The WTO: challenges ahead
der deutschen gesellschaft für auswärtige politik
(German council on foreign relations, Berlin)
Recent years have been full of promise for the world economy. The US economy has grown in leaps and bounds, surfing on the crest of a seemingly endless wave of technological innovation. The challenge for other countries has been to capture some of that zest for themselves. Though some people were afraid they would be left behind, the mood was generally optimistic: high-tech start-ups sprouted up everywhere from India to Israel, Germans and Japanese caught the Amazon bug, and free-spending Americans helped to lift all boats by splashing out on all things foreign.
This year is different. Share prices on the Nasdaq, the barometer of America's technology-fuelled optimism, have fallen back to earth. Its European counterparts, such as Germany's Neuer Markt, have equally suffered. The world economy suddenly looks fragile.
At the moment, U.S. growth appears to have slowed significantly. A downturn in America is ominous for the rest of the world. The portents are particularly gloomy in Canada, Malaysia and Mexico, where exports to the United States contribute significantly to their respective GDPs. Big exporters of electronic goods, like South Korea and Taiwan, are also nervous as American spending on information technology declines. Developing countries with large current-account deficits, like Brazil and other Latin American economies, are vulnerable if an American recession causes a flight of capital to safety.
Nor is Europe immune to America's ills. Admittedly, exports to the US are only 2% of EU GDP. But Europe is also exposed to the American economy through foreign investment. A slowdown in America is bad news for companies with big American-based affiliates, such as Daimler Chrysler. And it is worrying for the employees of American firms with big operations in Europe, such as General Motors. Europe's economy could also be hit by a sudden fall of the dollar. The weak Euro has given European exports a helpful boost in recent years. A much stronger Euro would give them a knock. An even bigger risk is that the contagious optimism that has spread from America in recent years, reflected in soaring share prices and sky-high consumer and business confidence, could give way to gloom and doom.
An upsurge in protectionism could make things much worse. Even during the good times, there has been a worrying increase in anti-dumping and anti-subsidy investigations in both developed and developing countries. Over 400 were launched in 1999, up from only 166 in 1995. And the OECD has noted that producer support estimates for agriculture are rising again.
Things could turn nasty if companies squeezed by falling profits convince governments that they need protection from foreign competition. The virtuous circle of trade liberalization and economic growth could all too easily become a vicious spiral of protectionism and stagnation.
It need not come to that. The nervousness this year provides an opportunity as well as a threat. The prospect of stagnant, or even shrinking, domestic markets increases the lure of new, foreign ones. This can help muster an export lobby powerful enough to overcome the entrenched interests opposing freer trade. A growing risk of protectionism makes the need for an insurance policy that protects against it all the more pressing. For instance, car manufacturers that start to fret that their supplies of cheap foreign steel will be cut off may start to lobby vigorously for open markets. A shared sense of vulnerability need not lead to beggar-thy-neighbour policies: it can also encourage greater co-operation among governments. That, after all, was the rationale for setting up the multilateral trading system after the protectionist nightmare of the 1930s. Politicians should see fresh moves towards trade liberalization as a way to tide the economy through hard times.
For the multilateral trading system, the stakes this year could not be higher. In November, Qatar will host the next WTO Ministerial Conference. Our aim is to launch a new round of multilateral trade negotiations. It is a big challenge, but with focus and flexibility we can succeed.
Launching a new round would help steady nerves and send a powerful signal that governments do not intend to let the huge gains from liberalization slip away. The risk is that the global rules-based system based on non-discrimination could give way to a patchwork of discriminatory regional deals and even potentially hostile blocs, combined with aggressive unilateralism by the big guys. Everyone would lose from this. But the biggest losers would be the poor and the weak.
We should launch a new WTO round this year. The economic case is compelling. Cutting barriers to trade in agriculture, manufacturing and services by a third would boost the world economy by $613 billion, according to a new study by Robert Stern of the University of Michigan and others. That is equivalent to adding an economy the size of Canada to the world economy. Doing away with all trade barriers would boost the world economy by nearly $1.9 trillion: the equivalent of adding two more Chinas to the world economy.
All countries would gain from further multilateral liberalization. Cutting trade barriers by a third would boost Mexico's economy by $6.5 billion and South Korea's by $14 billion. The United States would gain $177 billion, the EU and EFTA $169 billion, Japan $124 billion.
Of course, these are only estimates. Reasonable people can quibble about the exact size of the gains from a new round. But the basic message from study after study is clear: a new round brings huge benefits to all parts of the globe.
The political challenge is to ensure that we grasp the opportunity of freer trade rather than succumbing to the threat of protectionism. Negotiations in Geneva on liberalizing trade in agriculture and in services are entering their second year. Progress has been good. But we urgently need to broaden the agenda beyond the mandated negotiations.
Why? Because it creates political trade-offs. Take agriculture. The European Union and Japan have stated that they are willing to negotiate meaningfully on reducing agricultural protection. They are committed to negotiate by Article 20 of the WTO's Agreement on Agriculture. The looming expiry of the Peace Clause in 2003 gives them a strong incentive to negotiate in earnest. Yet agricultural liberalization is extremely sensitive politically. There is a much greater chance of reducing agricultural support in Europe and Japan if other countries are willing to make concessions in areas where Europe and Japan have demands.
A similar logic applies to implementation-related issues. Some developing countries have concerns about the burden of implementing their Uruguay-Round commitments and its perceived inequities. They have raised a number of issues which are being discussed in the WTO's General Council and in WTO committees. Modest progress has been made, notably at a special session of the WTO General Council last December. But I believe there is now a growing recognition that further efforts relating to past agreements require new negotiations. Instead of being a stumbling-block, implementation could thus become yet another building block of a new round. Here we need more focus and flexibility for Capitals to make progress. Unless developing countries have confidence that their issues will be addressed in a meaningful way, no new round will start and no new round will conclude.
Another potential building block is manufacturing, which has been at the heart of every previous round. There are still many damaging trade barriers in manufacturing. And most of their burden falls on developing countries. Manufactures now account for around three-quarters of developing-country exports, up from around 30% in the early 1980s. Moreover, developing-country exports of manufactures face much higher trade barriers than exports from developed countries. In one World Bank study it is estimated that barriers to manufacturing exports account for around 70% of the total export barriers faced by developing countries and that three-quarters of the gains from further manufacturing liberalization would go to developing countries. Clearly, then, manufacturing could be at the heart of a new round if it is truly to benefit developing countries.
Setting the agenda for a new round is not just about including issues. It is also about excluding some. From what I have seen, WTO members will never agree to use trade sanctions to enforce labour standards. It is a line in the sand that developing countries will not cross. They fear that such provisions could be abused for protectionist purposes. They also believe such matters are more appropriately considered in other international fora. But that said, the social implications of globalization are forcing governments to consider their priorities. This is also a matter of jurisdictions. It is a matter of coherence among institutions and we do need a better answer to those who protest out of fear and anxiety. The fact that much of their anger is directed at the wrong place is hardly comforting.
The environment issue is different. Our work at the WTO dovetails with environmental aspirations in potentially important ways. It is already part of our process now. In areas like agriculture and fisheries, some existing subsidies can compromise environmental quality. We should work together to address these issues. More importantly, poverty is no friend of the environment. The virtuous circle of open trade and growth contributes to poverty reduction, and the WTO has a positive role to play here too. But potential conflicts also exist, most notably when it comes to environmental quality issues that spill across national frontiers. Here we need greater cooperation among governments. The WTO cannot solve these problems alone. Punitive sanctions in the absence of international agreements are hardly the answer. It should not be impossible for governments to square their commitments at the WTO with those in MEAs.
Between now and July, we at the WTO shall make every effort to hammer out an agenda for a new round so that ministers can put the final touches to it in Qatar in November. And we need always to keep in mind that this is about launching a round – not concluding a round. The agenda has to be broad enough to have something in it for everyone, but must exclude issues that are inappropriate or where compromise is impossible. It has to be detailed enough to be meaningful, but not so detailed that it becomes a pre-negotiation. By July, we need to have a reality check, we need to have identified and boiled down our differences to a few issues that we can then put to Capitals and Ministers so they can resolve them at the highest level. We have learnt that Ministerial Conferences cannot resolve dozens of differences. If we have the same differences in July as we had in Seattle, we will have the same result as in Seattle. We are in the hands of our owners — the Members.
Time is short. That may be a good thing if it helps to focus minds. What we need now is the political will from Members to compromise. Finding it will be difficult and will require courage and commitment. But once found, progress can be swift.
There are many positive signs. The new US administration has made a new trade round a priority. President Bush is a committed free-trader. The new United States Trade Representative, Robert Zoellick, is a man of the highest calibre and a strong supporter of the multilateral system. As is Pascal Lamy, the EU's trade commissioner, and they have a good working relationship. Their personal chemistry could be a crucial catalyst for brokering a transatlantic deal. I welcome the real progress they have made recently in their long-standing dispute over bananas.
The European Union is also showing signs of flexibility. Its new approach to a new round is more realistic.
Developing countries too are being more realistic. Many of them have abandoned their previous opposition to a new round. They increasingly recognise that dwelling on the perceived injustices of the past does nothing to prevent even greater injustices in future. They increasingly say that the greatest threat to their economies is not globalization, but marginalization. As a study by the Tinbergen Institute points out, the potential benefits of a new round to the developing world are three times what it receives each year in overseas aid. OECD subsidies is equal to the total GNP of Africa.
As storm clouds gather over the world economy, the prospect of launching a new round is a ray of sunlight. Now is the time to move from words of support for a new round to making the compromises needed to launch one. Now is the time to question narrow, selfish interests in the interest of the overwhelming national good. This takes courage and vision. In Geneva, at every occasion, I am urging Governments to show flexibility, to revisit old positions and to put old speeches in the shredding machine. Now is the time to look beyond yesterday's battles towards tomorrow's opportunities. The world needs a new WTO round. Let's launch it as soon as possible, this year.