What Next for Trade After WTO Failure?

In order to stay relevant, the World Trade Organization must stress efficiency, liberalize initiatives, and adapt to changing realities

The collapse in the Doha round (BusinessWeek.com, 7/30/08) of trade negotiations has given us cause to take stock of the multilateral trade agenda and the problems that have dogged it since the failed WTO meeting in 1999 in Seattle. Unfortunately, looking back over the last near-decade in the multilateral trade negotiations, there have been very few bright spots. Indeed the only one, the launch of the Doha round in November 2001, has proven to be a false dawn, resulting as much from a reaction to the horrors of September 11 as from a realization of the need to liberalize trade by the WTO's members.

What is clear from the last decade is that trade negotiators have fallen almost completely under the spell of mercantilism—that exports are good, imports are bad, and tariff reductions are concessions to be given only when something else is won from a trading partner. It is true that mercantilism has been always with us. In the early days of trade negotiation, however, the fact that tariffs could be gradually reduced by harnessing this mercantilist impulse for a positive purpose was part of the genius of the system.

A New Framework Is Needed

As tariffs have come down and the new barriers become inside-the-border barriers, regulatory protection, and market distortions, the architecture of the trading system (at least on the multilateral level) cannot cope with the complex new reality. The train of trade in the 21st century is different, but we insist on driving that train on the old lines. Instead we must change the lines, and develop a new architecture to frame the real trade issues of the day. That architecture must now find a way of harnessing the very real mercantilist impulse in nations, which has always been with us, to ratchet down internal barriers, distortions, and anticompetitive practices. Here are a number of ways that this might be done.

• On agricultural negotiations, the historic bugbear of global trade, reductions in developed-country subsidy programs must be accompanied by a reduction in the overall global measure of market distortion faced by agricultural companies in these countries. The goal must be to secure not only liberalized agricultural trade, but also competitive markets in agriculture. As we have seen, working only on traditional agricultural tariffs and subsidies, while neglecting other market distortions such as regulatory bars and support for state-owned companies, will sink further discussions.

• Dealing with market distortions is not a mere add-on to the trade negotiation process. It is a vital part of discussions and the architecture must recognize this. Trade negotiators must recognize the role of market distortions.

• Willing countries must take the lead in crafting a set of agreements on public-sector restraints of trade that are uncompetitive or otherwise unjustified. These kinds of barriers are huge distorters of global trade and it is simply not rational not to deal with them. Every step should be taken to encourage other WTO members to join these disciplines, but their failure to do so should not hold back those who wish to proceed.

• Countries must offer much more liberalization and liberalizing initiatives in the industrial goods and services area. Services trade is growing at a tremendous pace, and will soon be the dominant force in global trade. It is regulatory barriers that distort services trade, and these must be dealt with comprehensively in negotiations. Those countries that liberalize these areas and lower their regulatory barriers will benefit enormously from doing so.

• In these days of rising food prices, and rising transportation costs, we must recognize the role that efficiency plays in solving many of these problems. China uses much more oil to generate the same level of economic growth as the U.S., for example. Anything that would make the Chinese economy more efficient will help reduce demand to levels that are more sustainable. Competitive markets deliver efficiency, and will help with some of the world's most pressing problems now.

Adapting to Changing Realities

From the days of Adam Smith and David Ricardo, trade liberalization has been about reducing trade barriers so that the forces of competition could be liberated to lower prices for consumers and lift the poor out of poverty. Trade liberalization's goals have not changed. By incorporating the points noted above, we can more clearly bring into focus for WTO members the fact that the overarching goal of free trade is to enhance consumer welfare and empower individual companies and their workers.

Future generations are counting on the trade system to evolve and adapt to changing realities, and to deal with the most pernicious problems that result in a lack of efficiency and damage trade. If we do not make the necessary adjustments now, when we have a chance to do so, the WTO will find itself increasingly irrelevant to the world's economic problems. Ultimately it is the poorest among us who will pay the price for our failure to act now.

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