Trade

How to make the WTO more effective

I was interviewed on BBC World Service’s Newsday about how to make the World Trade Organisation more effective. Last week director-general Roberto Azevedo said the WTO was “prone to paralysis” following India’s refusal to lift its veto on the Bali deal agreed last December to streamline customs procedures, which was meant to be a confidence-building exercise to kickstart the long-stalled Doha Round of broader trade negotiations.

Hur flexibla är Washington och Bryssel?

Europa och Amerika har glidit isär. Med ett uppåtstigande Kina och när kalla kriget blivit ett avlägset minne har USA flyttat sitt fokus till Asien. Därför är Barack Obamas besök i Stockholm den 4 september anmärkningsvärt på två sätt. Han är inte bara den förste sittande amerikanske president som gör ett bilateralt besök i Sverige. Det är dessutom hans första resa till Europa efter de i juni inledda förhandlingarna om ett transatlantiskt ekonomiskt samarbete som skulle kunna föra Västvärldens länder närmare varandra i en global ekonomi som alltmer lutar åt öst.

Det bästa är alltid att öppna sina marknader för alla. Men när samtalen inom världshandelsorganisationen WTO om en världsomspännande frihandel inte kommer någon vart och det inte finns några regler alls om utländska investeringar, skyndar sig länder att träffa hundratals bilaterala och regionala avtal. USA förhandlar om ett samarbete kring Stilla havet (Trans-Pacific Partnership) som skulle föra samman så skilda länder som Australien, Kanada, Japan, Mexiko och Vietnam. Samtidigt förhandlar EU med Indien, Japan, Kanada, Vietnam och många andra.

Men ett avtal mellan USA och EU skulle vara någonting helt annat. De två står tillsammans fortfarande för 45 procent av världsekonomin och för nästan en tredjedel av världshandeln, samtidigt som amerikanska och europeiska företag har investerat över 2,8 biljoner dollar i varandras ekonomier. I en tid när tillväxten är svag och det är ont om jobb skulle ett lyckat avtal kunna betyda en kraftig ekonomisk injektion.

För en liten ekonomi som Sveriges, vars framgång är beroende av utrikeshandel och internationella investeringar, är detta särskilt viktigt. Under de senaste decennierna har svenska företag blivit globala och nu investerar de mer i USA än i något annat land. Och det är trafik i båda riktningarna. Amerikanska Nasdaq äger Stockholmsbörsen samtidigt som Manpower, General Electric, IBM och ytterligare omkring 1300 USA-företag som etablerat sig i Sverige, tillsammans har fler anställda i Sverige än några andra utländska företag.

Förhandlarna siktar på snabba resultat, möjligen redan nästa år. Men det finns gott om hinder. Bidragsbönder är en mäktig påtryckargrupp både i Bryssel och i Washington. Amerikaner accepterar genmodifierade grödor, européer vill inte ha dem. Frankrike vill skydda sina filmer mot Hollywood. Skandalen med NSA:s spioneri gör européerna särskilt angelägna att skydda sina personuppgifter. Mer allmänt sett har Amerika och Europa olika regleringar och standarder på allt från att godkänna nya mediciner till att avgöra om en kemikalie är säker – och båda tycker naturligtvis att deras eget system är bäst. Amerikanska företag skulle bli mycket missnöjda om de fick se fler hindrande EU-regleringar smita in bakvägen medan européerna oroar sig för de förment lägre kraven i USA.

Det stora problemet med alla handelsförhandlingar är att regeringar ofta är bakbundna av protektionistiska lobbygrupper som övertalar dem att ett större urval av billigare importprodukter är ett hot snarare än en fördel. Under det kalla kriget hade den amerikanska regeringen ett bredare perspektiv till följd av den övergripande prioriteringen att hålla samman Västalliansen. Kan en sådan logik möjligen än en gång förmå Washington och Bryssel att vara flexibla? Trots allt skulle en överenskommelse inte bara föra Europa och USA närmare varandra. Det är också en chans att etablera långsiktigt hållbara, globala regler och förhoppningsvis kickstarta en utveckling mot en friare världshandel.

US slaps duties of up to 99% on Chinese steel pipes

The United States imported $2.7bn worth of the steel pipe used in oil and natural gas production in 2008, making it the highest-value US trade injury case on record.

But because of slumping demand and US duties already imposed in the case, imports of the product from China fell last year to about $1.1bn.

Now the US is slapping anti-dumping duties ranging from 30 per cent to 99 per cent on remaining imports from China.

American protectionism is ratcheting up another notch.

Stiglitz: US shouldn’t risk trade war with China

A truly excellent article.

Excerpts

On currency manipulation:

The US treasury has been charged by Congress to assess whether China is a “currency manipulator”. Although President Barack Obama has now delayed for some months when the treasury secretary, Timothy Geithner, must issue his report, the very concept of “currency manipulation” itself is flawed: all governments take actions that directly or indirectly affect the exchange rate. Reckless budget deficits can lead to a weak currency; so can low interest rates. Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate. Should Europeans have accused the US of “manipulating” the exchange rate to expand exports at its expense?

On exchange rates and surpluses:

In a global economy with deficient aggregate demand, current-account surpluses are a problem. But China’s current-account surplus is actually less than the combined figure for Japan and Germany; as a percentage of GDP, it is 5%, compared with Germany’s 5.2%.

Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings. The US’s multilateral trade deficit will not be significantly narrowed until it saves significantly more; while the recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.

Adjustment in the exchange rate is likely simply to shift to where America buys its textiles and apparel – from Bangladesh or Sri Lanka, rather than China. Meanwhile, an increase in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from America’s highly subsidised farms. This is the real trade distortion in the global economy – one in which millions of poor people in developing countries are hurt as America helps some of the world’s richest farmers.

A must read.

How should rich countries respond to emerging giants?

Patrick MesserlinPatrick Messerlin, one of France’s most perceptive economists, has written an interesting piece in the new issue of Europe’s World about how OECD countries should respond to the rise of China, India and other emerging economies.

Brazil, China, India, Korea and Mexico are already playing a key, positive role in the world economy.

First, in trade.

Few people appear to realise the fundamental contribution of the emerging economies to the success of the current world trade regime, something that has been of great benefit to OECD countries as well as to themselves. During the last three decades, the amazing success of China’s trade liberalisation has done much more to convince the other developing countries of the gains from trade than all the OECD countries’ exhortations. China has undertaken over the last 20 years a liberalisation process that it took 40 years for the U.S. and Europe to do. And China is the WTO member that has made the deepest liberalisation commitment on services, while Brazil has been decisive in cracking U.S. and EU agricultural protection and India in raising high the issue of services liberalisation. During key WTO ministerial negotiations in July 2008, Brazil was the most pro-active negotiator. The immediate reasons for the failure of those negotiations are generally attributed to India and the U.S., yet most observers seem to agree that the responsibility of the U.S. was the greater.

Second, through their measures, such as China’s fiscal stimulus, to halt the collapse of the global economy during the crisis.

Third, in environmental issues.

Brazil has improved its forest and agricultural land management while the U.S. and the EU have been massively subsidising production of environmentally-unfriendly (particularly detrimental to forests) first generation bio-fuels.

But other emerging economies have yet to play as constructive a role, Messerlin argues:

The credentials of other G20 countries like Argentina, Indonesia, South Africa, Russia, Saudi Arabia, South Africa and Turkey has been less convincing. These are countries that have been more hesitant in trade matters, more ambiguous in the instruments they have chosen for managing the crisis, and that are still more reluctant to deal with environmental issues. These attitudes also largely echo their less convincing performances on economy.

Pot, kettle

Eight years after China’s WTO accession, many US industries complain that they face significant non-tariff barriers to trade… These barriers include, for example, regulations that set high thresholds for entry into service sectors such as banking, insurance and telecommunications . . . and the use of questionable sanitary and phytosanitary measures to control import volumes.

Sounds a lot like the barriers foreign firms face in the US.

The economics of the madhouse

The failures of global finance have brought the world economy to its knees, threatening a re-run of the Great Depression of the 1930s. Such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.

Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Chang, in contrast, favours limited protectionism—in effect, a tax on imports.

This should ring alarm bells among people who may be tempted by the siren song of protectionism. Most governments are scrambling to boost spending and /cut/ taxes to stimulate demand. David Cameron’s Conservatives oppose such a fiscal stimulus. Chang goes one step further: he is proposing a (selective) tax hike instead. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.

Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.

Chang claims that rising protectionism in the 1930s was not as harmful as is often claimed. It is true that trade collapsed for several reasons, including falling demand. But protectionism greatly amplified the damage. According to a study by Jakob Madsen of Monash University (Trade Barriers and the Collapse of World Trade During the Great Depression), world trade declined 14% in inflation-adjusted terms between 1929 and 1932 due to declining incomes, 8% because of policy-induced tariff increases, 5% due to deflation-induced tariff increases (when prices are falling, a tariff of, say, £1 per item rises in real terms), and a further 6% because of the imposition of non-tariff barriers. So, most of the collapse in trade was due to rising protectionism rather than falling demand.

Nor did protectionism save jobs. Research by Doug Irwin of Dartmouth College, the leading US trade historian, concludes that “The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries.”

Clearly, then, the costs of protectionism are large. Yet Chang claims that “temporary” protectionism would have a big benefit: it would provide breathing space for companies and workers to reinvent themselves. But that too is dubious. Protectionism does not provide the right incentives for businesses and workers to adapt. Companies that have a captive local market tend to milk it, rather than seeking out more competitive markets overseas—especially if they are prevented from doing so by others’ protectionism. And while protectionism may start off as a “temporary” response to the crisis, companies that benefit from it have every incentive to find new reasons to maintain it, and to devote their energies to lobbying politicians to that end. Just look at Europe’s Common Agricultural Policy, which was originally designed to prevent Europeans starving. The last thing we need is a CAP writ-large.

Protectionism would obstruct the world economy from adjusting, rather than encouraging it. There is, for instance, huge overcapacity in the US and European car industries. If each country acts to prop up their carmakers, none will thrive. Only if the least efficient shrink can the carmarkers that produce the cars people actually want to buy thrive. Chang’s prescription is also bizarre considering his main focus is aiding developing countries. If the EU keeps out foreign cars, India’s Tata Motors and his native South Korea’s Hyundai, Daewoo and Kia will suffer.

In Britain’s case, advocating protectionism is particularly perverse. One big reason why the manufacturing sector has shrunk so much in recent years is the pound’s prolonged overvaluation. Now that the pound has collapsed, UK-based exporters, not least its remaining manufacturers, have received a timely boost that will make them more competitive when the global economy recovers. An increase in global protectionism would close off their future export markets.

The real help that companies need to tide them through the crisis is not protectionism but access to finance and broad measures to stimulate demand. These would also boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.

Protectionism watch

After the Omnibus Appropriations Bill signed into law by President Obama
scrapped a pilot programme that allowed a small number of Mexican
trucking companies to carry cargoes north of the border – as NAFTA
requires – Mexico has responded by slapping tariffs of up to 45% on 90 American agricultural and industrial imports.

Renault is to move production of its new Clio from Slovenia back to France, after President Sarkozy granted a bail out to French carmakers on condition they repatriate production from central and eastern Europe. Renault insists the decision is a commercial, rather than a political, one. So much for the EU single market.

Gordon Brown’s reshuffle

Gordon Brown’s reshuffle has certainly captured headlines. But what does it mean for the trade and immigration debates?

That Peter Mandelson jumped at the chance to leave his job as EU trade commissioner for a non-job as UK business secretary (which has been stripped of the energy and enterprise portfolios) provides further confirmation that the Doha round is dead.

Meanwhile, the appointment of Phil Woolas as immigration minister is ominous. He told the Guardian that he might ape the Tories and bring in an annual cap on migrants entering Britain.

"We must not pander to racists," he said – of course not, perish the thought – "but it is
particularly important that we have a credible policy on population
that can reassure people."

What do you think he means? A one-child policy? Leaving the EU? Or even tighter curbs on Africans and Asians coming to Britain?

Why the Doha breakdown matters

Philip Stephens has written an excellent article in the FT about why the Doha breakdown matters. He concludes:

The collapse of Doha, however, speaks to the failure of both sides
to own up to the world as it is. On the side of the rich countries,
particularly the US but no less many European nations, there is a
refusal to acknowledge that globalisation no longer belongs to the
west. In previous trade rounds, the rich nations set the rules and the
rest could take it or leave it. No longer.

Equally, the new
powers now give the impression – and you see this as much in India as
China – that they want to be free riders. They are happy to profit from
the rules, but unwilling to support the architecture of the system.
Doha, in this respect, saw both sides in blindfolds.

The
implications reach well beyond trade. The parallel with the need to
strike a global bargain on climate change is the obvious one. But there
are a host of other areas – think of nuclear non-proliferation, energy
security, state failure, terrorism – where the habit of multilateralism
offers the only sensible answers. A trade deal in Geneva would have
offered a glimmer of hope that world leaders understand this.