Sunday, November 24, 2013

What's the Future for International Trade?

An article in the Economist highlights how “the decline in multilateralism may not make much difference to big countries able to negotiate regional agreements on their own terms. Small countries without such leverage may be harder hit. But the marginalization of the World Trade Organisation (WTO) as a deterrent to protectionism is taking on new forms that are hard to deal with,” (p.16).
They go on to say how “free-traders in the West worry that the proliferation of regional trade agreements (RTA’s) is gutting the multilateral trading system. Arvind Subramanian of the Peterson Institute for International Economics calls for the rise of ever larger RTA’s as an ‘existential threat’ and gives warning that ‘multilateral trade as we have known it will progressively become history.’ Where the debate about whether RTA’s help or hurt the multilateral trading system has gone on for decades. Supporters argued that whenever two countries entered into an RTA, they would create incentives for others to join or to negotiate their own RTA. Trade barriers around the world would fall, one by one, and political support for multilateral deals would increase. Detractors claimed that once inside an RTA, countries would discriminate against outsiders and lose interest in multilateral liberalization, undermining the authority of the WTO. They would divert as much trade as they created and introduce big distortions.”
One of the key issues around this debate is “what are the forces that are driving ‘trade agreements’ and whether they are mostly ‘business’ driven or ‘politically’ driven”? It might be assumed that the two shouldn’t be mutually exclusive, but the time horizon for political decisions can be focused on a much shorter time scale and for totally different reasons than the drivers behind business decisions – where a business focus is often looking for long-term, reliable relationships that offer sustainable growth to the businesses concerned.
The forerunner of the European Union was established in 1957, even as the members of the General Agreement on Tariffs and Trade, the WTO predecessor, continued to cut tariffs. In the 1990s Bill Clinton signed the North American Free-Trade Agreement just as the Uruguay round of the trade liberalization was completed. Then in the early 2000s China joined the WTO and the EU expanded into Eastern Europe. In the past decade, though RTA’s have increasingly looked like an alternative, not a complement, to multilateralism. The Doha ‘development’ round, which began in 2001, immediately ran into trouble as emerging markets chafed at the central bargain: big cuts in their industrial tariffs in exchange for more access to rich-world agricultural markets. Talks faltered in Cancun in 2003 and finally collapsed in Geneva in 2008.
The problem with ‘developing’ regional or multilateral trade is that the negotiations and decisions are often made by government administrators in conjunction with representatives from big business (i.e. very big), with little consultation with the sme market and what their needs and/or expectations might be. Where ‘deals’ are made that help secure large government contracts with little regard for anyone else, and there doesn’t appear to be any research or data that shows whether this ends in an overall ‘gain’ for the economy or not, in both the short and long-term.
As the Economist highlights one of the biggest obstacles to more multilateral trade deals in today’s current global climate is the changing balance of global economic power. “Brazil, Russia, India, China and South Africa (the BRICS countries) see themselves as countries still poor enough to need protection for their industries while the rich ones lower their own barriers, especially to agriculture. But the rich world increasingly views the BRICS as fully-fledged economic competitors whose state capitalism is incompatible with a free and open global economy,” (p.14).
The dichotomy comes with the continued growth of multinational companies with a global reach, where there is no doubt that “regional trade liberalization is better than no liberalization at all, yet it interferes with globalization in several damaging ways. By excluding sensitive sectors or imposing onerous rules of origin, it complicates life for multinational companies whose supply chains cross multiple borders.” But further than this, the impact of the global financial crisis has had a severe effect on many sme sectors and governments would be well advised to look further than ‘negotiating’ trade deals that aid their big business partners and also actively consider the needs of their re-emerging sme sectors and their specific needs to compete on the international stage.
In my backyard: Multilateral trade pacts are increasingly giving way to regional ones. The Economist. 12-18 October, 2013. P.11-16.

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