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As Churchill might have said, the World Trade Organisation is the worst way of governing the world economy, except for all the others. That is what the seething globaphobic masses and padded ministerial suits who conspired to wreck the WTO’s recent meeting in Cancún may soon find out. With prospects for freeing world trade — the engine of global economic growth over the past 50 years — in tatters for now, the consequences could be devastating. Indeed, finance ministers who are in Dubai for the World Bank/IMF meeting have already been expressing regret for the Cancún debacle.

Worst hit will be developing countries: without freer trade, they have little chance of escaping poverty. The WTO too is on the ropes — and with it the principles of multilateralism and the rule of law that Europeans claim to hold dear. In place of global rules that apply equally to all, countries will press ahead with bilateral and regional trade deals that are by definition discriminatory: preferences granted to some are handicaps imposed on others. Robert Zoellick, the US Trade Representative, has already said that “the US will not wait: we will move towards free trade with can-do countries”. On US terms, of course: unlike at the WTO, when countries negotiate one-on-one with America, they have to take it or leave it.

Even more worryingly, the breakdown of trade talks at the WTO — the Doha Round — increases the risk of a lurch towards protectionism. While governments are negotiating to free up trade, they are wary of giving in to the demands of protectionist interest groups that antagonise their negotiating partners and jeopardise better export opportunities. But now that there is little hope of a WTO deal any time soon, governments will find it harder to resist protectionist pressures. And once one country acts to keep out foreign goods, others retaliate.

The US looks set to act first. Even during the internet boom, when unemployment had virtually disappeared, American support for free trade was wafer-thin. Now that the economy has stumbled, the temptation to lash out at foreigners is greater. More than two million jobs have been lost since President Bush took office. America’s trade deficit was a whopping $536 billion in the year to July. And with his re-election chances looking trickier, Bush may try to buy votes by slapping duties on imports that are deemed to threaten US jobs.

Bush has protectionist form. When the steel industry spuriously complained that dastardly foreigners were to blame for its ills, he caved in to their demands for emergency import duties. The WTO has since ruled that the American action is illegal — and now that the Doha Round is on ice, the EU could decide to hit back with WTO-authorised sanctions on US imports. American farmers are also benefiting from Bush’s largesse. They are gorging themselves on $190 billion in subsidies over ten years.

China is already in the firing line. Its crime: the Chinese spend some $100 billion less on American products than Americans do on theirs. John Snow, the US Treasury Secretary, accuses China of gaining an unfair competitive advantage by holding down its currency, making its exports artificially cheap and pricing American imports out of its market. The US wants China to abandon its dollar peg and let its currency float — upwards, of course — as well as lifting its capital controls.

America secured limited support for its position at the meeting of finance ministers from the Group of Seven rich countries in Dubai at the weekend. Although the G7 statement did not finger China directly, it called for more flexible exchange rates to reduce global financial imbalances.

This is potentially dangerous. If China refuses to give in to America’s demands, a trade war looms. The US Congress is already threatening to impose curbs on Chinese imports unless China adjusts its exchange rate. Beijing is hardly likely to take such aggression lying down.

Yet the consequences of China giving in to American bullying could be even worse. For a start, China’s currency is not obviously undervalued: its trade surplus with the US is huge, but it is only $21 billion a year with the world as a whole. So even a limited revaluation could do more harm than good, damping growth in one of the few economies in the world that is still thriving. But allowing China’s currency to float and throwing open its financial markets would be a disaster.

Removing China’s financial firewalls would expose its ramshackle financial system and all-but-bankrupt banks to the instability of global capital markets. It could lead to a repeat of the Asian crisis in the late 1990s that almost thrust the world economy into recession.

China is not to blame for America’s vast trade gap. The real problem is that the world economy is dangerously unbalanced. Americans are living beyond their means, while the Europeans and Japanese are not spending enough. One figure sums it up: the US current-account deficit — the amount Americans borrowed from abroad — swelled to $529 billion in the year to June. So the US economy’s continued growth relies on foreigners continuing to lend Americans nearly $2 billion extra every working day. This is unsustainable: at some point, either Americans will take fright and stop borrowing or foreigners will get scared and stop lending. Were this shift to happen suddenly, America’s economy would plunge into recession, dragging the rest of the world down with it.

What is needed, then, is faster growth in the world economy to boost US exports, reducing its borrowing needs. One way to achieve this is lower interest rates and bigger budget deficits. Another is freeing up trade. Pity ministers didn’t think about that in Cancún.

Posted 03 Sep 2003 in Published articles

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