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Re-booting the Multilateral Trade Process: What it Will Take

Author(s): Asia Global Institute

Date: Sep 15, 2011

Theme(s): Finance & Macroeconomics, Trade & Investment

Publications: Opinions & Speeches

Editor’s note: Few would dispute that trade has improved living standards across the world. Yet global trade talks seem chronically stalled. Fung Global Institute Senior Fellow Jean-Pierre Lehmann, who is also Professor of International Political Economy at IMD, believes that public ignorance about global trade economics is the greatest trade barrier of all.
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The great 14th century North African scholar Ibn Khaldun hit the nail squarely on the head when he wrote: “through foreign trade, people’s satisfaction, merchants’ profits and countries’ wealth are all increased”. Of course not all trade is good. Drugs, arms and people trafficking are evil. However, foreign trade by far does increase people’s satisfaction.  It generates profits and jobs, and increases the wealth of countries.  So why, seven centuries later, do we face a situation where the multilateral rules-based trading system is in a parlous state and could collapse?

The mystery deepens if one considers the extraordinary record of trade in creating economic growth over the past few decades.  The four NIEs (newly industrialised economies), South Korea, Hong Kong, Singapore and Taiwan, rose spectacularly from Third World poverty to First World prosperity, thanks to trade. China is following a similar path. Other examples abound throughout history. Sweden and Switzerland were among Europe’s poorest countries as recently as the 19th century, yet both became among the wealthiest, in good part through trade. Going back further still, the great city-state of Venice would never have known such splendour without trade.

Trade is closely linked not only to people’s satisfaction, merchants’ profits and countries’ wealth but also to the enriching of culture and civilisation. Since China opened up in recent decades, for example, not only have Chinese consumers benefitted from many foreign products and services but Beijing has also become one of the world’s major centres of classical music. The evidence that trade changes lifestyles is everywhere.  Think of a quite ordinary citizen who owns a Korean mobile phone, a German car, a Chinese laptop computer, Italian suits, a cellar full of Australian, Chilean, South Africa and French wines, and who watches Turkish soap operas on his or her Japanese television while eating Iranian pistachio nuts and preparing for a trip to archaeological sites in Yucatán, Mexico. This is the lifestyle enjoyed, in multiple forms, by millions, and to which millions more aspire. Trade in goods (eg, the wine) and services (eg, the tour in Mexico), brings not only satisfaction but happiness.

While trade improves the lives of the well-to-do, the point must be emphasised that trade mainly benefits the poor, since imported basic goods such as footwear and clothes bring about significant price decreases. When Brazil underwent market liberalisation in the mid-1990s, it is estimated that the price of pencils fell by almost 70 per cent, making writing instruments more easily available to poor children and thereby helping to raise literacy rates.

So trade is good but, like all human activities, it needs to be regulated.   When there are no rules, there is anarchy. The abuse of trade has regularly occurred in history. This was especially the case in the 1930s when states engaged in predatory trade practices aimed at harming others. Trade became a weapon. This is what inspired Cordell Hull, Nobel Peace Laureate and Secretary of State to President Franklin Roosevelt, to write at the height of international trade warfare in 1937: “without prosperous trade among nations any foundation for enduring peace becomes precarious and is ultimately destroyed.” And that sentiment, in turn, laid the philosophical foundations for the establishment of the post-war international trading system, initially, in the General Agreement on Trade and Tariffs (GATT), and subsequently, from 1995, the World Trade Organisation (WTO), which was to be multilateral, rules-based and to uphold the core principle of non-discrimination.

As there is no reason to dispute the correlation between international trade and material improvements in living standards around the world, why is being “anti-trade” so effective among populist politicians currying favour with their citizenries?  Why, when trade has benefitted so many, is the multilateral rules-based trading system, as represented by the WTO, in such a shambles?

There are many reasons, but three stand out. First, trade policy is dominated by mercantilist politics and politicians. From this perspective, trade is a weapon on a battlefield where exports are good and represent victory and imports are bad and represent defeat. This is contrary to classical theory which holds that the main benefit of trade is imports.  Yet, countries must export in order to afford imports. Second, as Luther Hodges, who served as Secretary of Commerce to Presidents Kennedy and Johnson from 1961 to 1965, once commented: “If ignorance paid dividends most Americans could make a fortune out of what they don’t know about economics”. This applies especially to trade economics and is by no means restricted to Americans. Mercantilism was the main guiding political philosophy of Japan for decades under the notorious Ministry of International Trade and Industry (MITI).  It resulted in Japanese consumers having far more limited choice and far higher prices. Yet the idea that exports represented Japanese virility was not challenged. Third, the Cold War alignments that glued the liberal trade agenda together for 50 years after World War Two no longer apply. Furthermore, during those 50 years, the US led trade policy along Churchill’s famous dictum that “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Unfortunately, even that form of American leadership in trade policy seems, at least for now, to have disappeared. American trade policy is paralysed, and hence the world trade policy agenda is paralysed.

These three phenomena, among others, have resulted in transforming the WTO and its Doha Round into a pantomime. The show goes on, but the chances of a trade deal being concluded are less than those of the proverbial snowball in hell.

So what is to be done? First, is to recognise, in paraphrasing the French statesman George Clémenceau’s famous remark about generals (“war is too important a matter to be left to military men”), that trade is too important to be left to trade negotiators. The trade policy system is top-down and nationally driven. Specific vested interests are promoted by states often at the expense of the citizenship in general. The most flagrant example is agriculture in the countries of the North, where trade negotiators claim to be defending the “national interest”, but in fact are pandering to small but politically powerful agricultural lobbies. Liberalising agricultural markets would benefit the vast majority of citizens. But consumers lack the political organisation and hence the clout of producers.

To counter these trends, there is an urgent need for global citizens to be better educated and informed about trade and for public opinion to become more aware and sophisticated about what constitutes their own best interest.  “Consumers of the world unite” may be a fitting motto for this decade. Pro-trade activists have much to learn from the campaigning civil rights and environment movements. Only with such pressure will politicians think about abandoning populist mercantilist protectionist policies and mind-sets. At this moment, nothing less seems able to re-boot the multilateral trade process. Meeting what one might call the “Luther Hodges challenge”, namely, to address ignorance about global trade economics, will be a major challenge and goal of the Fung Global Institute.