Guest blogger Richard Higgott sets out the challenges and priorities for G-20 leaders to contain the spread of the financial crisis to the trade sector.
The governance of global trade and the international trade regime will clearly be affected by the fallout from the current wider economic and financial turmoil. Enhanced global economic policy coordination is needed. Existing institutions do not currently offer enough – in either sufficient quantity or quality. Amidst efforts to stabilise the global economy, the multilateral trade system is threatened by the perception that globalization has been tarnished by speculative investment and other excesses in financial markets seeking ever larger profits at the expense of sound business practice.
The multilateral trading system is at a fundamental crossroads. Support for an open, liberal trading system is neither consistent nor unambiguous. The spill over from the growing political and public anger about bad practices in the financial sector into a growing opposition to trade liberalisation and the increasing demand for protectionism might be irrational, but it is nevertheless real. Trade liberalisation may well continue, even without a completed multilateral round. Unilateral trade liberalization has been strong over the last two decades as states have reduced barriers to trade and investment across most sectors of their economies; but the process has slowed over the last couple of years and pressures to stop, or roll back, this progress are growing in the face of the current economic downturn. Whilst most members of the World Trade Organization (WTO) appear to have kept the worst domestic protectionist pressures under control there is growing evidence of countries adopting, or threatening to adopt trade restricting or trade distorting measures to protect key national businesses and jobs. The financial crisis also inhibits trade expansion through the negative effects of reduced liquidity on access to and sharp increases in the cost of trade credit for exporters. This is particularly acute for developing country exporters. The cost of trade credit tripled in the last six months in some countries up to February 2009.
The collective management of the global economy is crucial to the environment in which trade governance exists. Conversely, the architecture of the trade regime will need to accommodate the new stresses placed upon it by questions of sustainability and economic development emanating from the financial crises and the protective sentiments and practices that ensue. The WTO or the multilateral trade regime generally cannot to address all these issues, and nor should it try. However, it is apparent that in the increasingly interdependent world in which we find ourselves, trade policymakers can ignore neither the context in which they operate nor the need to contribute to the resolution of global challenges, such as climate change. Whether any global institutions are capable of meeting this challenge is arguable. What is clear is that these challenges raise major questions of institutional policy coherence and global governance.
At the current time of crisis, the conceptually amorphous concept of global governance takes on a more concrete form. The clear task of global governance is to manage the global economy taking into account the interests and views of all actors not simply those of the G7 as has been so much the case under conditions of globalization over the last quarter century. In the context of the current crises, only a new regulatory regime will be sufficient to assure the new state actors, especially the BRICS (Brazil, Russia, India, China and South Africa), that a balance can be restored between the benefits and risks of globalization, and of continued integration into the global economy.
We have known for several decades that most key policy areas (trade, climate change, infectious diseases, food and water supply) reflect an increasing and indeed inexorable global interdependence as opposed to national independence. But it has taken the global financial crises to expose the limitations in our transnational abilities to manage the risks attendant on interdependence through coordinated collective action and extra-national problem solving. The under-development of the global polity, less visible in normal times when compared with the interdependence of the global economy, is only too easy to see in times of crisis. The growing disconnect between the increasing globalization of risk and the lack of globalization of responsibilities in the current era needs to be addressed.
Identifying these problems and their potential consequences is not to suggest that the essence of a system of global economic governance is totally absent or incapable of positive enhancement. The overall challenge for global governance is to recognize that while it is made up of its parts it is also more than the sum of its parts. The regulation of the financial system and the governance of the trade regime require different policy responses but to solve the problems in one domain we need also to solve them in the other.
The global trade regime is still in need of reform if it is to meet global economic aspirations and respond to the challenges it faces. The difficulties with concluding the Doha Development Agenda (DDA) negotiations demonstrate not only the difficulties of conducting multilateral trade negotiations in the 21st century but also expose serious fault lines in the contemporary architecture of trade governance in particular and global economic governance more generally. Even if a major negotiating break though had emerged in Geneva in July 2008, there remain major differences regarding how to determine the scope of the WTO’s activities. Any discussions about how to improve the effectiveness and efficiency of the WTO as an agenda-setting and decision-making body needs to address the relationship between the ‘consensus problem’ in its decision making and its ability to actually negotiate trade liberalisation. They also need to address the shifting politico-economic landscape, and especially the rise of new actors such as India and China on that landscape. A re-adjustment in power relations in the global economy is accompanied by a messy transition from one global economic equilibrium to another as new voices and centres of politico-economic gravity emerge.
A further recurring challenge to the WTO reflects the wider debate about the nature of contemporary global governance; that is the extent to which the issues of fairness, justice and democratic accountability are addressed at the WTO. The WTO gathers regular and fierce criticism from non-governmental organizations (NGOs) and numerous developing country governments, dissatisfied with what they see as the extremely limited, or qualified, legitimacy present in its negotiation, decision-making, and dispute settlement processes. This criticism is often misplaced. Since the debacle of the Seattle Ministerial meeting in 1999 the WTO instituted several substantial reforms for which it is not sufficiently credited, especially in the direction of improving internal transparency. It is difficult not to argue that it is ahead of other international organizations in this regard, and especially the international financial institutions (IFIs) in the current crisis. Indeed, The WTO displays many of the attributes of a democratic and inclusive club. Its rules provide for consensus decision-making in agenda-setting and the results of negotiations are applied on a Most-Favoured Nation (MFN) basis, thus ensuring that all members enjoy the same benefits. In this sense, the weakest WTO Members gain from being part of a rules-based organization.
The real challenge in the current climate is not to protect the poorest developing countries from trade but to enable them to participate in the international division of labour on more equal and successful terms. But a growing frustration with the multilateral regime has seen policymakers increasingly turning to other vehicles for reform – notably bilateral and regional agreements. The recent trend amongst larger countries to go outside of the WTO to reach trade deals carries the risk of undermining the fabric of inclusive, fair and stable institutional arrangements that underpin international trade.
The largest trading nations have so far desisted from negotiating preferential trading agreements (PTAs) among themselves. Here, the largest trading nations in the system should show leadership. They should be willing to underwrite the “public good” of non-discriminatory multilateral trade and foreswear the establishment of PTAs among themselves in the future.
A completed Doha will not speed up liberalization dramatically. Nor does it prevent states from resorting to previously higher tariffs. But this is not the only purpose or effect of completing the Round; other linked elements are also important. For many supporters of the WTO it is the other elements, especially its role as the guardian and socialiser of the principles and rules of global trade (especially reciprocity and most favoured nation status) that are so important.
At the G20 London Summit, the global community needs to reaffirm its principled commitment to multilateralism more generally. We do have a substantial set of rules, principles and processes that currently underpin the multilateral trade system that can address some of the challenges identified during the first decades of the 21st century if, but only if, we continue to support and strengthen the activities of the WTO. Under stress they may be, but these principles and rules have not been disavowed by the global economic policy community. That said, some of the lessons about the importance of rules and principles in international relations, especially with regard to the value of multilateralism and multilateral institutions as venues and vehicles for global policy making, may also be coming ‘unlearned’ by some major players at exactly the time, ironically if not tragically, that they may be more appreciated by the smaller ones. These principles need to be coordinated across policy areas.
Professor Richard Higgott is Pro-Vice Chancellor of the University of Warwick, United Kingdom. He was the Director of Studies of the first Warwick Commission: The Multilateral Trade Regime: Which Way Forward? (2007.)
This article is part of a forthcoming compilation on a trade agenda for G20 leaders edited jointly by Dr. Carolyn Deere Birkbeck (Global Economic Governance Programme) and Ricardo Meléndez-Ortiz (International Centre on Trade and Sustainable Development (ICTSD)). The compilation will be published in mid-March 2009.
