An open international trade system is the backbone of the global economy. Vigorous trade has been the instrument of international prosperity in the past half-century. The secret of the trading order’s success has been its continual expansion in terms of members (the number of nations) and reach (such as products and services subject to its rules). Yet despite its impressive record during the last 50 years, the international trade regime is under threat as perhaps never before. The culprit is politics.
Although the global economy has surmounted its worst crisis since the Great Depression, the effects of the scare are lingering. Smaller nations question the wisdom of their commitment to free trade. Yet, instead of finding leadership and reassurances about staying the course, they see the United States, Europe and Japan embroiled in trade disputes over items ranging from airplanes to wool sweaters. Looking elsewhere, the World Trade Organization, the institution created to oversee the trade system and smooth out any wrinkles, is without a director general at this critical juncture. Worse, selection of the new head is creating yet more friction and encouraging doubts about the fairness of the entire trade framework.
The interplay of all those issues has been visible lately. Last week, the four biggest members of the world trade system — Japan, the U.S., the EU and Canada — met in Tokyo for their 32nd “quadrilateral” meeting. The two-day ministerial was notable for how little it produced. Participants agreed that China should join the WTO, that the next round of world trade talks should be completed in three years and that it should cover a wide range of sectors. Real progress on any of those issues, as well as the matter of the WTO head, was lacking.
Together the quad members make up about two-thirds of world commerce; if they can find so little to agree upon, it is no wonder that the rest of the world shows little enthusiasm for continuing trade liberalization. The lack of leadership was evident at the weekend meeting of the finance ministers of the Asia Pacific Economic Cooperation forum.
The 21 members of APEC, which account for about 60 percent of the world economy, include some of the nations hardest hit by the financial crisis that began in the summer of 1997. Those governments, led by Malaysia, the host of the APEC meeting, are seeking substantive measures to rein in the “hot money” that ravaged their economies. They have called for curbs on hedge funds and other sources of speculative capital. Other countries have different priorities. New Zealand, for example, prefers guiding principles for capital markets rather than strict regulations. The U.S. would rather see countries continue with reforms that will strengthen their financial systems and better insulate them from the effects of speculative funds.
The normal differences between developed and emerging economies have intensified in the wake of the WTO leadership spat and taken on a harder tone. There is seemingly genuine ill will — which could turn to outright obstructionism in the APEC talks — as well as a retreat from economic liberalization. This is politics at its worst.
There is no simple solution, but there are steps that can be easily taken. If the real problems are political, then the solutions lie in finding the will to solve them.
First, the U.S. and Europe need to reconfirm their commitment to the liberal trade order. That means a renunciation on the part of the U.S. of its use of unilateral measures and renewed commitment to the WTO dispute-resolution mechanism. For its part, Europe must cease playing games and accept the rulings against its banana and beef rules. The EU’s flagrant abuse of the rules has obliged the U.S. to retaliate in kind. The tit-for-tat behavior discredits both sides and demeans the WTO regime.
Japan takes pride in the $30 billion aid package it announced last November to help regional governments deal with the crisis. Last weekend, it offered an additional 2 trillion yen in loan guarantees. Both are welcomed by Asian governments, but neither shows the Japanese government willing to accept the pain of reform it has urged on its neighbors. Japan continues to demand exemptions for its politically sensitive trade sectors — a poor example from a country so dependent on trade. This nation, too, must show some political courage to push reform.
That, in turn, could help create a compromise on the two WTO questions: finding a new director general and agreeing on terms for the admission of China. It will not be easy, but a start must be made. The price of failure is becoming evident.
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