  An analysis of restrictions to trade in property and casualty insurance in 72 economies (developed and developing) conducted in 2009 by the U.S. International Trade Commission (1) found that limitations on cross-border provision of insurance were relatively common

In 2006, an ad hoc financial services industry group produced a “model schedule” for insurance services.(2)  Many of the elements cited relate to establishment of commercial presence, investment and limitations on foreign supply of compulsory insurance (e.g. auto insurance).

For the last 10 years or longer, the industry has not provided major input specifically with respect to the potential value of WTO negotiations regarding insurance, nor updated its list of concerns, which, for example, do not cover activities in space, an area of high risk.

There has been some initial activity at the WTO more generally about trade in services, however.  Last year, a group of Members (Chile, Mexico, New Zealand and Panama) made a proposal aimed to revive discussions of key services trade issues by proposing ‘exploratory discussions’ where delegations would exchange views on their current areas of interest.  But at this stage there is just the hope that this could help pave the way for some market access negotiations in the future.  An initial paper has been presented in this forum.  It is on tourism, and others are planned.   

Submitting a paper on financial services, a sector of much  broader significance, could help underscore recent trade, policy, and technological developments that make liberalization and openness increasingly relevant.  This would encourage a discussion among finance and trade experts in the WTO, but also a discussion between government officials and the private sector in capitals.

 

Conclusion

Populism and nationalism are still growing phenomena, but they need not undermine the trading system.  Your companies have enough at stake to make support of the liberal international economic order a company and industry priority. 

The narrative that needs to be given greater public airing is that the rules of the multilateral trading system are designed to provide fairness, and for business, essential predictability as well.  Fairness in a system of agreed rules is not an empty term.  It means, that there is to be no discrimination on the basis of national origin for the goods and services.  It means the protection of  intellectual property.   It means greater predictability needed for investment.  It is a system of rights secured by enforceable international commitments.

The Brexit debate should be a call to action at the WTO.  This is not because it is the business of the WTO to influence the Brexit decision in one direction or another.  It is because   the U.K. Treasury has estimated that the difference between being in the single European Market and having a Norwegian style arrangement with close adherence to EU regulations would mean a loss of GDP by the UK of 2% by the year 2035, a 5% loss to the UK if it had an arrangement similar to the EU-Canada free trade agreement, and a loss to GDP over this same period of 8% of GDP if the EU and the UK applied WTO rules to each other and nothing else.  There is a lesson in this. 

Extrapolating to the world economy, the loss of GDP by not having a global single market, which no country seeks, and living with the current WTO's coverage implies a $90 trillion loss of worldwide economic activity (GDP) by 2035.  By comparison, the annual GDP of all of the continent of Africa is less than $3 trillion. 

This Global Brexit Gap indicates the potential for improvement in the world trading system.  Services, and specifically financial services, account for an increasing level of the world's economic activity.  Were services liberalized, the gains to employment and global GDP would be enormous.  

The insurance industry can consider what it would gain as well as what more it would be contributing to the world economy if the WTO provided greater coverage to this vitally important sector.  It is worth analysis, and a consideration by company CEOs of what should be done.  It is part of the job of managing the external environment.   The world economy needs your active engagement in shaping its future.