How to manage trade in a new world order

How to manage trade in a new world order

Turmoil! An apt description of the trade scene as we enter 2004. There is always turmoil in international commerce, of course, but rarely at the level that prevails today. A failed World Trade Organization ministerial meeting in Cancun last September; a languishing negotiation of the Free Trade Agreement of the Americas, to which band-aids were applied recently in Miami; a myriad of so-called free-trade agreements being negotiated regionally or bilaterally, all of which discriminate against non-participants, and many of which are borderline "free trade" at best; multibillion-dollar retaliations in the offing if nations - including the U.S. - do not correct practices in violation of WTO rules; a universal fear of China as the new "600-pound gorilla" in world trade; a huge trade deficit in the U.S. bringing protectionist rhetoric to the fore once again; and anti-globalization forces questioning the merits of any level of global commerce.

All of this can be confusing and perplexing, not only for the general public in all countries, but even for those who work on trade policy every day. Hence, providing some perspective may be useful.

First, we need to make the multilateral system - meaning the WTO - work. Regional and bilateral free-trade agreements advance the cause of trade liberalization, but they are no substitute for an effective worldwide system of balanced, respected trade rules. The North American Free Trade Agreement, for example, has its winners and losers among companies and industries; but for the three participating nations as a whole - Canada, Mexico and the U.S. - it has been a huge success. Trade volumes have risen spectacularly since NAFTA took effect on Jan. 1, 1994, and far more jobs have been create than have been lost. But a successful NAFTA, even when added to similar successes elsewhere, is no substitute for a successful WTO.

Instead of criticizing the WTO every time something goes awry in world trade, if we really believe it has shortcomings, we should fix them. Are the rules inadequate? If so, let's

mend them. Is implementation of the rules a problem? Then let's give the WTO the tools it needs to ensure implementa-tion. Is it too weak? If so, let's make it stronger. That requires leadership from the major trading nations, and if we're not

getting the WTO performance we seek, we have only ourselves to blame.

What should we do first? Get the Doha Round of negotiations, which went off track in Cancun, rolling again. There are three major issues currently on the Doha Round agenda: industrial tariffs, services and agriculture - all very important to the U.S. With industrial tariffs, the basic objective should be to lower them, especially where they are still inordinately high. That can be done by formula, as it has in prior negotiating rounds. But a secondary objective should be to eliminate low-level tariffs, for they're just a nuisance. They slow the movement of goods at the border, and aren't worth the cost of administration.

With services - a huge and growing area of commerce - the WTO rules need far greater depth and breadth than they have today. The existing rules were put in place only a few years ago, so they're still embryonic. They need to catch up with the rules for goods, which were first developed just after World War II.

Agriculture is always a major stumbling block in multilateral negotiations, and Cancun demonstrated that this is still the case. What is lacking here is political will, the will to reform. The major "distorters" of agricultural trade are the European Union, Japan, South Korea, a few smaller countries like Norway and Switzerland, and the U.S. All need to be willing to reform their agricultural policies, well beyond where they are today. The EU in particular needs a more flexible negotiating mandate on agriculture if the Doha Round is to have any chance for success.

But developing countries need to do their part, too. Even though this is "the Doha Development Round," that doesn't mean developing countries can sit on their hands. It is in the long-term self-interest of all countries to further open their agricultural markets to international competition, and that needs to get done in the Doha Round. If some developing countries persist in seeing this as "a freebie," the round will fail.

In Cancun, no agreement was reached on adding other items to the Doha Round agenda. That is regrettable, for a broader agenda would be in everyone's interest. Trade facilitation, a topic that should be of great interest to Journal of Commerce readers, ought to be added. Moving goods and services across borders quickly, securely, efficiently and at low cost should be a goal of every trading nation.

Greater transparency in government procurement is the other issue that many felt would be added in Cancun to the Doha Round agenda. One wonders why anyone would be opposed to transparency, for that is by far the best way to ensure integrity in the procurement process.

With an agenda of industrial tariffs, services, agriculture, trade facilitation and transparency in government procurement, could this negotiation be finished by the time U.S. fast-track authority comes up for renewal in mid-2005? That's a tight schedule, but not an impossible one. Political commitment is the key. If that is not in the cards, a two-year extension would be in order, thereby providing for a 2007 closure of the Doha Round.

The other topic that is ripe for negotiation is investment. The U.S. and many other countries have a multitude of bilateral investment treaties, but again they're no substitute for an effective multilateral accord. The latter is the only way to get anything approaching harmonization, which would be extremely beneficial to business borrowers and financial lenders. It is incongruous for the world to have an elaborate set of trade rules, and nothing comparable on the investment side. After all, investment and trade are flip sides of the same coin.

Developing countries are hesitant about engaging in investment negotiations, but they shouldn't be. A solid, fair, balanced accord would foster foreign investment in their countries, something they all need. Without it, most of them will never achieve the levels of economic growth and job creation to which their populations aspire. Because this topic is so contentious, the WTO might want to handle it as a separate negotiation rather than add it to the Doha Round agenda. The world has been marking time on this issue, and we need to get on with it.

Economic growth rates in most of the world have been below par in recent years, a situation similar to that of the mid-1980s (when Japan was perceived as the world's 600-pound gorilla). Protectionists emerged from the woodwork 20 years ago, when we heard a lot about the alleged hollowing out of American manufacturing, unfair trading practices, etc. Ironically, all of that occurred just as U.S. companies were dramatically enhancing their international competitiveness, leading to often unprecedented boosts in economic performance and job creation in the 1990s. We're hearing similar laments today, and let's hope we as a nation have a similar antidote for them.

The laments, here and elsewhere, do put strains on the multilateral system. Today the protectionist weapons of choice seem to be anti-dumping laws and, where applicable, food safety regulations. In both cases, WTO leadership is essential, for these are global challenges. Anti-dumping cases are incredibly costly, cumbersome, often grossly unfair mechanisms for the resolution of trade disputes. The U.S. has resisted reforms to the WTO anti-dumping code, and to our own anti-dumping laws, but that is shortsighted. Other nations are beginning use these laws - in a major way - against our exporters, so they've come back to bite us. If anti-dumping laws are to remain in existence, as they probably are, they need about as much reform as do the world's agricultural policies.

The WTO already has a "sanitary/phytosanitary" ("SPS") code, which calls for the use of sound science in developing food safety and animal health regulations. Unfortunately, the EU, Japan and others have often shunted the code aside as they've applied what they call the "precautionary principle" in such situations. That principle clearly elevates domestic politics above science and economics, and is usually far too risk-averse. Hence, it is often unjustifiably protectionist, whether or not that was intended. WTO leadership is essential if we're to have greater harmonization, and a lot more common sense, in this contentious arena.

Finally, it is time for a long-term look at WTO governance. The WTO and its predecessor, the General Agreement on Tariffs and Trade, have operated by consensus for more than half a century. But the number of member nations has skyrocketed during that period, and achieving consensus among nearly 150 members today is not the same as doing so with a couple of dozen members in the early years. One or a handful of intransigents can preclude progress, as was starkly evident in Cancun.

That has to change or the WTO will never accomplish anything of note, either within or without its negotiating rounds. But change, whether formal or informal, will not come easily, for everyone will want to be in any "inner circle" that might evolve.

One must also ask whether negotiating rounds are obsolete. Do we really need high-profile launches, ministerial meetings and dramatic closes? Those events draw thousands of attendees and lots of media coverage, but is this an ideal setting for accomplishing anything worthwhile in

negotiations?

Other, equally important, governance issues come to mind. These can be postponed, but not ignored; they won't go away. Trade "turmoil" will always be with us. The question, this year and every year, is how well we manage it, and if in December the system works better than it did in January. That requires commitment, diligence and hard work - by every trading nation.