Crisis in multilateral trade

by Ramesh Thakur

“Globalization” remains controversial. It has produced increasing economic interdependence through the growing volume and variety of cross-border flows of finance, investment, goods and services, and the rapid and widespread diffusion of technology.

The scale, benefits and vilification of globalization can all be exaggerated. Since the 1970s, the movement of people is still restricted and strictly regulated; in the aftermath of 9/11, even more so.

The growing economic interdependence is highly asymmetrical: the benefits of linking and the costs of delinking are not equally distributed. Industrialized countries are genuinely and highly interdependent in relations with one another. But developing countries are largely independent in economic relations with one another, and highly dependent on industrialized countries.

Compared to the immediate postwar period, the average rate of growth has steadily slowed down during the age of globalization: from 3.5 percent per annum in the 1960s, to 2.1 percent, 1.3 percent and 1.0 percent in the 1970s, 1980s and 1990s, respectively.

Globalization creates losers as well as winners. An International Labor Organization blue-ribbon panel noted two years ago that the problems lie not in globalization per se, but in the “deficiencies in its governance.”

Deepak Nayyar, one of the ILO panel’s commissioners and a former Vice Chancellor of Delhi University, argues that under the impact of globalization, there has been a growing divergence in income levels between countries and peoples. Assets and incomes are more concentrated.

Wage shares have fallen while profit shares have risen. Capital mobility alongside labor immobility has reduced the bargaining power of organized labor. The rise in unemployment and the accompanying casualization of the workforce, with more and more people working in the informal sector, has generated an excess supply of labor and depressed real wages.

The rapid growth of global markets has not seen the parallel development of social and economic institutions to ensure their smooth and efficient functioning. Labor rights have been less assiduously protected than capital and property rights.

The deepening of poverty and inequality — prosperity for a few countries and people, marginalization and exclusion for many — has implications for social and political stability among, as well as within, nations. It is in this context that the plight and hopes of developing countries have to be understood in the Doha Round of trade talks.

Begun in 2001, the Doha Round was supposed to be about trade-led and trade-facilitated development of the world’s poor countries. After five years of negotiations, the talks collapsed because of unbridgeable differences between the European Union, the United States and developing countries led by India, Brazil and China. Each, not surprisingly, defends its position.

From the developing country perspective, the problem is that the rich countries want access to their resources, markets and labor forces at the lowest possible price. Some were agreeable to deep cuts in subsidies but resisted opening their markets, while some others reversed this.

Developing countries are determined to protect the livelihood of their farmers — farmer suicide has been a terrible human cost and a political problem for state and central governments in India for some years already — and rural development. The rich countries’ pledges of flexibility failed to be translated into concrete proposals during the negotiations. They effectively protected the interests of tiny agricultural minorities.

By contrast, in developing countries, farming accounts for 30 to 60 percent of GDP and up to 70 percent of the labor force. This is why labor rights protection is at least as critical for developing countries as intellectual property rights protection is for the rich.

Developing countries are not unmindful of more than a century of Western public regulation and social investment to compensate for market failures and extremes of income inequality.

Even successful East Asian economies like Japan, South Korea and Taiwan included government help to local business to develop new technologies and markets and shelter fledgling firms from international speculation.

Developing countries were promised a new regime that would allow them to sell their goods and trade their way out of poverty through undistorted market openness. This required generous market access by the rich for the products of the poor, and also reduction or elimination of market-distorting producer and export subsidies that enable the rich world to dump produce on world markets.

Thus Europe launched its “Everything but Arms” initiative whereby it would open its markets to the world’s poorest countries. The initiative foundered on too many nontariff barriers, for example in the technical rules of origin. The U.S. seemed to offer EBP — everything but what they produce. Under its proposals, developing countries would not have been free to export textiles, agricultural products or processed foods.

Elimination of rich country production and export subsidies and opening of markets, while necessary, would not be sufficient for developing countries to trade their way out of underdevelopment. They also desperately need to increase their farmers’ productivity and may require technical assistance from international donors. Similarly, they will require additional social safety nets to cushion them against price and market volatility for their products.

The failure of the Doha Round is symptomatic of a much bigger malaise, namely the crisis of multilateral governance in security and environmental matters as well as trade. We risk a proliferation of bilateral and regional preferential trading arrangements and a retreat into protectionism. This would be a lose-lose outcome. That is why emphasis has been placed on resurrecting and concluding the Doha round of trade talks.