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Putting world trade back together again

Business Day, South Africa

Putting world trade back together again

Razeen Sally

7 August 2006

The Irish poet WB Yeats wrote that when things fall apart, the centre cannot hold. The Doha round has finally fallen apart. What, if anything, can hold the World Trade Organisation (WTO) and the multilateral trading system together?

Much more trouble lies ahead. The WTO is in seemingly inexorable drift - away from the hard politics of trade liberalisation and the rules that underpin it. Serious players will switch further to preferential trade agreements; and they will be tempted to flout existing multilateral rules.

In essence, the WTO suffers from severely diminishing returns. In contrast to the General Agreement on Tariffs and Trade, it has a bigger, messier, politically more controversial agenda, shot through with multiple and contradictory objectives. And decision-making is crippled in a general assembly with near-universal membership.

To get the WTO out of its rut after Doha, its members need to do three things: restore focus on a core trade-liberalisation agenda; revive effective decision-making; and, not least, scale back ambitions and expectations.

Workable decision-making depends mostly on intergovernmental political will, not on formal procedural changes. This demands recognition of hard-boiled realities outside Geneva. About 50 countries - the Organisation for Economic Co-operation and Development plus 20-25 globalising developing countries - account for almost 90% of international trade and foreign direct investment. They must do the deals. SA and at most a small handful of other African countries are in this bracket. An inner core of “big beasts” - the US, European Union (EU), India, China and Brazil - must exercise leadership. Otherwise nothing will move. The other two-thirds of the membership (about 100 countries) have very marginal involvement in the world economy, bad to terrible governance and scarce negotiating resources. Frankly, they cannot play more than a secondary and reactive role. Providing they do not block negotiations, they should be given a free ride through generous special and differential treatment.

Last, the WTO needs to adapt to a more modest future. Market-access and rule-making negotiations should be incremental; and trade rounds should probably become a thing of the past. There should be more emphasis on the everyday tasks of improving policy transparency and administering rules better. And dispute settlement should not degenerate into backdoor law-making.

These, arguably, are the preconditions for the WTO to serve its core purpose: to be a helpful auxiliary to governments, particularly in the developing world, that have made a strategic choice in favour of markets, competition and global integration. The alternative is a permanent state of United Nations-style infantilism.

Are preferential trade agreements preferable to a stalled WTO?

Not really. Most are bitty, quick-fix sectoral deals that are bedevilled by mind-bogglingly complicated and restrictive rules-of-origin requirements. They are driven by symbolic copycatting of others’ preferential trade agreements and otherwise empty-gesture politics. And they deflect attention from sensible unilateral reforms and the WTO.

Hence, preferential trade agreements, in addition to the WTO - indeed trade negotiations generally - have severe limitations. They are probably not going to tear down the remaining protectionist barriers that matter. The remedy lies primarily with unilateral liberalisation and regulatory reform. This is the Nike strategy: governments “just do it”; they liberalise independently and voluntarily outside trade negotiations.

Bottom-up unilateral liberalisation is patchy and uneven: it is not a total substitute for multilateral rules. But it is the best liberalising engine on offer. The World Bank estimates that, since the 1980s, about 65% of developing-country tariff liberalisation has come about unilaterally. This is especially true of east Asia, with China now the pacesetter. It is Chinese unilateral liberalisation, not the WTO or preferential trade agreements, that will probably spur a pickup in trade-and-investment liberalisation in Asia and beyond.

So much for scenario painting. What policy implications follow? First, in the WTO, a group of about 50 capable and willing members should explore ways of reviving negotiations on core market access (agriculture, industrial goods and services) and rules (such as antidumping procedures and subsidies), though in a restricted setting and not as part of another “round”. Negotiated concessions should be extended to the rest of the WTO membership via the most-favoured-nation clause. Negotiations on newer regulatory issues could proceed among smaller groups of willing and like-minded members.

Getting such initiatives going will require co-operation among the big beasts, and invariably US leadership. Barring a global economic crisis, that will not happen soon. A John McCain presidency might be its best prospect. A plurilateral track will also need to be insulated from noxious influences in the WTO: antimarket governments, old-style protectionist interests and new-style nongovernmental organisations.

Second, new preferential trade agreement initiatives should only be launched with caution and a sense of economic strategy. Two new initiatives come to mind. One is a transatlantic free-trade area. This should aim to abolish all tariff and nontariff barriers at the border, make serious progress on eliminating other regulatory trade barriers, and have simple, liberal and harmonised rules of origin. Gordon Brown should think of this as a major foreign-policy initiative when he assumes the British premiership.

The other is an EU free-trade agreement strategy for Asia, starting with southeast Asia. This should avoid the temptation of quick and dirty agreements and aim for genuine, least-restrictive liberalisation (for example, through comprehensive coverage, strong transparency disciplines and liberal rules of origin).

Sadly, credible free-trade agreement initiatives leave out most of Africa, given the lack of commercial interest. That leaves “trade-light” agreements full of political gimmickry and phony economics.

Third, and most important, it is vital that the Asian engine of unilateral liberalisation does not stall. That depends on internal conditions in China, and increasingly in India too. But it also depends on a clement external macroeconomic and trade environment. Thus the US and EU must strengthen “constructive engagement” with the rising Asian powers across a broad range of foreign and economic policy issues, while containing belligerent and protectionist forces at home. This is more a matter of unilateral example-setting and bilateral co-operation than of trade negotiations.

‖Sally teaches at the London School of Economics and is a senior associate fellow at the Institute of Southeast Asian Studies in Singapore.