For decade after decade since the Second World War, trade growth surged well ahead of output growth and globalisation (short-hand for a higher and higher average share of trade in world output) was a major driver of higher living standards in already-rich countries and lifting hundreds of millions of people out of poverty, especially in Asia.
What’s happened to the trade-growth machine that has been so successful? And how do we need to go about fixing a system that has served the world so well up to now?
The answer to the first question is not entirely clear. Certainly the global financial crisis has turned the global economy inward, despite a largely successful attempt to hold the ‘standstill’ against new protectionist measures in major industrial economies after the recession hit. With under-utilisation and down-sizing of industrial capacity in major economies, the upsurge in anti-dumping and other ‘legal’ protectionist measures has closed off market access. Moreover, the outlook in global commercial diplomacy has been gloomy. The ambition to build global value through international production chains is high; confidence in the framework of trade and investment rules that is essential to doing that has been ebbing away after the WTO Doha Round stalled.
The answer to the second question is painfully clearer day-by-day: highlighted last week again by the frustrations of getting the reasonable outcome from the WTO trade ministers in Bali (just announced) and the approach to the Trans Pacific Partnership (TPP) negotiations on the side in Singapore over the coming days.
Even the trimmed-back goals of the Doha Round of trade negotiations that new WTO Director General, Roberto Azevedo, and the main players have struggled to achieve — by implementing trade facilitation measures to smooth cross-border commerce and protect farm development and food security for developing nations — will boost the global economy by US$1 trillion and breathe new life into the WTO as a forum for international trade deals. But first India, anxious to avoid exposure of its costly farm support program and then Cuba (backed by Bolivia, Nicaragua and Venezuela) capturing the moment to highlight US trade discrimination against it, held the entire settlement hostage down to the wire.
But success there was. USTR Michael Froman says that ‘the WTO has entered a new era.’ Azevedo has declared that ‘the decisions we have taken (in Bali) are an important stepping-stone toward the completion of the Doha Round.’ They have certainly done much to restore the credibility of the WTO which has had the wobbles over the past decade.
While the WTO and the multilateral trading system continues to have the wobbles, despite its final victory in engineering a deal in Bali, the TPP and other regional trade deals are touted as the international trading system’s twenty-first century saviour. The political omens seemed favourable to seal a TPP deal — of almost any kind in Singapore at the weekend, with a coalition of the willing filing in behind America’s pivot to the region and high political stakes on it in Washington.
The week’s lead essay from Philippa Dee explains deep flaws in the structure of the TPP negotiation around trade liberalisation being held hostage to an American intellectual property rights agenda that is inimical to economic development. This is an ironical twist in negotiations for a region that is the leading-edge of global development.
The core of the matter, as Dee explains, is that, for private sector interests in the United States which have captured the high ground in the US and therefore the whole negotiating agenda, increasing the rents accruing to existing IP is the main game. Since the game cannot be played successfully in the WTO, it is being played in free trade agreements, including the negotiation of the TPP.
As Dee goes on, ‘countries that are trying to preserve and expand international rent transfers need to rely on bundling, so that they can sell the good with the bad. In the WTO, bundling was ensured by the single undertaking; in free trade agreements, bundling is ensured by offering market access concessions on a discriminatory basis’. But therein also lies a pot of crock, since offering preferred treatment to Vietnam, for example, on its textile exports to the United States that excludes any content in its exports from China, Indonesia, India (or half the world that is not a party to this discriminatory agreement) imposes costs on Vietnamese producers and reduces rather than increases the gains from trade. This kind of agreement, like the multiplicity of such discriminatory agreements that have preceded it in the past couple of decades, is inimical to effectively driving income growth through global value chain production networks. That’s why the multi-national producers who are the pointy end of global trade and income growth avoid using them.
And that’s only one part of what’s wrong with the TPP negotiation as it’s presently structured: there is also, of course, no serious undertaking yet to lift the burden of agricultural trade restrictions in the United States, let alone Japan.
Dee’s argument is not just a critique of how the TPP is structured, devastating though her ‘mercantilist nonsense’ description of that surely is. It is about something much more important that needs to be addressed in where the trading system is at, and what the Asian economies, which are now the leading trading nations of the world, might think about doing with it.
‘The real question,’ Dee concludes, ‘is about bundling, underpinned by current WTO rules. Should WTO rules allow developing countries an opportunity for phased reforms, or are they to be subjected to discriminatory punishment unless and until they are prepared to take on the whole package, be it the EU’s acquis or its US equivalent, with the sometimes dubious provisions contained therein? It is anti-development to expect developing countries to forgo the benefits of market access until they are ready to take on the so-called platinum provisions of IP protection and so on, as part of the bundle’.
This is one of a set of issues that world leaders (in the G20) might begin with in thinking about how the global trade and investment regime might be fixed, and Asian leaders have every incentive to get that conversation going.