Guest blogger Simon Evenett argues that fighting murky protectionism and concluding the Doha Round should be the top trade priorities for G-20 leaders and explains how this agenda would benefit developing countries.
Even though the global economic crisis is far from over and may unfold in hitherto unexpected ways, the interests of developing countries, especially as they relate to the multilateral trading system, have definitely been implicated in ways that ought to force a rethink of national priorities. The purpose of this note is to identify a number of matters where crisis-related considerations should alter national calculations.
It would not be credible to write about this subject without mentioning the World Trade Organization’s Doha Round, which has yet to be concluded. This is not the place to recount the twists and turns of this painful negotiation where many players (both rich and poor) simultaneously feign their generosity and how wronged they are. By substantially reducing bound tariff rates, eliminating export subsidies, and tightening up various trade rules, the completion and implementation of the Doha Round on the terms discussed mid-2008 would substantially limit the extent to which WTO-legal trade distortions could be erected during this economic crisis.
Indeed, the crisis forces us to rethink how to “value” the Doha Round. Typically, the status quo is taken as being the benchmark from which trade agreements depart. However, during a severe economic downturn governments will come under pressure to raise trade barriers and to subsidize (or bailout) firms and, as we have seen, many governments have succumbed. The gap between the trade barriers that might well be in place at the end of this downturn and the barriers allowed after any implementation of the Doha Round has widened considerably, essentially increasing the estimated gains from finalizing this multilateral trade negotiation. This argument has even greater force for those developing countries, such as China, and industrialized countries, such as Japan and Germany, that are highly dependent upon exports.
Upward revisions in the estimated gains from completing the Doha Round, driven entirely by crisis-related circumstances and not by there being more on the negotiating table, are why some analysts (myself included) have reconsidered their views and now see a stronger economic case for locking-in prior trade reforms with a new multilateral trade accord. Now is not the time to make the perfect the enemy of the good. If the economic estimates are anything to go by, this Round is not likely to generate substantial new welfare gains for the world economy, but it could stop twenty years of reforms being reversed. Completing the Doha Round is thus in the interest of developing countries.
Another important feature of this crisis has been the mutation of protectionism, with new forms of discrimination often being buried in the very state measures taken to stabilize national economies and critical sectors, such as the banking system. Richard Baldwin and I have labeled such discrimination “murky protectionism,” precisely because of the way in which discriminatory measures have been hidden inside government initiatives that on the face of it have perfectly reasonable goals. From a systemic point of view, this is not exactly a new matter–after all one goal of the WTO disciplines on national treatment is to put a stop to this kind of discrimination. Still, arguably the crisis has demonstrated that WTO rules in this regard are weaker than they need to be.
Tackling murky protectionism is not likely to be on the WTO’s agenda in the short run; just look at the progressive watering down of any commitment to trade matters in the run up to the G20 Summit to get a sense of the limited appetite of some for any initiative with the slightest teeth. Yet, this crisis has raised the following governance questions for the multilateral trading system as to (i) whether over the longer term the WTO’s national treatment disciplines need to be strengthened, (ii) whether the WTO subsidy accord needs to be revisited in the light of the bailouts and other financial transfers offered to commercial entities in this crisis, (iii) whether other existing WTO accords or new accords are needed to tackle specific aspects of murky protectionism, and (iv) whether WTO members should negotiate an accord that applies to government measures only for the duration of a far-reaching global economic downturn?
It is precisely because murky protectionism hurts the interests of trading partners that I would not be surprised if these questions are raised by some WTO members; the crisis will therefore have long-term impacts on the negotiating priorities of some countries and the potential future scope of WTO disciplines. Arguably there is some precedent for this in the Uruguay Round, where the measures taken in the sharp economic downturn of the early 1980s shaped in part the negotiating mandate adopted in the Punta del Este declaration that launched the Round.
Expanding the scope of the WTO’s rules along these dimensions, however, may smack some as leading to a re-run of the ugly Singapore Issues debacle. However, there are two differences, both of which are relevant to developing countries. First, even though it was untrue, many negotiators claimed the Singapore Issues were of hypothetical or no demonstrated interest to their countries. In contrast, the elements of murky protectionism from this crisis that make it on to the future negotiating agendas will likely be the ones that have been widely used and aggravated a large number of trading nations, including developing countries.
Second, new WTO rules on murky protectionism would help redress one perceived asymmetry between developing countries and industrialized countries throughout this crisis; namely, that the former cannot afford large subsidies, bailouts, and other expensive forms of support and feel confined to using more transparent tariff instruments that are subject to stringent WTO disciplines. Although it may be far off into the future, and certainly well after the Doha Round is concluded and implemented, the basis of a future deal may be market access improvements in developing countries in return for stricter non-discrimination rules in industrialized countries (plus further market improvements by all in agriculture.)
Even if the global economic crisis does not get any worse–and just because a trade war has not broken out yet does not mean it can not happen in the future–there will be longer-term consequences for deliberations and governance at the WTO. New, murkier forms of protectionism have emerged that will create pressure for stronger, possibly more intrusive, WTO rules on non-discrimination. Given the key role that exports have played in driving the growth of many developing countries, the experience of this global economic downturn means that these nations in particular have a strong interest in advancing such a rules-based negotiating agenda at the WTO in the future.
Simon J. Evenett is Professor of International Trade and Economic Development, University of St. Gallen, and Co-Director, International Trade and Regional Economics Programme, Centre for Economic Policy Research, Europe’s most established group of academic researchers. Recently, he co-edited with Richard Baldwin a book titled The Collapse of Global Trade, Murky Protectionism and the Crisis: Recommendations for the G20, available at www.voxEU.org.
This article is part of a forthcoming compilation on a trade agenda for G20 leaders co-edited 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 on 23 March 2009.
November 25th, 2009 at 5:31 pm
The financial problem associated with U.S. subprime loans is becoming a global economic problem. Arguments are increasing from Europe and Japan that this is the beginning of the end of the U.S. globalization system and may become a serious international political problem if it persists over a long period. We may recall that political support of fascism and communism grew in certain parts of the world 80 years ago because the international great depressions in the 1930s invoked serious feelings that global capitalism was collapsing. Therefore, resolving today’s financial crisis quickly may not merely be a problem of U.S. economic policy but should be considered an urgent action point for stability of the international community as a whole.
The point is that housing prices could cease to fall soon or they could continue deteriorating for years. Both scenarios could be self-fulfilling and which of them will be materialized depends upon policy actions now. Japan’s experience tells us that policy-makers should prepare for a worst-case scenario in which a vicious circle continues. My concern is that economic policy-makers in the U.S. and other G7 countries seem to have chosen a wait-and-see policy on the U.S. financial system, laden with risky and wishful thinking.
Self-help by financial institutions may not be able to stop this vicious circle because losses can swell beyond control as asset prices fall sharply. In this situation, a fear of future insolvencies in financial institutions persists as part of a “self-fulfilling prophesy,’’ in which fear shrinks the economy, which in turn lowers asset prices; and lowered asset prices in turn justify the fear of insolvencies. Banks cannot be released from this vicious circle by reinforcement of their capital unless investors are committed to unlimited capital augmentation.
My arguments here may at the moment be politically incorrect, especially among economists. This was the case in Japan 10 years ago. Why should taxpayers bear the costs, if any, of saving inept bankers? Japan found the answer: because otherwise the weakest in society will be forced to pay for the bankers’ mistakes over the long term due to the malfunctioning payment system. Political damage will also be immeasurable if the U.S. economy loses its credibility as the most affluent and well-functioning market economy in the world. A wait-and-see attitude on the financial system based on wishful thinking that housing prices will soon pick up is extremely risky, since inaction feeds fears of future bank insolvencies, which drops housing prices further. Responsible policy-makers should prevent a self-fulfilling insolvency crisis by setting out a clear provision now.
References
March 12th, 2010 at 11:11 am
Guided Globalization is what should be promoted in the developed nations so as to assist them to grow.