The Stealth Threat to World Trade

Threats to world trade come in many guises. The usual suspects include protectionist barriers and militant anti-globalization protests of the type that derailed the “Millennium Round” of World Trade Organization (WTO) talks in Seattle last year. Although these protests grab headlines, a new and perhaps even more insidious threat to world trade has quietly taken shape over recent years: so called “open sectoralism,” or the practice of negotiating access to foreign markets on a selective, industry-by-industry basis.

What this practice entails is that countries negotiate lower tariffs on some types of products but not on others. Contrary to appearances, open sectoralism is not a first step to more comprehensive trade agreements. Indeed, it may prevent wider agreements from being negotiated.

For even when successfully negotiated, sectoral agreements jeopardize economic efficiency and performance by protecting the least competitive industries because each country tries to open trade in areas where it is competitive. No country likes to open its manufacturing dinosaurs to foreign competition. The economic implications of such a stance, however, are perverse. Imagine an America or Europe still stuck in the 1950s, with economies dependent on coal and steel, and textiles, and with no competition from cheaper producers in Asia and elsewhere, and the danger becomes obvious.