Guest blogger Ricardo Meléndez-Ortiz makes the case for how to de-risk and de-carbonize global trade through better governance.
The past 12 months have seen trust demolished. In addition, daily uncertainty about the fundamentals of the economic environment have resulted in generalized anxiety about the future. Not the ideal conditions for a rapidly changing world to confront the daunting challenges facing it.
The world economy entered the twenty-fi rst century at a high speed of globalization. In most parts of the world and across borders, economic activity thrived as never before, driven by a cocktail of technological change, hastily multiplying and available capital, and freshly abundant and readily available labour. As a result, local and national economies, and their societies, today find themselves tightly interlaced into the dense fabric that was so swiftly weaved.
But as the first decade of the century advanced, this intense pace has been met face to face by two grim facts: nature’s defiance to our pretension to living beyond its means and the coarse realization in 2008 that much of the recent growth we have enjoyed sprung from a multi-decade super bubble spawned by a complex, unstable, and inadequate global financial system. All this, against a backdrop of persistent and -in some cases- increasing income and social inequality within and among nations.
Today’s economic downturn is reminiscent of the 1930s crash, but of markedly different characteristics and scale. The nature of its global reach is unprecedented. The notion of a world decoupled into areas of influence of the dollar, the euro, and enormous Asian savings has been quickly exposed as a myth.
The cross-border organization of production, trade and investment that underpinned decades of growth and wealth creation has now served as a mischievously efficient transmission mechanism of the credit and capital crunch. Global value chains and production networks, a complex web of trans-national investment, and the expanded geography of trade of today, flourished in the context that originated the current crisis. The slowdown of output and trade over the last quarter of 2008 and the first of 2009 has seen a degree of synchronicity around the world that has left most analysts in awe. The globalized world has demonstrated that it can fall as dramatically as it had been ascending, and can do so in chorus.
The ongoing financial crisis has now made its ways into all countries’ ‘real’ economies. In 2009, developing countries, including the faster-growing emerging economies, have faced weakening external demand, accompanied by a deterioration of finance and lower commodity prices. Barring a dramatic turn around, the world risks a social calamity, as massive numbers of people lose their jobs. The IMF predicts global economic output will contract in 2009, a first in 60 years. As recently as 2007, global GDP grew at 5 percent. This year, OECD economies are set to shrink by an average of 4.5 percent, with the world economy as a whole projected to contract by 0.5 to 1.5 percent. The WTO expects the volume of global trade to decline by 9 percent in 2009, a dramatic break from a half-century of almost uninterrupted growth.
This financial and economic unraveling is taking place against a backdrop of increasing stress on our natural environment. The effects of the atmospheric accumulation of greenhouse gas emissions are intensifying; the withdrawal and use of fresh water is at record levels; ecosystems are being destroyed, and species lost. Unless action is taken immediately, experts predict widespread water shortages across Africa, Europe and Asia by 2025, by which time some two-thirds of the world’s population will be living under conditions of water supply stress, with 1.8 billion people in absolute scarcity. The Intergovernmental Panel on Climate Change has mapped out impacts in agriculture and the natural environment affecting most arable regions in the developing world. The economics of biodiversity, too, are now better known.
The financial crisis has shocked the world at a time when responses to these tragedies-in-the-making are being devised. The current crisis cannot be allowed to distract from that purpose.
The world is facing a double hazard. In the world economy, the breakdown of confidence; physically, the risk of pushing the natural envelope too far. The G20 and other decision makers on global matters need to both steer the world economy out of danger, and place it on a better course to realize long-term goals, notably sustainable development.
Into the future, the key is governance. Action now must be firmly grounded on a shared vision of the future. The conceptual construct of sustainable development embraces hope, steering us away from the anxiety that seem to have now taken over as ethos.
Decisions taken by the G20 and the broader international community of nations will ultimately be measured against their effectiveness in tackling the long-term structural deficiencies in our paths to growth. Success, in a globalized world, requires cooperative institutional arrangements at the international level that foster integration, coordination and coherence. With population growth projected to be highest in the poorest parts of the world, and the real prospect that the current crisis will increase the numbers of people in poverty, it is imperative that these institutional arrangements, in a Rawlsian tradition of justice, also engender a minimum of social primary goods for the least advantaged, such as opportunities; liberties, income and wealth (including natural endowments, functioning ecosystems and energy flows).
International trade is and will continue to be a major driver of economic Activity. It will continue to determine the use and allocation of resources, affecting wealth creation and opportunities for people all over the planet. But current international regulatory systems on trade are ever more complex; they are in varying degrees of disarray, and continue to lose alignment with the principles of non-discrimination enshrined in the WTO system.
In addition, notwithstanding enlightened principles and a cosmopolitan approach, design of trade arrangements is marked by a mercantilist history of negotiations, in which economic power and commercial interest have prevailed The result is that valuable principles such as non-discrimination and multilateral rules coexist with myriad derogations, a chaotic tangle of arbitrary and exclusive arrangements, and mercantilist accommodations excluding the sensitivities of the traditional major trading partners. The high level of complexity of such an international regime, made up of hundreds of competing trade agreements, is reflected in the mind-bogglingly complex rules of origin. Complexity and gaps in the trade governance system exacerbate fundamental asymmetries of information, knowledge and capacity among nations, further disadvantaging the weak.
Furthermore, the global public good constituted by multilateral principles and rules is being squandered at a time when it is most needed. The global community will do well to use the current crisis as an opportunity to strengthen the governance of trade as an essential trust-building matter. In this respect, action by heads of state at the G20 or the proposed UN Global Economic Council on the aspects explored below may help to set us on a generative track of change.
AVOID THE OSSIFICATION OF THE MULTILATERAL TRADING SYSTEM (WTO) BY ENHANCING ITS FUNCTIONING
Revive the spirit and the letter of the agreements establishing the WTO, by ensuring that the institutional architecture created for the existing agreements operates separately and effectively from ad hoc arrangements for negotiations. The WTO architecture of standing organs, including the Ministerial Conference as its higher overseeing body, the subsidiary bodies of the General Council and the Committees, were created to ensure full implementation of the Uruguay Round Agreements. The WTO’s various functions of rule-making and market opening may well be carried out through negotiations at any time and of various types, including the all-encompassing single undertaking scheme set up for the ongoing Doha Round. Negotiations should be carried out in bodies specifically established for that purpose, under a special committee, the Trade Negotiations Committee (TNC). In formal terms, this is what happens by and large today. In an optimal situation other functions of the system such as dispute settlement, monitoring and surveillance, and policy debate should be insulated from negotiations. However, during the Doha Round, the Ministerial Conference and the review and prescriptive mandates of several committees, have been hijacked and compromised by the negotiations. Certain functions of the system, such as agenda setting and the enforcement of notification and other obligations, require the full operation of the institutions created for that end. Anything less results in the deterioration of current disciplines, impedes the evolution of agreements on rules and keeps the WTO ill-equipped to deal with global challenges and priorities. A first step in this direction would be to call a Ministerial Conference that makes sense of what is at stake in the DDA negotiations but also carries out its oversight and strategic debate and planning functions.
INSTITUTE GLOBAL OVERSIGHT OF THE BROADER INTERNATIONAL TRADE REGIME
Making sense of a chaotic and disorderly system made up of hundreds of preferential trade arrangements of various types and coverage is a necessary step to minimize risk and optimize global governance. There may be merit and economic rationale for many of the existing arrangements. The WTO has miserably failed to bring coherence or discipline to these developments. Few governments or other stakeholders can grasp the implications of the complex web of arrangements for global challenges. Indeed, assessing their virtues and shortcomings to contribute to the global stability of markets or the accomplishment of other policy goals, is virtually impossible. And their development in a closed, competitive approach, results in a fragmentation of markets at various levels, making participation in global markets less integrative, by definition expensive and a complication rather than a facilitation of trade. Clarity in institutional arrangements would do much in restoring trust and de-risking the global economy. A simple step towards a daunting job of finding ways for a mutually supportive coexistence or a design that delivers higher welfare gains at the global level, may be the institution of a Global Task Force of Ministers that takes up such a review in coordination with, but separate from, the WTO Ministerial Conference. The Task Force would consult with stakeholders on options for a more coherent international trade regime. As with the issue above, the active involvement of ministers is essential to bring about change.
BRING DOHA TO CLOSURE BY DEALING WITH THE IMMEDIATE AS WELL AS THE MERELY IMPORTANT, IN THAT ORDER
Delays in taking the Doha Round to closure can be explained in as many ways as the number of countries participating in the negotiations. Whether one attributes the difficulties to the design of reciprocal bargaining arrangements, the political economy dynamics surrounding the issues under negotiation, or the shifts in trade geography and power, the fact is that enormous transformations have taken place in the world economy while countries have been failing to come to agreements. At a time of upheaval, a step-back from mercantilist competition in negotiations may effectively help. As naïve as it may appear, a gesture to allow implementation of agreements already negotiated and ready but unavailable in account of the single undertaking obligation, would contribute to re-building confidence. A case in point is the delivery of Duty Free Quota Free market access with universal product coverage for exports from least-developed Countries.
ACT WHERE IT NOW HURTS MOST AND WHERE IT’S EFFECTIVE
Virtually all analysts now agree that the collapse of confidence in credit markets and the transmission to the developing world is becoming potentially catastrophic for least developed countries. As Paul Krugman recently has repeatedly stated when asked about the urgency of replenishing the IMF facilities or otherwise inundating the world economy with money, “think Bangladesh”! A concrete agreement to fund Aid for Trade programs in addition to the large economies packages of stimuli is imperative. As designed in parallel to the Doha Round, financing directed at enabling poor countries adjust to trade liberalization and participate fully in the global trade system, is both an immediate action and a long-term critical element of good governance of trade. In the immediate term, adjustment in the form of trade infrastructure and institutions requires earmarked assistance or we run the risk of rollback. In a longer term, a genuinely global system of trade, in this case the WTO cannot fairly operate with members at different levels of institutional capability to benefit from it, not least with respect to their institutional ability to avail themselves from tools provided in the agreements such as safeguards, antidumping and countervailing action, or the use of the dispute settlement mechanism. Not providing countries that cannot afford the institutions the means to do so would be foul game. So, there are two immediate steps that leadership cooperation can take now: a. Make funds available through efficient channels for Aid for Trade programs, and b. advance in the design of mechanisms that would guarantee a lasting, efficient and effective delivery of such resources. Not doing so, will involve risks both of an economic and a sustainability nature.
A TRANSITION TO A LOW CARBON ECONOMY NEEDS A STRONG AND SUPPORTIVE TRADING SYSTEM
In the more optimistic scenarios, after a long year or two, perhaps months, the financial crisis will be over. But the climate change, water and energy crisis will persist. It will continue to hover over us, testing the international governance infrastructure again and again. An effective global effort to address climate change will require no less than a fundamental transformation of our economies and of the ways in which we use energy. Addressing climate change requires the internalization of carbon costs, which will have significant effects on what we produce, where we produce, what we trade and how we trade. For international cooperation aimed at a low-carbon economy to be effective, international regulatory frameworks, certainly those on trade, need to support this effort.
In the present moment an aggravated reality has been added to this fact: the collapse of carbon prices in the face of decreasing demand for electricity has suddenly exposed weaknesses in the market tools that had been conceived to deal with internationalization through carbon trading. Two steps seem possible now: a) a commitment by all governments to refrain from domestic policies that may hurt others on the basis of competitiveness rather than in pursue of climate change objectives. b) a support for “Green New Deal” type of measures, as part of the fiscal stimulus packages being designed. This financial support should come also in the form of additional assistance for developing country programs that benefit the environment and simultaneously create jobs and economic activity.
It will be tempting for policymakers to wait until the economic storm has abated before they turn their attention to de-carbonizing production and energy use. But giving in to that temptation would sow the seeds for a future crisis that would make the current one seem mild in comparison. Great transformations and changes require responses in the same order of magnitude, not least on global economic governance. The moment calls for such and for boldness to regain control of our future. As President Obama recently said about the need for climate legislation, “We can’t wait.”
Ricardo Meléndez-Ortiz is the founder and Chief Executive of the International Centre for Trade and Sustainable Development (ICTSD) and the publisher of the BRIDGES series of periodicals. He has recently co-authored Envisioning a Sustainable Development Agenda for Trade and Environment (Palgrave Macmillan, 2007) with Adil Najam and Mark Halle, and co-edited Agricultural Subsidies In The WTO Green Box: Ensuring Coherence With Sustainable Development Goals (Cambridge University Press, 2009) with Christophe Bellmann and Jonathan Hepburn.
