Summer of Setbacks

The world economy continues to exhibit amazing resilience to events that in the past would have hurt it severely. This summer the combination of robust economic growth and low inflation seems to be continuing almost everywhere, despite such disturbances as the weakest dollar in more than 25 years, excessive subprime lending and another spike in oil prices. Economic strength persists irrespective of deficient economic policies in many countries, including the key ones. Why? Because the engines of modern globalization--international trade and investment--keep on propelling and shielding overall economic performance. It is thus somewhat ironic and rather suicidal that politics, especially in those countries that have historically benefited from economic integration and interdependence the most, is dancing more and more to the tune of protectionism and isolationism.

Examples of this dangerous trend abound. At a June summit in Brussels European leaders bent to the wishes of France's new president, Nicolas Sarkozy, and dropped the principle of free and undistorted competition from the treaty that, if ratified, will replace the EU constitution sacked by French and Dutch voters in 2005. Industrial interventionism, dressed up as economic patriotism, and opprobrious agricultural protectionism have new and powerful champions on the European continent, and that is not good news for global prosperity.

Unfortunately, things don't look any better on the other side of the Atlantic. China-bashing and the threat of imposing arbitrary trade barriers against that country look to be entrenched in American politics. Furthermore, not even relatively minor U.S. trade partners are safe from protectionist lobbies. To curry favor with Congress the proposed U.S. trade deals with Peru and Panama have been imbued with labor standards enforceable by trade sanctions--a protectionist artifice hotly discussed and ultimately rejected by the WTO's members a decade ago. Despite that unfair concession, Congress is still dragging its feet in approving those deals and appears close to killing the trade agreements with South Korea and Colombia, not to mention how it trashed comprehensive immigration reform earlier this summer.

Doha Debacle--Déjà Vu

On a global scale, the worst blow to the future of open markets resides in the latest collapse of the Doha Round negotiations. For all practical purposes this took place on June 21 in Potsdam, Germany, when a ministerial meeting among the so-called G-4 (the U.S., the EU, India and Brazil) that was supposed to provide the essentials for a broader deal among the entire WTO membership broke down abruptly and acrimoniously. Although the round is not yet formally defunct, its successful conclusion looks more remote than ever. For one thing, congressional authority for President Bush to negotiate trade deals expired on June 30, and congressional leaders wasted no time in making clear that consideration of fast-track renewal is not among their priorities. Experience tells us that no country will negotiate seriously with U.S. trade representatives in the absence of that authority. And it's more than likely that U.S. leadership in trade negotiations will be further undermined by the new farm bill that is expected to be voted on in the fall.

Just as when the talks collapsed at the Cancun WTO ministerial meeting in September 2003, U.S. officials blamed the Potsdam failure on India's and Brazil's intransigence. It's true that throughout the negotiations those leading emerging countries held fast to their highly defensive positions and to the last minute were unwilling to offer meaningful cuts in industrial tariff ceilings. But the fundamental cause of the Doha Round's failure lies in the rich countries' refusal to seriously reform their agricultural protectionism. The debacle is rooted in the lack of political will in those countries to dismantle a system that costs their taxpayers and consumers huge amounts of money and channels most of that money to only a small proportion of rich producers and other rent seekers in the farm sector. This protectionist system severely distorts world agricultural markets to the detriment of poor farmers in developing countries and serves as an argument for this group of countries to stick to their own protectionist policies.

The cost of the round's failure is not only in the income opportunities lost to both developed and developing countries by not opening their markets further but also, and more important, in the enormous losses all will incur if the round's collapse causes the multilateral trading system to deteriorate to the point that countries fall into a protectionist spiral. Because it would be so economically devastating, this scenario may appear unlikely even to those politicians who talk isolationism to enhance their popularity but, when it comes to the consequences of closed and distorted markets, know better. They may sincerely believe that riding the anti-globalization wave constitutes the best way to control and limit that force's antitrade effects while at the same time earning them the political capital they need to pursue other important structural reforms. That would be the most benign interpretation of the latest populist rhetoric heard on both sides of the North Atlantic. The problem with this is that delusion and bad politics are coming together as usual, and sooner or later bad politics will lead to bad economics.

This may be the real and wretched legacy of this SOS (summer of setbacks) for open markets.