Jeffrey Matsu | New York Global trade linkages have deepened across all major regions in 2005, with global trade as a share of GDP expected to exceed $14 trillion, or 30% of world GDP, this year. From 1987 to 2005, global trade accounted for 36% of global GDP growth (at market exchange rates), more than double the 17% seen during the 1974 to 1986 period. According to IMF estimates, world trade volumes of goods and services will have grown 8.9% in 2006, well above the 7.5% longer-term growth trend and our call for 5% GDP growth this year. While technological advances contributed to a sharp reduction in transportation and telecommunications costs, thereby stimulating trade, it was a more inclusive trading system that generated tailwinds for economic growth and recovery. Developing countries are benefiting from this integration as well — the ratio of trade to GDP of least developed countries increased from 25% in 2000 to 30% in 2004, the latest year for which data are available. As a result, any move toward reduced openness could limit their potential for growth.
Pundits have argued that a mix of factors preordained the death of Doha — decision-making based on consensus in an increasingly disparate WTO membership, recalcitrance of developing countries represented by the G-20, and the more prominent role of bilateral and regional free trade agreements. Reluctance of the US and Europe to meaningfully liberalize their highly subsidized agricultural sectors has not helped either. Yet it is precisely those countries and regional blocs most exposed to the competitive pressures of globalization that have reaped the benefits of free trade in recent years. Between 2003 and 2005, average annual growth in the export of goods from ASEAN, Mercosur and the Andean Community exceeded that of the EU-25 and NAFTA (18%, 25% and 31%, respectively, versus 13%). While the former are dwarfed in absolute size by the latter, their export and import shares with the rest of the world are considerably higher. This is not to say that free trade alone fuels economic performance, as fiscal prudence and balance of payments are equally, if not more so, important, but it helps. GDP growth in the Mercosur is expected to remain above 4% this year and next, and our prognosis for the ASEAN-5 is equally strong with 5%+ growth projected through 2008. This contrasts with a deceleration of growth below 3% in NAFTA next year, and weaker growth in Europe as well.
If free trade is so beneficial for growth, then why have negotiators refused to compromise? Poor countries, led by Brazil, India and South Africa, have argued that as latecomers to a game created by and primarily for the rich, they are at a distinct disadvantage and hence should be expected to yield less ground. Yet inter-regional export diversification is most pronounced in Africa, the Middle East and Latin America, accounting for trade shares of 84%, 72% and 90%, respectively. Bilateral trade flows between China and Africa have more than tripled since 2002, and Africa’s net trade with China is now positive. Moreover, according to the World Bank, more than half of the costs associated with the exports of poor countries results from restrictions imposed by other poor countries. For example, the tariff structure imposed by India on textiles from neighboring countries such as Bangladesh and Sri Lanka effectively doubles or triples final product prices, heavily skewing the terms of trade. Roughly sixty percent of total customs duties collected on merchandise imports worldwide accrue to the developing world, based on data from the WTO.
Unfortunately, the explosion of bilateral and regional trade deals over the past several years has distracted from multilateral efforts, consuming limited political capital which will be needed if Doha is eventually to succeed. Asking politicians to repeatedly take the stand for trade liberalization, no matter how small or inconsequential the deal, is neither a smart nor sustainable strategy. Yet just about all 149 WTO members participate in at least one of the nearly 200 regional trade agreements currently in effect. Not only does this lead to inefficiencies for multinational companies who must devote more resources to understand the myriad of rules and regulations affecting their products, but it negatively impacts smaller or poorer countries that often do not possess the clout to extract favorable trade terms. To fix the mess they started, the US and Europe must exercise greater leadership in curbing preferential trade agreement (PTA) contagion if discipline is ever to be restored to the global trading system. This is particularly urgent given the enabling clause of the GATT, whereby trade amongst developing countries is unbound by Article 24 and the nondiscriminatory most-favored nation rights that apply to developed countries. For burgeoning economies such as China’s, which is expected to become the world’s second largest trader in 2007, the unrestrained ability to cherry-pick who gets what level of preferential tariff treatment is unlikely to nurture support for freer trade elsewhere in the world.
Acknowledging the redistributive nature of trade and implementing more robust mechanisms to support those who fall between the cracks will be necessary to stem the backlash against globalization. Deep-seated mistrust for further global integration has already been evidenced through a bevy of protectionist events ranging from the razor-thin passage of CAFTA in the US, rejection of the EU Constitution, and economic patriotism vis à vis the failed deals of Unocal/CNOOC and Dubai Ports World. China-bashing is also on the rise, with more than two dozen pieces of anti-China legislation circulating in the US Congress. Expanding trade adjustment assistance, in the form of worker retraining programs, enhanced educational opportunities and wage/health insurance schemes, could rebuild public support for freer trade in industrialized countries at relatively little costs. Estimates by the Institute for International Economics show that this would amount to an additional $3-12 billion annually in the US, a paltry sum compared to the $500 billion potential gain from further liberalization. Finally, multilateral organizations such as the World Bank are in a unique position to incentivize poor countries to open their markets through the administration of aid-for-trade programs that provide technical assistance and compensation for lost tariff revenues and special preferences.
To regain momentum on the global trade front, the world needs a policy jolt akin to the inaugural Asia-Pacific Economic Cooperation (APEC) summit held in November 1993. What worked as a catalyst for the Uruguay Round could work again for Doha. With roughly 40% of the world’s population, the 21-country trading bloc accounts for 57% of world GDP and 48% of world trade. As was the case then, the economic costs associated with the potential exclusion from an Asian Union or Free Trade Area of the Asia Pacific could bring Europe and other major holdouts back to the bargaining table. Aspirations of the Association of Southeast Asian Nations (ASEAN) to accelerate the creation of a single-market economy amongst its 10 members by 2015, and the proliferation of PTAs throughout the region, could also promote an outgrowth of competitive liberalization that reinvigorates Doha and puts global trade liberalization back on track.
Bilateral and other less-than-multilateral trade agreements are a poor substitute for a global deal, and lead down a dangerous road pot-holed with reciprocal barriers and other retaliatory measures. By further reducing market distortions such as tariffs, subsidies and quotas, Doha has the potential to reintroduce much needed discipline into trade negotiations that have increasingly favored one-off deals driven more by political rather than economic considerations. As part of a rules-based regime, developing countries are for once on a level playing field to have their voices heard. Threats from terrorism, escalating confrontations in the Middle East and heightened tensions with North Korea further underscore the imperatives to reform rogue states through economic integration rather than isolation. While laissez faire liberalism may not be the answer, neither is forfeiting on a more inclusive international rules-based trading system.