The WTO: What is at stake?
John Payne Memorial Lecture
European Business School London
Ladies and Gentlemen,
This year is a crucial year for the multilateral trading system. In November Qatar will host the fourth WTO ministerial meeting. 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. The alternative looks very unattractive.
The world economy is showing signs of vulnerability. The US economy, its motor for the past decade, is stuttering. For the world trading system, this poses a threat as well as an opportunity. I am always reluctant to predict recessions, I am a bit of an authority. I accurately predicted ten of the past four recessions.
The threat is that a recession in America could export trouble to the rest of the world. Some countries would be more at risk than others in terms of the immediate effects. Canada and Mexico sell more than 85 per cent of their exports to the United States. Malaysia sells over 20 per cent. Big exporters of electronic goods like South Korea and Taiwan, would also be hit hard by a fall in American spending on information technology. Europe and Japan are more exposed to America through foreign investment than through trade. A downturn in America would deal a big blow to companies such as Daimler Chrysler and Toyota which have large American-based affiliates. And developing countries with large current-account deficits, like Brazil and other Latin American economies, would suffer if an American downturn caused a flight of capital to safety.
The blow to the world from a slowdown in America could be many times greater if harder times stoke up protectionist pressures. Even during the good times, there has a been a worrying surge 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. Support for agriculture in OECD countries amounts to a billion dollars a day.
Things could get much worse if companies squeezed by falling profits convince governments that they need protection from foreign competition. The virtuous circle of trade liberalisation and economic growth could all too easily become a vicious spiral of protectionism and stagnation.
It need not come to that. This is where the opportunity offered by a precarious world economy comes in. 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. Moreover, 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. What's more, a shared sense of vulnerability need not lead to beggar-thy-neighbour policies: it can also encourage greater co-operation between governments. That, after all, was the rationale for setting up the multilateral trading system after the protectionist nightmare of the 1930s. And last but not least, anxious politicians could come to see fresh moves towards trade liberalisation as a way to tide the economy through hard times. It boils down to this. When do you fix the roof? When the sun shines or when it rains? There are dark clouds out there. The forecast is for heavy winds and light drizzle.
The economic case for a new WTO round 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.
Cutting trade barriers by a third would boost Canada's economy by $13.5 billion and South Korea's by $14 billion. The gains to Australia would come to just over $5 billion, those to Mexico to $6.5 billion. The United States would gain $177 billion, the EU and EFTA $169 billion, Japan $124 billion. All countries would gain from further multilateral liberalisation.
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. For instance, a study by the Tinbergen Institute finds that the potential benefits of a new round in agriculture alone to the developing world would be three times what it receives each year in development aid.
The political challenge is to ensure that we grasp the opportunity of freer trade rather than succumbing to the threat of protectionism. Time is short, but the need is great. This month, the negotiations on agriculture and services that have been underway in Geneva for the past year pause for stock-taking. These two sectors, which together account for two-thirds of the world economy, are key building blocks of a new round. The progress that has been made in both sets of negotiations is heartening. But the pause for stock-taking could yet become a deadlock. To ensure it doesn't, we need to broaden the negotiating agenda beyond agriculture and services.
Why? Because it creates political trade-offs. Take agriculture. The European Union and Japan have stated that they are willing to negotiate meaningfully on reforming agricultural policies. Moreover, they are committed to negotiate by Article 20 of the WTO's Agreement on Agriculture. And the looming expiry of the Peace Clause in 2003 gives them a strong incentive to negotiate in earnest. Yet agricultural liberalisation is extremely sensitive politically. There is a much greater chance of reforming agricultural support in Europe and Japan if other countries are willing to make concessions in areas where Europe and Japan have interests, such as competition, investment, and anti-dumping.
A similar logic applies to the so-called “implementation” issue. Many developing countries have concerns about the burden of implementing their Uruguay-Round commitments and its perceived iniquities. They have raised a number of issues which are being discussed in the WTO's General Council and in WTO committees. Some modest progress has been made, notably at a special session of the WTO General Council last December. We need more progress and understanding here. But there is now a growing recognition that further efforts to rebalance past agreements require new negotiations. Instead of being a stumbling-block, implementation could thus become yet another building block of a new round. The developing countries have won, and correctly so. There will be no new round without clear signals on this issue. And no new round will conclude without satisfactory results.
Another key building block is market access for industrial products, which has been at the heart of every previous round. It is commonly assumed that trade in manufacturing is now largely free and that any further gains from liberalisation would go mostly to rich countries. That is simply not the case. For one thing, 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, as a study by Thomas Hertel and Will Martin of the World Bank points out. They estimate 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 liberalisation would go to developing countries. Clearly, then, manufacturing has to 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. The 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. Moreover, trade sanctions would harm, not help, workers in poor countries. However, 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. Frequently, their solutions would make it worse for the poorest and most vulnerable of our Members.
The environment issue is different. Our work at the WTO dovetails with environmental aspirations in potentially important ways. It is part of our process now. In areas like agriculture and fisheries, some existing subsidy policies can compromise environmental quality. We should work together to address these issues. More importantly still, 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.
Let me recap. The agriculture and services negotiations pause for stock-taking this month. Between then and July, we shall make every effort to hammer out an agenda so that ministers can put the final touches to it in Qatar in November. 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. It must be 95% understood and done by July, not 95% to do in November. It must not be another Seattle.
Four months is not a long time. That may be a good thing if it helps to focus minds. It is not unreasonably short. I have already sketched the broad outline of what a round must contain. Most trade hands will agree that it is realistic. The missing ingredient is the political will to compromise. Finding it can be difficult, but once it is found, progress can be swift.
There are already many positive signs. The new US administration, which I met last month in Washington, recognizes the importance of a new round. President Bush is committed to open markets. 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. Mutual self interest is the building block for agreements but the cement is personal relationships. Churchill - Roosevelt - Marshall - Bevin.
The European Union is also showing signs of flexibility. It has just completed a review of its approach to a new round. Its fresh approach has realistic ambitions. For instance, the idea that only those WTO members that want to need initially sign up to negotiations on competition and investment is helpful and in keeping with the precedent set by the WTO's services agreement, which has proved a great success.
Developing countries too are looking freshly at the issues. Many of them have abandoned their previous opposition to a new round. Developing countries increasingly realise that the large countries have needs too. They increasingly recognise that dwelling on the perceived injustices of the past does nothing to prevent even greater injustices in future. They increasingly understand that the greatest threat to their economies is not globalisation, but marginalization, a lack of development, and aggravated poverty.
That is also a key message of Clare Short's white paper on international development. I wholeheartedly agree with the ambitious International Development Targets set out in her recent white paper. Many governments, international organizations and agencies have endorsed the targets as the key focus of the efforts of the international community towards poverty eradication. They provide an objective means of measuring progress, and of steering efforts towards the practical outcomes which really make a difference to the poor.
The overarching objective is to reduce by one half the proportion of people living in extreme poverty by 2015. Many more specific targets are also specified to make this a reality. Trade helps growth and has a major part to play in achieving the International Development Targets. This is one powerful reason why we want a round of trade negotiations.
Listen to the words of Alec Erwin, South Africa's trade minister: “The danger of not having a multilateral round is to further exacerbate the development problem. If nothing happens this year, don't underestimate the dangers of disintegrating the multilateral system. For us in the developing world that would be disastrous.”
At the WTO all 140 member countries have a say. Even the smallest country has a veto, so it can block progress unless its needs are considered. Even the weakest country can appeal to our impartial dispute-settlement system when its feel its rights under previous agreements are being violated. Costa Rica, for instance, appealed to the WTO when the United States blocked its exports of underwear. Costa Rica won; the US lifted its restrictions. That simply would not happen without the WTO. The poor and the weak would be marginalised.
What's more, when a country opens its markets to another country at the WTO, it must do so to all. That prevents big countries from using their clout to rig the market in their favour. A big country cannot offer privileged access to its markets to one country at the expense of its neighbour. And it cannot play off neighbours against each other, gaining special access to their markets in return for limited access to its own. Without the WTO, the poor and the weak countries would all too easily fall victim to such power games.
The WTO is also the surest guarantor that a country is open to international trade and investment. Binding WTO rules give businessmen the confidence to invest in a country, and without that investment and the know-how that comes with it, development is all but impossible. That is why the WTO's membership has increased by 12 countries, from 128 to 140 in its five years of existence, why China is on the brink of joining, and why many more countries, including Russia and Ukraine, are queuing up to join. And it is why Yugoslavia has just applied for membership. As Yugoslavia's minister for foreign economic relations said recently in Geneva: “We believe the WTO is a cornerstone of the international economic system; it is crucial that we must participate in it. We believe membership will contribute to the democratisation of Yugoslavia and will greatly contribute to stability in south-eastern Europe.”
I don't want to sound like I'm crying wolf. The multilateral system will not fall apart if we fail to launch a new round this year. It may, however, become more marginalized for a few years. A global rules-based system built on non-discrimination could give way to a patchwork of discriminatory regional deals and even potentially hostile blocs, combined with aggressive unilateralism by big countries. Everyone would lose from this. But the biggest losers would be the poor and the weak.
But regional trade agreements need not be detrimental to the multilateral system. Some regions need to progress in order to better take part in the global economy. Moreover, to the extent that the possibility of being left out of future regional deals encourages compromise in Geneva, they may even be a good thing. After all, it is arguable that NAFTA and APEC spurred Members to reach a deal in the Uruguay Round. But standing still is going backwards. The status quo is yesterday's compromise. Injustices must be addressed and they can best be addressed collectively through fresh negotiations.
We would do well to heed my three immediate predecessors as head of the GATT/WTO. In a joint statement issued in Davos six weeks ago, Arthur Dunkel, Peter Sutherland and Renato Ruggiero warned of “danger in the present situation”. “We consider it is time for political and business leaders to pay attention to the danger and make the development of an adequate response a priority.”
Business has not been vocal enough in calling for a new round. That is in some ways understandable. A round can seem nebulous and distant, hard to measure and harder to achieve. Much like an effective domestic legal system, the WTO's impact on a business's bottom line may not be immediately obvious. All of this is true, but it does not alter the inescapable fact that world trade rules are the backbone of a globalising economy. They benefit big multinationals, and the millions of people in rich and poor countries who work for them, by enabling them to conduct business internationally. But they also bring huge benefits to small businesses and entrepreneurs who, in the absence of effective international rules, would not have enough clout to deal directly with governments. Clearly, it is tempting to take the system for granted. It is easy to assume it will look after itself. But as I have said earlier, that is to run a big risk.
Politicians too need to do more to push for a new round. It is all too easy to pay lip-service to the need for a new round without showing the necessary flexibility. It is all too easy to lose sight of the overwhelming national good in the defence of narrow, special interests. And it is all too easy to allow the WTO to cop the blame for national failings and to fail to explain, and explain again, the case for trade liberalisation and a rules-based system to voters.
My core message is refreshingly simple. Don't take the benefits of the WTO for granted. Don't assume that the world trading system will look after itself. Don't fight yesterday's battles and neglect tomorrow's opportunities. The world needs a new WTO round. Let's launch it in Qatar this year.