Home truths, globalisation and competition

Making trade work

WTO talks have to be put back on track, but there is time to do some thinking first. In particular, to work properly, free trade needs to be backed by strong competition rules.

To say that there has been a rush to judgement following the collapse of the Cancún WTO ministerial meeting would be an understatement. In some ways, Cancún was the farce to Seattle’s tragedy; or perhaps déjà vu all over again. But the time for apportioning blame for the failure of Cancún has passed, and there is an urgent need, not so much for action – there is always a need for that – but to step back and think carefully about where the trading system is, and where it should be going. We should do this because the trading system is important, as it can deliver benefits for all trading nations. A refocused system can make sure these benefits reach ordinary citizens.

We have a golden opportunity to take stock now because some of the major players on the trade stage will be locked in elections or government reshuffles; it would be a surprise if much happened in the trading system for the next two years. But two years passes quickly and it is vitally important to adjust the trading system; in particular, the bedrock of progress, the bid-offer system, is losing its appeal as tariff levels generally fall and attention turns to domestic regulations. Is the current set-up and agenda able to respond to the challenge of making world trade work for everyone involved?

The first thing we have to accept is that the success in trade talks to date has been based on reciprocal mercantilism between richer, stronger countries – you take my exports and I take yours. The problem with this approach is twofold. On the one hand, huge differences between tariff rates make reciprocity difficult – how does a tariff of 4% get traded off against a tariff of 40%? And on the other, it is an inflexible and probably inappropriate tool for more complex “development” issues or indeed systemic issues like competition and trade facilitation. We either accept that progress requires us to carry out time-honoured bid-offer talks, or we design something else. In a consensus organisation, it is not easy to see what that “something else” is, so in the short run we need to refocus minds on the bid-offer process.

Secondly, trade policy is a domestic issue with international spillovers. The US protects its cotton farmers and the EU all its farmers, not to damage developing countries, but to appease or please important vested interests. The first people they damage are their own citizens. Protection is first and foremost a domestic redistribution issue, the outside world comes second. Attacking someone else’s protectionism relies on there being a domestic reform movement to strengthen your hand.

It is no surprise that in Cancún the US could stand firm on the cotton initiative while the EU had to give way (a little) on agriculture. This was because there was no domestic reform push in the US, while there was in some countries of the EU. For international reform to work it must be in sync with domestic reform.

Thirdly, there is a serious mismatch in agendas between developed and developing countries. For most developed countries, the tariff swamp has nearly been drained; for most developing countries, it is still in flood. This poses two sets of challenges. Firstly, for most developing countries, tariff levels between each other are now just as important as tariff levels in the developed world. Nepal should care more about tariffs in India than Ireland and Argentina should care more about Brazil than Britain.

Secondly, the mismatched agenda undermines the viability of a bid-offer system. If European agricultural non-tariff barriers are my market access problem, what can I offer to get movement? Not a lot in some cases, which is why some countries find they have to sell off the family silver in the form of privatising their state assets. This agenda mismatch requires developing countries to look closer to home and to also form alliances with developed world reformers; but also to look for broader solutions to developed world domestic reform problems.

So those are the problems; what of solutions? Firstly, to get any movement in the short term, we have to get back to good old-fashioned reciprocal mercantilism. Bid-offer worked for 50 years and there is some life in the old dog yet. Secondly, for the longer run, we need to get the agenda into place now to allow us to refocus the WTO on the next generation of problems. That agenda requires OECD countries above all to dismantle complex systems of domestic protection and tackle webs of private and public restraints on trade-like cartels and anti-dumping. It requires developing countries to tackle powerful vested interests that capture the benefits of trade liberalisation and privatisation for themselves, rather than ensuring they spread to ordinary citizens.

That agenda is the competition agenda. Only through strong and effective competition rules do ordinary consumers get a guarantee that trade liberalisation will benefit them. Only through such rules will we have the tools domestically to attack vested interests and inappropriate regulation.

To rehash an old trade cliché, we need the trade community to get itself back on the bike and pedal with the basics of trade negotiations. And it needs to have a better vision of where it is pedalling to. For that, it is vital that it also focuses on the competition agenda and develops the tools for all countries to bring benefits of trade between nations to all their peoples.

References

Evans, P. (2003), “Is Trade Policy Democratic? And Should it Be?”, in The New Economic Diplomacy: Decision-making and Negotiation in International Economic Relations, Ashgate Publishing, Aldershot.

Sylvan, L., (2002), “Consumers first”, in OECD Observer, No 235, December.

©OECD Observer No 240/241, December 2003




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