Friday, October 24, 2014
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Running in Place on Trade

NEW YORK – Meetings of G-20 leaders regularly affirm the importance of maintaining and strengthening openness in trade. June’s G-20 summit in Toronto, although not very effusive on trade, did not back away from it. Yet talk is cheap, and the open-mouth policy of (generally pro-trade) pronouncements has not been matched by action.

The paradox is that this has been good for holding the line on protectionism. After all, actions are also necessary to “roll back” open trade. So we have largely stood still, in trade jargon.

But lack of trade activism has also meant that we are not moving forward with trade liberalization. The long-standing Doha Round of multilateral trade negotiations seems to have been put on indefinite hold.

That governments did not break out into protectionism after the global financial crisis hit surprised many. In retrospect, it is easy to see why. Policy is driven by three “I’s”: ideas, institutions, and interests (i.e., lobbies). On all three dimensions, protectionist policy was hemmed in.

Progress in economic thought after 1929 initially led to the argument that, in a depression, tariffs are justified because they would divert insufficient aggregate world demand to one’s goods at the expense of others. But all could play this game, saddling the world economy with tariffs that would likely hurt all while failing to revive growth. The solution was obviously to forgo protectionism and increase aggregate demand instead. This lesson has been well learned.

Institutions have also helped. Following the passage of America’s Smoot-Hawley Tariff in 1930, countries raised trade barriers in a tit-for-tat frenzy, with no rules to constrain their behavior. The architects of the postwar global order therefore established the General Agreement on Tariffs and Trade (GATT) in 1947, which embodied such rules – as does the World Trade Organization, which absorbed and expanded the GATT in 1995. Indeed, no country has defied WTO rules in the current crisis.

Of course, we might still have yielded to pressure for protectionist measures, especially as WTO rules leave open the possibility of such a response. Thus, for instance, bound tariffs (i.e., agreed ceilings) allow countries to raise actual tariffs, which are often lower, without restraint. What has prevented the eruption of WTO-compliant trade wars has been the changed structure of the world economy, which has created strong anti-protectionist interests.

Thus, when the United States Congress enacted “Buy America” provisions for public procurement, many US firms, such as Boeing, Caterpillar, and General Electric – all fearing retaliation in their foreign markets – lobbied successfully to moderate the legislation.

The Doha Round ought to profit from some of these fundamental forces that favor open trade and impede protectionism. Indeed, conventional wisdom holds that, during a depression, citizens become risk-averse and will not support liberalization. But, with many people now aware that their jobs depend on trade in a closely integrated world economy, polls in the US and elsewhere show continued majority support for free trade.

While the Doha negotiators have settled many important issues, the final negotiations first stalled last year, owing to America’s refusal to cut its agricultural subsidies further and India’s insistence on special safeguards to prevent exposing its millions of subsistence farmers to unfairly subsidized US competition.

Today, domestic politics in the US and India has left America as the only stumbling block to progress. The last election freed India’s Congress Party of its coalition with the Communists, who opposed trade, and thus increased the flexibility of pro-trade Prime Minister Manmohan Singh. But the last election in the US ushered in a Democratic congressional majority that is indebted to trade-fearing unions, thus constraining the pro-trade President Barack Obama.

Obama also faces falling support from business lobbies in manufacturing and services – sectors that are demanding more concessions from other nations. Were he to opt to close the Doha Round as it has been negotiated to date, he could become a general without any troops. His silence on Doha at the recent G-20 summit was deafening.

So, how do we move forward on trade? One solution, favored by some Washington think tanks, is to go along and ask for more. But that would mean several years of re-negotiation. The Doha Round would then be de facto dead.

The other option is to close the Round by resolving the US-India discord on agriculture. Mutual concessions can be crafted that ensure negligible political fallout for both leaders. This would also require marginal improvements in concessions by the major developing countries, and by the US and the European Union on services.

The problem is that lobbyists in Washington would reject this modest solution if the Doha Round were the end game. So, part of the solution would have to be declaration of another Round to negotiate new aspirations and demands. We could even call this the Obama Round. After all, Obama should have to live up to his Nobel Prize as a multilateralist!

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