Sunday, April 20, 2014
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The Perilous Retreat from Global Trade Rules

GENEVA – Over the last half-century, the world has been undergoing a “great convergence,” with per capita incomes in developing countries rising almost three times faster than those in advanced countries.­ But developments in 2013 revealed that the open trade regime that has facilitated this progress is now under grave threat, as stalemate in multilateral trade negotiations spurs the proliferation of “preferential trade agreements” (PTAs), including the two biggest ever negotiated – the Trans-Pacific Partnership (TPP), and the Trans-Atlantic Trade and Investment Partnership (TTIP).

The rules and norms arising from the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have underpinned the export-led growth model that has enabled developing countries to lift millions of people out of poverty. The irony is that large developing economies’ rise to systemic significance is at the heart of the current deadlock in multilateral trade negotiations.

Advanced countries argue that emerging economies should embrace reciprocity and establish trade regimes similar to their own. Emerging economies counter that their per capita incomes remain far lower than those of their developed counterparts, and insist that addressing their enormous development challenges demands flexibility in terms of their trade obligations. The resulting stalemate has impeded meaningful discussion of the main issues – including non-tariff measures, export restrictions, electronic commerce, exchange rates, and the trade implications of climate-change-related policies – raised by an open global economy.

Against this background, mega-PTAs seem poised to re-shape world trade. The TPP negotiations involve a dozen Asian, Latin American, and North American countries, including Japan, Mexico, and the United States; the TTIP would encompass the world’s two largest economies, the European Union and the US; and the Regional Comprehensive Economic Partnership (RCEP) includes 16 Asia-Pacific countries. Japan is also developing an agreement with China and South Korea, as well as a deal with the EU.

Such PTAs are said to have the potential to improve conditions well beyond the borders of the countries involved. If either the TPP or the TTIP produces meaningful reforms to trade-distorting farm subsidies – becoming the first non-multilateral agreement to do so – the benefits will be truly international. But the PTAs that now exist or are being negotiated focus more on regulatory issues than tariffs, and would therefore require participants to reach agreement on a wide range of rules covering, for example, investment, fair competition, health and safety standards, and technical regulations.

This presents a number of obstacles. While some non-tariff measures might be easy to dismiss as protectionist, many others serve legitimate public-policy objectives, such as consumer safety or environmental protection, making it difficult to ensure that they do not conflict with the basic principles of fairness and openness.

Moreover, such agreements can lock various groups into different regulatory approaches, raising transaction costs for domestic traders and making it difficult for external goods and services to penetrate the bloc. Such market segmentation could disrupt supply chains and lead to efficiency-damaging trade diversion.

Finally, the ability of mega-PTAs to set norms that benefit non-participants might prove to be more limited than many believe. Transatlantic trade rules on currency valuation, for example, might leave Japan indifferent. And specific rules to protect intellectual property could do nothing more than prevent Brazil and India from participating.

Overcoming these obstacles will require, first and foremost, some level of coherence among PTAs, with the various deals following roughly similar principles when addressing regulatory issues. Furthermore, if regionalism comes to be perceived as coercive and unfriendly, countries could form defensive trade blocs, leading to economic fragmentation and heightened security tension. To prevent such an outcome, the deals should be relatively open to newcomers and amenable to the possibility of “multilateralization.”

But the need for policy coherence extends beyond the mega-PTAs. Optimal outcomes for international trade require attention at all levels to the interface between trade and a host of other policy areas.

Consider food security. Effective national policies concerning land, water, and natural-resource management, infrastructure and transport networks, agricultural-extension services, land-ownership rights, energy, storage, credit, and research are as important as trade arrangements to transferring food from surplus countries to those in need.

Likewise, regional cooperation on water and infrastructure is critical to improving diplomatic relations and establishing well-functioning markets. And, at the multilateral level, agricultural production and trade is influenced by policies on subsidies, tariffs, and export restrictions (although the latter are not currently governed by strict WTO rules).

Despite the great value of regional cooperation and coherent national policies, a functional multilateral trade system remains vital. In order to reinvigorate multilateral trade cooperation, governments must work together to address unresolved issues from the Doha agenda, such as agricultural subsidies and tariff escalation. To be sure, the agreement reached at the WTO’s recent ministerial conference in Bali represents a boon for world trade and multilateral cooperation.

But governments must expand the agenda to include guidelines aimed at ensuring that mega-PTAs do not lead to economic fragmentation. Future WTO rules on export restrictions could help to stabilize international markets for agricultural commodities. Trade in services could be liberalized further, and industrial subsidies could prevent countries’ green-innovation objectives from getting lost amid pressure to boost employment at home.

Moreover, global rules on investment could enhance the efficiency of resource allocation, while international guidelines for competition policy would serve the interests of consumers and most producers more effectively than the existing patchwork system. Increased cooperation with the International Monetary Fund on exchange-rate issues, and with the International Labor Organization on labor standards, could diminish trade tensions and enhance trade’s contribution to improving people’s lives.

A shared strategy for addressing non-tariff measures would help countries to avoid unnecessary trade friction. And new developments in energy production might facilitate more meaningful international cooperation on energy trade and investment.

All of this would require that emerging economies accept eventual alignment of their trade commitments with those of advanced economies, and that advanced countries accept that emerging countries deserve long transition periods. In 2014 and beyond, all parties must recognize that, in a multipolar world, an international trading system based on an updated set of rules is the least risky means of pursuing their growth objectives. The recent WTO agreement reached in Bali on streamlining border protocols, among other issues, shows that important steps in this direction can indeed be taken.

Read more from "2013: Reversing Gears" here, or on Kindle and iBooks.

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  1. CommentedJonathan Lam

    Gamesmith94134@ The Anatomy of Global Economic Uncertainty
    In the search of the optimal paradigm for the four dynamics as in economic and financial or social and political, after the lender and debtor placed in growth and development we can see the clear distinctions on globalization, profitability, and balance of payments are pretty extreme; especially when the basis of the exchange in its value of currencies or durable goods like the real estate, or resources like oil changes. They do created the uncertainty on how we saw in the historical values integrated with change on the status from the globalization, profitability, and balances of payment. Perhaps, when we observe the deleveraging on the value of the economical advances or the currencies after the liquidity turned to solvency problems; and the exchange rate on the currencies made sit worsen on the restoring the historical values-----uncertainty on the value of the currencies made the foundation of the present exchange system collapsible even after the Libor rate principle is no longer relevant from the changes in globalization, profitability and the balance of payments.
    At first, we would question the title of the “Consumer of the World’, America and the merging of the European Union after the 92’. It sounds as the game of monopoly in the stock and commodity markets. It was the price market that most emerging market nations attempt to catch up with the economical growth by offering its labors and cheaper currencies; and the economical giants like US and EU were taking advantages of the profitability; but they gave up the industries that utilized its human resources by prompt on the raising salaries on the high end industries they sustained, and the government themselves shared their profits with government workers like teacher, policeman and fireman, and the growth push the cost of living standard forward the most labors were benefited from the surge. When their high end jobs missed their competitions from the emerging market nations, the balance of payment was default with deficits. Since the Western world is short on the political will to adjust and deprive the inflation, the liquidity traps were set in the quantitative easing with more bonds to sell.
    Perhaps, the key point was the excessiveness of the funds created after the issuance of the bonds with less of equity backings. Then, they accompanied with the financial establishment like banks boomed with the inflated pricing, hoping the emerging market nations accept its inflation by raising its currencies rates to exchange instead of harvesting the surpluses. Consequently, these issues were not purchased by investments of its people nor corresponded by the revenues of its government. Thus, it created the sovereignty debt that the foreigners must pay as the bearer of the issuance of these bonds. It went on to build up the price on stock or commodity; but the interest rate was mutated by its anemic growth in the developed nations; and inflation hit the emerging market nations with hike on the labor cost. Then, in due process, sovereignties are separated in the globalization after the fact on the political ends; while the debtor nations shirked with its debt, and the emerging market nations restricted the floating rate from inflation. It is why globalization was not a part of free trade in the sake of sovereignty under its protectionism.
    However, the bond issuers had applied the liquidity instead of solvency to the deficits or create growth, in reverse, they also developed the bubble in the stock and commodity market and the exchanges rates with their suppression of the interest rate to growth variation that the funds were created had no basis for growth, and its currencies were devalued. Then profitability was questionable on the displacement of time and value as it were; when the interest rate was under the spell of monopoly, that neither dollar nor Euro was the only alternative in storage of value in free will either. Soon as the deficit surface, the secondary storage, like real estate or commodity does not reflect the value of the future. The market collapsed on the demand of the appropriate compensation with hike of interest rate. With lesser success to improve the exchange in the bonds, the credits dragged on to the financial, that most medium business structure suffered most of the credit crunch. Then, profitability is limited on the established business and the medium business lost its profitability from the cash it must store or raise more to survive rather to gain. Since the anemic growth will continue globally and inflation hit harder to the labor cost for those exposed to the profitable nations and developed establishments. ..then, the credit crunch set in for the ordinary working class too in amending the balance of payment, from his credit card to home mortgage. Eventually, his job is hanging by a thread due to the eroding job market and the other is fighting inflation with low rising income or wages.
    Perhaps, we are identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation”, from the changes in the value line that flip flap in the merging globalization how each is sensitive to inflation and deflation; or, how profitable is each investment we are involved whether it is stocks, commodities or bonds may not be depended on the outcome but how it would evolved relatively to others like the exchange of the currencies; or it is more depandable on the reveiws on the balance of payments from the soveriegnties, and from average working class as well, since the present political environment is much vulnarable to change whether it was keynesian or socialististic. It is hard to tell how we value on the currencies or the government is soaked in the welfare state, and is coming to drown itself. Finally, I am looking forward in the next years in the settlement of the Euro and its sovereignty debts; and how the Western world looking at the globalization by fending off China or reminbi which had already set from the watermark of the global economy, and it is not going away. However, I would expect another new world order that is much stabler than the Euro-dollar rule, in the multi-speed, and multi-currencies Zones mode, which will extended its protection on its sovereignty power and currencies in running its domestic financial and global financial; so, monopoly or hegmony is no longer relevant in our civilized community and financial world.
    May the Buddha bless you?

  2. Commentedhari naidu

    NTBs are crux of Lamy's prescriptive analysis of current FTAs being negotiated across the global trading platform - i.e. without WTO.
    This outcome reflects on history of GATT trade negotiations which ended with Uruguay Round in Morocco and establishment of WTO - under political pressure from US Treasury (Clinton/Rubin).
    Doha Round lasted so long principally b/c developed OECD countries demanded reciprocity in Agri sector from developing countries - in order to dump their surplus production and impact self-sufficiency in countries like India and Brazil.

    I've noted previously that NTBs will impact whether TTIP will be finalized or not, including regulatory impasse, as food security is EUs paramount focus.