Trade Rounds a Harder Sell

After the debacles in Seattle and Cancún, forecasting the outcome of World Trade Organisation ministerial meetings can be a hazardous business. But two predictions for next week’s Hong Kong meeting look fair bets. First, it will not break the deadlock in the Doha trade round. Second, all participants will proclaim it a success.

On the principle of never tackling today what will be no easier tomorrow, governments have agreed to try to head off a crisis in Hong Kong by putting off the really tough decisions until next year. If the meeting nonetheless dissolves in acrimony, the WTO is in even worse trouble than we thought.

It may well be, in any case. That ministers’ priority is to avoid the embarrassment of yet another failed meeting is a sad verdict on the body that was supposed to be the foremost rule-making machine for the globalised economy. The Doha talks’ difficult history suggests the fault lies not just with a few sticky cogs, but with deeper systemic failures.

One mistake was to call this, the eighth world trade round, a “development agenda”, in an effort to win over the predominantly sceptical developing countries that comprise four-fifths of the WTO’s members. Doing so raised expectations that the round would make all poorer economies richer as of right.

But no trade round can do that. Liberalisation – the WTO’s core mission, despite periodic efforts to load it with other responsibilities – does not guarantee economic outcomes. It can only create opportunities. How they are used is up to countries and producers. Furthermore, the round’s title has not made rich countries conspicuously more generous on issues of interest to poorer ones, while giving the latter a handy argument for blocking whatever they do not like.

However, the biggest problems run deeper and are rooted in geopolitical change. The WTO grew out of the General Agreement on Tariffs and Trade, created in 1947 in response to the ruinous protectionism of the 1930s. The cold war gave the US, the Gatt’s chief architect, an even stronger incentive to promote multilateral free trade, as a way to strengthen democracies around the world

But by the mid-1980s, US commitment began to waver. A few years later, the fall of the Berlin Wall undermined its overarching geostrategic rationale. With tariffs in the biggest markets already cut to low levels by earlier trade rounds, the political impulse for launching new rounds shifted from eagerness for further economic gains to fear of losing established ones.

That is what really got the Uruguay round going in 1986. An outburst of US protectionism, the Latin American debt crisis and the aftermath of the 1979 oil price rises all sparked widespread anxiety that, without decisive common action to underpin the world economic order, it would start to crumble. Likewise, it took the shock of the September 11 terrorist attacks to get the Doha round launched four years ago, after several false starts.

However, the effect wore off once the world started to return to normal. Indeed, the resilience of trade and the global economy in the past decade has defied all expectations. It has shrugged off the 1997 Asian crisis, Japanese deflation, the bursting of the dotcom bubble, volatile equity markets and steep rises in oil prices.

Small wonder governments’ willingness to expend political capital on the Doha negotiations has been limited – and that many countries have used the impasse in agriculture as a convenient excuse to resist pressure to negotiate away barriers to their services markets and lower industrial tariffs. East Asian economies, which profit mightily from free trade, have been among the most cautious of all.

In a sense, trade rounds are politically irrational activities. Their success requires governments to take heat from powerful vested interests at home, in the name of long-term gains that are imperceptible to much of the population. By the time gains materialise, the politicians responsible will probably no longer be in office. If the world economy does not need fixing and with so much else to worry about, why bother?

The biggest threat to the global trade system right now is not French farmers. It is apathy bred by its own success. Members appear to have come to take the WTO for granted, assuming it can be left to look after itself. Collapse of the Doha round could turn complacency into cynical indifference. A weak result could be equally debilitating, providing an excuse for indefinite drift and inertia.

How much would that matter? In the short-term, it need not halt trade liberalisation. Economies such as Chile, Hong Kong and Singapore have all shown that opening markets unilaterally can yield big benefits, often bigger than trade rounds. China and India are also liberalising faster than required by the WTO.

Longer term, the consequences could be more serious. One would probably be to accelerate the worldwide stampede into bilateral trade agreements. It began soon after the WTO’s 1999 Seattle meeting and, ominously, was led by Asian countries such as Japan and Singapore, previously die-hard defenders of the multilateral system.

More bilaterals would further segment the global market by turning it into a patchwork of preferential arrangements, each with its own complex customs rules that inflate the costs of international business. Strong partners would be emboldened to bully weak ones into conditions dictated by the narrow interests of the former’s domestic producers, rather than of freer and fairer trade.

Second, marginalisation of the WTO would call into question the value of its disputes tribunals, the bedrock of its authority. Their effectiveness hinges on members’ willingness to comply with rulings. How long would that last if governments sidelined the WTO as a legislative forum?

Loss of respect for the disputes procedures would weaken a bulwark against a relapse into protectionism. That may seem a distant threat in a globalised economy in which large volumes of goods, services, capital and information already cross borders at dazzling speed. But twentieth-century history shows that those flows could also go into reverse.

That is a bleak prospect. It is, however, avoidable. It depends on whether governments remember the lessons of history – or will have to learn them all over again by repeating the mistakes that led to the creation of the multilateral rules-based system in the first place.