Guest blogger Sylvia Ostry reflects on the challenges for the trade system amidst the financial crisis.
If there was ever any doubt about the close, even intimate, relationship between trade and finance in the global economy, the statement issued by the G20 leaders on 15 November 2008 put that doubt to rest. In that document – wide ranging and complex – the G20 tasked several national and international organisations with implementing enunciated principles for reform of financial markets and an initial set of specific measures, including high-priority actions to be completed by the end of March 2009.
Alongside asking their officials to deal with financial reform in the light of the global financial meltdown, the G20 leaders were quick to commit to an open global economy, recognising “that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems.” They further declared it critically important to reject protectionism and not to turn inward. They committed that: “Within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.” And for extra emphasis on the importance of trade to global economic health and the need to avoid raising barriers to trade, they told their trade ministers to “strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome.”
Sounded great. But it was rather misleading. While there have been a few protectionist measures in some countries, the Doha Round is comatose. But the most serious development has been the ‘Buy American’ requirement in the United States’ recent stimulus legislation. Even if the economic nationalism of the Buy American plan has now been watered down, there is no doubt that the ongoing global financial crisis will generate protectionist pressures around the world.
The Uruguay Round and the creation of the WTO in 1995 were integral to the evolution of today’s global trading system. After years of negotiation, the new system emerged through what Sylvia Ostry argued was a ‘grand bargain’, which in reality proved for many countries to be a ‘bum deal’. The Uruguay Round negotiations created a completely different system from early reciprocity arrangements in the General Agreement on Tariffs and Trade (GATT). It was essentially an implicit deal: developed countries opened their markets to agriculture and labour – manufactured goods, especially textiles and clothing – in exchange for the inclusion of services, intellectual property and, to a minor degree, investment. But the implicit deal was more one-sided than expected. There was far less opening than expected and the reduction of restrictions on textiles and clothing was back-loaded and more than offset by the impact of China’s growing economy and exports. The Uruguay Round agreements required a major institutional upgrade and a significant improvement in infrastructure for most developing countries. Such changes demanded both time and money. For many developing countries the challenge of implementing such upgrades was difficult if not impossible.
The asymmetry of the trading system went well beyond the inclusion of services and intellectual property. The global trading system also housed a ‘knowledge trap’. In the area of services and intellectual property, developing countries needed advanced and sophisticated knowledge on the substantive and procedural components of agreements, which were unavailable to many of them. The grand bargain proved not only to be highly asymmetric but also highly burdensome for those developing countries with the least ability to overcome the knowledge trap.
The WTO has not been able to do much to assist the poorest countries. The WTO is highly juridified (more by accident than design), has no real executive power, its negotiating function is very cumbersome as the only avenue for law-making, and its research capability to assist the poorest countries is very limited. These factors exacerbate the knowledge trap – the strong get stronger and the weak weaker. The asymmetry of the multilateral trading system was recognised in 2001 in Qatar, when WTO members launched a new round of negotiations – the Doha Development Agenda (after a spectacular failure in Seattle in 1999). Again meeting after meeting has failed. The shift in the balance of power from the old great powers (US and Europe) to the new great powers (especially China, India and Brazil) has paralysed, not catalysed, the great game in trade.
The ongoing financial and economic crisis will not lead to a replay of the protectionism of the 1930s. But a serious erosion of the global trading system would further undermine confidence and increase uncertainty. To avert this, a coalition of middle powers should push for the launch of a new project that analyses the intersection of trade and development and propose ways to move forward without delay.
This proposal borrows an idea from the launch of the Uruguay Round, when the United States and Europe were at loggerheads over agriculture. A group of developing countries (led by Brazil and India) opposed the introduction of ‘new issues’ (e.g., services and intellectual property).
To break the deadlock at that time, a group of middle powers prepared the ministerial declaration that launched the Uruguay Round of negotiations. At that time, the core issue was one of promoting the rule of law over the rule of power. With multilateralism at stake and the shift in the balance of power, this challenge of sustaining the rule of law remains equally as pertinent today.
The proposed study could be funded from foundations or other philanthropists. The research and discussion should all be available on the internet and briefings for today’s great powers (the G20?) should be arranged. A representative of least developed countries (LDCs) (a group not otherwise represented in the G20) should receive financing to attend.
One very difficult problem is how to form the coalition of middle powers. It should be voluntary so that there is no linkage with WTO rules or negotiations. Countries should be free to withdraw and suggest a replacement. Indeed, since the coalition must be a reasonable size (although no larger than 30), rotation might be a good idea. The simplest way to handle this would be for the WTO’s Director-General to appoint an ambassador for multilateralism to head the procedure for selection. Geography is crucial, of course, but so is the issue of dealing with the big, emerging markets (who is a middle power today?). Nonetheless, when there is a political will there is a policy way.
As for protectionist actions, foundations and think tanks that seek to hold countries to a non-protectionist standard should place these measures on the internet for the G20 leaders to review and discuss at the London Summit. As should the WTO’s Director-General Pascal Lamy.
Sylvia Ostry, Distinguished Research Fellow, Munk Centre for International Studies, and Alan S. Alexandroff, Research Director, Program on Conflict Management and Negotiation, University of Toronto.
This article is part of a forthcoming compilation “Rebuilding Global Trade: Proposals for a Fairer, More Sustainable Future” 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 is available at: http://www.globaleconomicgovernance.org/wp-content/uploads/rebuilding-global-trade.pdf
