Business as Usual? The G20 Communiqué and Global Trade
With the world on the cusp of a serious recession, last weekend's G20 summit of the leaders of the richest industrial and emerging economies pledged to maintain an open global economy in the face of the economic downturn. In addition to a raft of statements responding to the financial crisis, the leaders' 47-point action plan included a pledge to keep free trade and to liberalize it further through a renewed effort to conclude the Doha Round of multilateral negotiations at the World Trade Organization (WTO).
Together, the G20 represents 85 percent of the world economy. In the build up to the summit, newspapers were full of comparisons to the Wall Street Crash of 1929 and the Great Depression, and political leaders were reminded of the hard lessons of the 1930s, when the "beggar thy neighbor" policies adopted by the major trading powers led to a collapse of global trade. In 1930, even as the League of Nations was attempting to negotiate a tariff truce in Geneva, the U.S. Congress passed the infamous Smoot-Hawley Tariff Act, which was greeted as "a virtual declaration of economic war on the rest of the world" and responded to in kind by America's trading partners. A downward spiral began as countries sought to export their economic difficulties to each other, stifling trade and hampering economic recovery. Financial crises come and go, but once the business networks around trade are destroyed they can take a long time to rebuild.
As the negative effects of the current financial crisis bleed into the real economy, there is a perceived danger of a resort to protectionist trade policies, as governments are tempted to shield struggling domestic producers from foreign competition or seek much-needed revenue by raising tariffs. In the current global context, even a modest return to protectionism could have serious economic consequences. In a unique study released on the eve of the G20 summit, noted trade modelers Antoine BouÃ«t and David Laborde of the International Food Policy Research Institute (IFPRI) have shown that more than $1 trillion worth of trade - 7.7 percent of total world trade in goods - is potentially at risk, living on borrowed time in the gap between bound and applied tariff rates. Even if we assume that countries would only impose very limited new trade restrictions, raising tariffs no further than the highest applied levels of the past decade, this still results in a contraction of world trade by 3.2 percent.
To guard against all this, the G20 leaders in their communiqué made two commitments on trade. First, they pledged that:
within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.
Second, they agreed to:
strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome.
Both of these statements are laudable, and have been greeted as such. The problem is that in political terms the first commitment, essentially a "standstill" agreement, may actually work against the second, a successful conclusion of the Doha Round. To understand why, it is necessary to go back to the dynamics of the WTO negotiations.
Trade ministers meeting in Geneva this past July failed once again to reach agreement on elusive modalities in agriculture and manufactured products, without which the negotiations cannot move ahead. While the proximate cause for the July collapse was a stand-off between India and the United States over the arcane details of the so-called Special Safeguard Mechanism, it is becoming ever clearer that the U.S. business community has been a significant obstacle behind the scenes. Normally a reliable source of support for trade agreements, influential business groups like the National Association of Manufacturers have adopted a high-risk strategy that no Doha deal at all is better than a Doha deal that falls short of their demands. Back in July, they besieged the United States Trade Representative with calls to walk away from the package that was on the table in Geneva.
The changed context of a full-blown financial crisis and worsening global economic outlook should have given pause to these business groups. Even small increases in tariffs can have a major impact on globalized companies with distributed supply chains making products from components that are sourced in multiple countries and have to cross multiple borders. One argument for agreeing the Doha Round package as it stands is that by making deep cuts in tariff bindings it provides a global insurance policy against protectionism - as renowned trade economist Patrick Messerlin has been arguing convincingly, and as European Trade Commissioner Catherine Ashton repeated in the run up to the summit.
The problem with the commitment not to raise trade barriers in the G20 communiqué is that, in the logic of WTO negotiations, some countries have just given away something for nothing - and at a time when the market value of that €˜something' (certainty, predictability, a global insurance policy against protectionism) has just risen exponentially. The United States, like the European Union and a small group of other WTO members, has given up nothing by making this commitment. U.S. applied tariffs are either at or very close to their bound levels. The systemic risk to global trade stems from the large gap between bound and applied tariff rates - the so-called €˜binding overhang' or €˜tariff water' - that is available to a host of developing and emerging economies. Emerging economies bear all the €˜costs' of the G20 commitment not to raise trade barriers, because they are the ones surrendering their policy space. With recession in the United States and European Union, these countries will also be providing close to 100% of global economic growth next year. The U.S. business community just got an insurance policy against protectionism for free, without having to pay anything for it at the WTO.
To be clear, the fact that the emerging economies set their faces against protectionism is to be applauded. By taking the high road, they have recognized the truth that, by putting up trade barriers, they would in fact only be hurting their own interests - as was the case for many of the countries who rushed to impose export bans in response to the food crisis earlier this year. Trade is a positive-sum game, and the benefits it confers on countries (better prices, lower interest rates, improvements in competitiveness and productivity) come not just from enhanced export opportunities but substantially from their own domestic liberalization. In the argot of trade economists, it is the WYGIWYG principle: "What You Get Is What You Give."
As an institution, the WTO generally helps to advance this positive-sum view of trade. Unfortunately, however, multilateral trade talks are still conducted along the lines of a mercantilist bargaining logic in which opening up to trading partners is about making €˜concessions.' That logic is pretty much at the end of its useful life. But for now it is the only negotiating technology we have at the WTO. The fact that leaders of emerging economies just gave up an important bargaining chip at the G20 summit in Washington could be problematic for moving forward at the WTO. It would be a sad outcome if this act of leadership were simply pocketed by the U.S. business lobby, allowing them to continue their mercantilist foot-dragging.
In fulfilling the mandate their heads of state gave to them to complete the Doha Round, trade negotiators from emerging economies would do well to point out that the G20 "standstill" guarantee is a fragile and temporary political commitment, and is in no way legally binding. If the business community in the United States wants real insurance against protectionism, then they will have to buy an insurance policy. And right now, the only place to get such a policy is at the WTO - through the successful completion of the Doha Round.
The views expressed in GMF publications and commentary are the views of the author alone.