Spoiling world trade

BY THE sorry standards of much of this century, world trade looks in rude health. In the 1930s, protectionism helped poison the world economy. After the second world war, tariffs and other trade barriers fell too slowly. However, over the past decade, many of the restrictions that stifle international commerce have been relaxed--thanks in large part to the lengthy Uruguay round of GATT talks, completed in 1993. Since 1990 world trade has grown by 6% a year, compared with less than 4% a year in the 1980s. As if to confirm the importance that governments now attach to the subject, there is now a World Trade Organisation (WTO), with 126 members, to police the new regime and to take the cause of free trade further into areas where there are still far too many restrictions, such as agriculture, services and investment.
From this perspective, the WTO's first big ministerial meeting, which starts on December 9th in Singapore, is going to seem disappointing. Ministers are preparing to squabble publicly over all manner of things--from the pace of trade reform to the terms on which China should be admitted to the WTO (see pages). On the last day there will be a bland communiqué of some sort, which will do nothing to beat back the protectionists that lurk in America and Western Europe. However, the greatest damage in Singapore will not be done by what is said, but what is left almost unmentioned: the threat that "regionalism" poses to global trade.

When the feasible is the enemy of the good
Thanks to the recent explosion of regional trade arrangements, whose members agree to liberalise trade among themselves, the WTO is just one cook among many stirring the free-trade broth. Only a handful of the WTO's members are not already part of some other local club. The European Union has 15 members and could soon have more. Some Americans are already looking for ways to meld together the North American Free-Trade Agreement (NAFTA), which was formed with Mexico and Canada, with Mercosur, a customs union formed by four South American countries. Free-trade areas are planned in both South-East Asia and South Asia. And the 19-strong Asia-Pacific Economic Co-operation (APEC) forum has a grand plan for "free trade in the Pacific" by 2020.
     Put this way, it sounds like something to applaud. The Economist has given qualified support to many of these agreements as and when they have appeared. What is it about their cumulative effect that should give pause for thought?
     Most governments and many free traders believe that regional free-trade areas are a step in the right direction. Their defence is usually a mixture of economic principle, practical diplomacy and visionary politics. First, they ask, how can it be possible for countries to agree to scrap tariffs among themselves and not make trade freer? Then they argue that it is often easier to make a deal in a small group than in the unwieldy WTO. And, finally, trade agreements, they say, are politically valuable: if countries are tied by commerce, they are less likely to start shooting at each other.
     The first of these arguments, plausible as it seems, is simply false. Regional "free-trade areas" need not make trade freer. By liberalising trade only with their neighbours, countries are by definition discriminating against those not lucky enough to be in the local club. Some goods will be imported from other members of the free-trade area at the expense of producers elsewhere; and members will begin to specialise in industries in which they lack comparative advantage.
     Thus, the EU has a bloated farming industry while many producers in poorer countries suffer from not being able to serve its markets; and NAFTA has complicated "rules of origin" requirements, stipulating how much of a car needs to be made in Mexico to qualify as "NAFTAn", and so enter America tariff-free. It is always better to liberalise without discrimination than to open up only to neighbours; sometimes, selective opening is worse than doing nothing at all.
     The argument that, despite this danger, regional trade areas represent a speedier, more practical way to proceed than does the WTO, is also open to question. True, the Uruguay round lasted more than seven years, and even now governments are struggling to finish off some outstanding negotiations, but slow progress bedevils regional arrangements, too. Despite much talk about expansion, the membership of NAFTA is stuck at three. APEC is moving at a glacial pace. Similarly, although the local clubs sometimes broach subjects long before the WTO (for instance, NAFTA has a treaty on foreign direct investment), they can also introduce possible bugbears (NAFTA also contains worrying agreements on standards for labour and environmental protection).
     Moreover, the standard against which each regional trade pact needs to be measured has, mercifully, been raised. Back in the 1950s, the idea of a customs union in Europe (even if it was linked to an idea as awful as the common agricultural policy) was attractive because the alternative (no customs union at all) was plainly worse. Now, the emergence of the WTO has raised the hurdle: the architects of regional agreements know they will have to defend their plans against the charge of setting back liberal trade, and adjust their plans accordingly. That is fine, but it raises a question: would it not be simpler, after all, to make these deals at the WTO?
     That leaves the last "political" argument--that bodies such as APEC and Mercosur have brought old enemies together. So they have. Again, however, would this be any less true of broader multilateral agreements? And there are limits to how far the goal of international amity, worthy as it is, should be used to justify economic lunacy. Invoking France's post-war friendship with Germany seems an odd way to defend the EU's limits on imports of Argentine chocolate.
     If governments paid more attention to the threat of regionalism, that would be an excellent start. One excuse for their not doing so is that the WTO's own system for policing regional trade agreements is a mess. At present, each new free-trade area or customs union is appraised by a committee, open to all members and with extremely vague terms of reference. Unsurprisingly, only six of the 70-odd committees formed since GATT began have ever reached a firm conclusion. It would be much better if agreements were examined by a smaller team of independent scrutineers with a precise mandate to assess the effect on world trade--and, in particular, the way that the new agreement treats outsiders.
     It can be hard to say whether any free-trade area is so restrictive that its costs outweigh its benefits--though Mercosur, by some calculations, fails the test, and the case for the new ASEAN agreement also looks weak. Most agreements are a mixture of good and bad. The long-term challenge for the ministers about to meet in Singapore is thus twofold: to change the worst details in their own regional deals; and, even more important, to press ahead with multilateral trade liberalisation in the WTO. Governments now have a chance to make this new institution the strong catalyst for liberal trade which they have long said they wanted. They should seize the opportunity.

The Economist Home Page - Search - Contents - Next article