Big game hunting

* Trade posts represent solely my own opinions.

At a recent conference that I attended, one of the speakers borrowed a quote from Ike Eisenhower to great effect: “if a problem cannot be solved, enlarge it.” It occurs to me that this sentiment directly applies to the politics of trade in the United States. The public is divided on whether trade is beneficial to the economy, the 111th Congress has already demonstrated protectionist instincts, and it is increasingly difficult to advocate openness as jobs are lost and the recession deepens. How should President Obama, who understands the benefits of trade, address these political realities?

Enlarge the problem substantially by negotiating a comprehensive free trade agreement with the European Union or Japan. First, such an agreement would have huge economic benefits: EU-US trade flows were worth more than $640 billion in 2008. Export-oriented industries on both sides could be counted on to exert a lot of political pressure for that kind of market access. Second, a USEUFTA would take a very long time to negotiate due to the complexity of the trade relationship and both sides’ preference for high-quality agreements. This would put trade on the backburner for at least several years, which would help diffuse political tensions and give the economy time to recover, thereby mitigating the political influence of import-exposed industries. Negotiating with the EU would eliminate the standards (labor, environmental or otherwise) problem.

There are serious drawbacks to such an approach, such as the fact that it shuts out China, India, Brazil and other developing countries (though if you believe in competitive liberalization, you might argue that this would spur further negotiations.) Perhaps most worrisome, by establishing a substantive parallel system, it could easily undermine the multilateral trading system and provide a final knockout blow to the Doha Round. That would be terrible.

Still, the Obama Administration made it clear in its 2009 trade policy agenda that it would seek more economically meaningful agreements. Indeed, in a lot of ways, it would be better to complete one really big one instead of many smaller ones. Perhaps it’s time for trade policy-makers to consider big game hunting.

Trade wars as a proxy for great power struggles?

The WTO can’t get no love. People criticize it for being slow, ineffectual, not comprehensive enough, too comprehensive, irrelevant, etc. Most of these arguments are as old as the GATT. If you have 3 hours, I’m happy to sit down over a few beers and hash them out again.

But every once and a while, you read something completely new. Enter Daniel Abebe. The University of Chicago Law School Faculty Blog is hosting a roundtable discussion on the future of the WTO this week, and Mr. Abebe contributes this fascinating thought experiment:

What does international relations theory tell us about these questions? ...With the end of the Cold War, the relative importance of realist concepts of security, survival and military power began to decline; the great powers all had nuclear arsenals, democracy was increasingly the preferred from of governance and globalization brought states together. Around the same time, the WTO came into existence and international trade, not naked security competition, became the prominent issue for some states in international politics... we should see great power competition to be increasingly focused on trade issues and, given the tentative claims here, we should see increasing gridlock in the WTO... the implication is that the WTO will be a venue for great power competition and struggle to generate compromises on trade issues and that changing the institutional rules is unlikely to address the underlying structural problem or variation in internal characteristics among the great powers.

I have a lot of problems with this analysis. Above all, it’s very hard to take a realist power framework and try to apply it to trade relations. Unlike traditional power struggles, trade is a positive sum game that’s underpinned by a robust international legal framework. Further, all of the major powers are still firmly committed to an open trading system and understand that constant sniping at each other will produce a worse outcome than cooperation.

I’m not suggesting that there’s no tension in global trade relationships. There’s a lot, and there have been some contentious, economically significant cases so far. But such tension is rooted much less in state-state power struggles than domestic political considerations. (Trade is a political economy issue, remember?) Countries generally bring cases in the WTO because they get complaints from domestic constituents.

Further, a brief look at the WTO’s dispute settlement understanding would suggest that the multilateral trading system makes for a pretty lousy venue for great power struggles. The Appellate Body can take years to deliver a ruling, which can then be appealed, thereby further dragging out the process. And if you’re economically powerful enough, you can ignore the AB’s rulings anyways: this has happened a number of times in post-Uruguay Round dispute settlement, and it would very likely be the case if the number of contentious cases increased. However, if all the major countries started ignoring most of the AB’s decisions, it would probably lose its credibility quickly. In short, concerted great power struggles would destroy the WTO.

Indeed, if the current crisis has shown us anything, it’s that the WTO is still remarkably fragile. The progressive rounds of trade liberalization over the past 60 years have been hard-won. The international community would do well to preserve and expand them. There's a lot of work to be done: tellingly, most of the new (post G-20 summit) protectionist measures don’t even violate obligations as they currently stand.

I think we’re a long way from trade wars supplanting real wars.

(photo from nomad photography’s photostream)

L’économie politique du Roquefort

*These observations on trade are strictly my own thoughts.

One final note on l’affaire Roquefort, in which outgoing-President Bush raised tariffs on imports of French Roquefort cheese to 300%. I have generally been disappointed by the quality of debate in the blogosphere on this issue. As I have argued many times on this blog, trade policy is not understood very well through the prism of either political science or economics. If you want to understand trade policy outcomes (not the underlying theory), it’s best to think in terms of political economy.

The Roquefort tariff was first addressed by FP Passport, whose analysis hinges on the likely political impact:

The last thing Obama wants right now is to get into a trade war with France over
a last-minute decision by his predecessor, particularly when he's looking for
French cooperation on far more pressing issues.

Turning to economics, after a first attempt, the Economist followed with a scathing post:

While the measure hurts producers (and consumers) of a large number of
scrumptious products, the greatest casualty is Roquefort cheese. Yes, while
Europeans will be relishing delicious bleu cheese, Americans can eat
hormone-injected beef with a side of stale freedom fries. The asymmetry of the
quality has predictably inspired ridicule for the duties in France.

Beyond that superficiality, the Roquefort duty in particular is poorly
targeted and hardly just. A village of 600 people will have to face the most
severe consequences of a single European anti-trade policy. The banning of the
cheese is a symbolic measure that will do little to affect France’s economy as a
whole. Instead, it serves to provoke Europe unnecessarily and to reinforce
accusations of American jingoism.

Both analyses are incomplete. Passport’s international politics framing would be a suitable analytical point for other issues, but trade policy rarely moves so fast, and it would be extremely unlikely for the US to hike tariffs for no reason. This is especially true given Mr. Bush’s predilection for free trade. The Economist correctly identifies that the tariffs were enacted as a WTO-legal retaliatory measure in response to the EU’s banning the import of American hormone-treated beef. But they are wrong to hastily conclude that the Roquefort tariff is “poorly targeted.” As I wrote recently, the WTO is in many ways a mercantilist institution, and retaliatory sanctions (tariffs) are the only punishment it can authorize in disputes. Countries which are given WTO permission to apply sanctions have an incentive to make them symbolic, painful or, if possible, both. In doing so, the offended country hopes to harness the affected domestic producers in the offending country to pressure their government to make the sanctions go away (ideally, by complying with the WTO ruling.)

For many reasons, I do not want to discuss the specifics of this particular tariff. But this is the best framework with which to view this issue. Essentially, it’s rigging a purposefully inefficient outcome with the hope of forcing a more efficient outcome (i.e. freer trade in both European cheese and American beef) than the previous equilibrium (free trade in European cheese only.) Juicy as it may be, I doubt we can draw many conclusions about Mr. Bush’s free trade record from this incident or tie it to France’s opposition to the Iraq War.

Alors...

Why we need the WTO

The World Trade Organization is an odd institution. Its mandate is to govern and expand the global trading system, but it relies on an inherently mercantilist logic to do so. During negotiating rounds, countries essentially barter over ‘concessions’; that is, access to their domestic markets. By the same token, if the WTO rules that one country has neglected its trade obligations to another country, the WTO can grant the offended country scope to apply retaliatory sanctions, which essentially amount to the revocation of the concessions discussed above. If you think about it, negotiating over market concessions and threatening to revoke them to enforce compliance only make sense if you view exports as good and imports as bad.

In truth, unilateral liberalization is probably the best economic policy decision a government can make, in terms of aggregate gain. But it is also an unlikely policy outcome for many governments: the short-term dislocation is too severe, and the political pressure or even civil unrest risks from well-organized domestic interests are too large. While perhaps less economically palatable, multilateral liberalization is far more politically feasible, precisely because many people do view trade as competition. This is why the WTO must use mercantilist logic to advance free trade, and it is also why the world needs the WTO. By binding our trade liberalizing commitments in international treaties, they become much more difficult to backtrack on. This is especially critical in countries with weaker governance structures. I was reminded of this simple but powerful fact today when I read a new study on voxeu.org, which finds that rigorous accession commitments matter when determining a country’s benefits from joining the WTO.

This is an important way to understand the WTO, and it gets to the heart of arguments about why the WTO’s legitimacy is more important than ever. In a sense, the WTO is a painstakingly-constructed barrier against protectionism. But if it loses its legitimacy as the arbiter of international trade, this 60+ year old barrier would weaken significantly.

With that in mind, what happens to the WTO’s authority if the Doha Round ever completely collapses? It’s worth remembering that Doha has ceased to be only about the deal that’s on the table. In a broader sense, it’s now also about whether the WTO can “deliver” on trade. If it can’t, then it’s hard to imagine a scenario where the organization doesn’t lose a good deal of legitimacy.

The WTO saves governments from their worst and most short-sighted impulses. In these turbulent times, I would argue that we need it to be as strong and vigorous a force as possible.

UPDATE: see this post from last summer on why the Doha Round matters. What I wrote then has gained an even greater sense of urgency since.

Cotton subsidies under attack

The IHT is reporting that Brazil is seeking recommendations from the WTO on the application of retaliatory sanctions against the United States, which refuses to abandon its subsidies to cotton farmers. This is a significant development, because the WTO’s Dispute Settlement Understanding (DSU) takes a considerable amount of time to proceed to a point where sanctions are authorized. The DSU process goes something like this: 1.) the two countries try to settle their disputes through consultations. 2.) If no solution can be reached, then a panel is formed and rules on the dispute. 3.) Either the defendant country or the complainant country can appeal the ruling, in which case the Appellate Body reviews the ruling and either upholds or overturns it. 4.) If the defendant country is ruled against (complainants usually win) and does not comply with the adverse ruling after a reasonable period, then the complainant is authorized to apply sanctions. In this case, Brazil first challenged the US all the way back in 2002 (DS267: United States subsidies on upland cotton.)

Having just finished my Master’s dissertation on the WTO’s DSU, this is quite exciting. The cotton subsidies are glaringly inconsistent with America’s WTO obligations, and it would be better for the majority (the interests of American consumers, American taxpayers, international consumers, Brazilian producers vs. the interests of American producers) if the subsidies were eliminated.

It will be interesting to see how much the Appellate Body prices the trade distortion at, and whether or not Brazil’s sanctions have any effect. In my dissertation, I argued that ‘high-value’ disputes such as these tend to emphasize relative power capacities over the legal process in determining outcomes. To put it bluntly, it will depend on whether Brazil can hit the US hard enough with its sanctions to make keeping the subsidies more painful than eliminating them. According to the US Dept of Commerce, American exports to Brazil were worth $24.6 billion in 2007. That ought to give the Brazilians a hefty amount of retaliatory capacity.

Brazil is also considering initiating a trade dispute against American ethanol tariffs. International litigation is hardly an ideal way for America to develop coherent domestic policies. But if the United States is unable to produce farming and energy plans that don’t overly-privilege specific domestic sectors at the expense of the rest of the country, perhaps we can look to our trading partners to sue the hell out of us until we see the light. (That was a joke, but only just…)

(Picture by Brian Hathcock)

Dr. No (or, the future of multilateral trade)

As I mentioned a couple days ago (and gave updates on all last week), the "make or break" talks to save the Doha Round collapsed this week. There is a lot of doom and gloom about the WTO's future here and here and here and here and here and here... and, uh, about 3,000 other places. Without being overly repetitive, I have a few thoughts to add.

First, this is not doomsaying, this really is a big deal: in the entire history of post-war multilateral trade negotiations, we've never had a negotiating round collapse. Perhaps more notably, this was the first time that a round was negotiated under the new organizational structure of the WTO, not the more fluid and less-institutionalized structure of the GATT. Doha's collapse will fuel criticisms that the WTO's structure makes it very hard to do deals.

Second, as much as I respect China and India for playing hardball in trade negotiations, this collapse strikes me as a short-sighted and quite likely Pyrrhic victory for both of them. At the end of the day, both of these countries have relatively open economies and need the certainty of market access that the WTO and its dispute settlement procedure provide. Furthermore, despite the obvious legalistic and economic undertones, trade negotiations are still fundamentally diplomatic negotiations. I don't think this sort of behavior positions either country well in future trade talks, be they regional or otherwise, and I suspect that the perception of recalcitrance will not disappear quickly. Side note: I do still think that India's trade minister Kamal Nath has the coolest nickname of any trade diplomat ever: Dr. No, because, well, he liked to say 'no' a lot.

Third, I am rather pessimistic about the WTO's future. Failure to perform is one thing, but failure to perform when there is a perceived viable alternative in the shape of regional trade agreements (RTAs) is quite another. I have said before that RTAs (or FTAs or PTAs) are a dangerous substitute for multilateral free trade, a bit like taking infomercial diet pills instead of going to the gym every day. I understand the political economy arguments for RTAs very well, but I do not think they pass muster. This is a subject I hope to explore this weekend.

To continue with the WTO, however, I agree with Clive Crook that the most likely outcome of Doha's failure is a gradual marginalization of multilateral trade over the next 10 - 15 years. As I'm arguing in the dissertation that I hope to have done by next week, the WTO's institutional legitimacy in the next few years now hinges on litigation through Dispute Settlement Understanding (DSU). If, and this is a big if, the DSU continues to deliver quality and sophisticated resolution for trade disputes, it provides a good reason for the WTO's continued relevance and might buy negotiators enough time to reconvene in a few years and find a new way forward.

This is unlikely to be enough, however. And speaking of Dr. No, one of Mr. Bond's most famous lines from that movie probably applies to the WTO in its current state: "That's a Smith and Wesson. And you've had your six."

Doha talks have collapsed

The Doha talks collapsed today because the US, China, and India could not reach an agreement on agriculture.

Die another day

The Doha talks are doing their best James Bond and simply refuse to die. Word is coming out of Geneva that after another marathon session, the G-7 (the major Doha players: Australia, Brazil, China, EU, India, Japan, United States) have come to some consensus over a general plan advanced by WTO Director General Pascal Lamy. It must be stressed, of course, that this remains a vague framework with the specifics yet to be determined, but it is a way forward and talks are going into overtime. Of the G-7, only India is expressing serious reservations about Lamy's framework, and Brazilian foreign minister Celso Amorim has raised his predictions of success from "50-50 to 65-35." You gotta love his precision - let's hope he's right.

Bridges has the deal's specifics if you want to get into the nitty gritty.

Doha mini update

From Bridges (emphasis mine): 

"The next 24 hours will determine whether governments can rescue WTO talks from the brink of collapse, officials said Thursday evening.

A crucial day lies ahead for the ongoing attempt to strike framework deals on liberalising agricultural and industrial trade. Discussions have been largely stalemated since they started Monday, and negotiators are under increasing pressure to find common ground -- and soon -- or potentially face the breakdown of the troubled Doha Round. 

'Tomorrow is the day in which we will know if it's possible or not,' Brazilian Foreign Minister Celso Amorim told reporters Thursday night. "We're doing our best. It's not easy, but we're trying.'"

Do read the whole analysis: for trade reporting, Bridges is peerless. But the talks have predictably come down to the wire and today's the day we see whether they can cut a deal. Stay tuned.

Mini-ministerial day two

There's not a lot of major news coming out of Geneva after two days of trade talks. This is not uncommon for these sorts of negotiations, though: Bridges notes that Monday's discussions were little more than political positioning and grandstanding. The real wheeling and dealing will likely come towards the end of the week.

However, the FT reports that the United States offered on Tuesday to lower its farm subsidy ceiling to $15 billion/year, with some conditions attached. This is still comfortably higher than what the US actually spends on farm subsidies each year, which is about half that. Developing countries say the move is not enough. The US retorts that the offer is a genuine concession. We'll keep you posted on how things shake out as more information becomes available.

Side note: as these talks are ongoing, I am currently very busy writing a dissertation for my Master's Degree about the WTO. Ironically, if the talks fail, my dissertation topic will become extremely relevant, timely, and a good deal more interesting than it is presently. I stand by what I wrote yesterday, though - let's hope a deal gets done.

Why Doha matters

Trade ministers from about three dozen WTO member-nations are meeting in Geneva this week to try and break a stalemate in negotiations to conclude the Doha Round, which was launched in 2001 after the 9/11 attacks. The so-called mini-ministerial conference is being hailed as a "make or break" moment in the Doha negotiations. If you follow international trade relations, these sorts of doomsday phrases get thrown around a lot, but there is good reason to believe that it really is now or never for Doha this time. Nothing gets done in the WTO without the United States, which is heading into a hotly-contested presidential election amid rising protectionist sentiment. As the FT notes, a global free trade deal is unlikely to be a priority for either candidate, and a general election in India and changes on the European Commission further complicate things.

So where exactly is the impasse in negotiations? On the one hand, developing countries want increased market access for agricultural products, which means tariff and farm subsidy reductions, largely from the EU and the US. On the other hand, developed nations are demanding increased access for manufactured goods in the form of lower industrial tariffs. Oh, and the negotiators also need to resolve disagreements about trade in services, address LDC and LLDC (less-developed and least-developed countries) concerns about preference erosion, and sort out disagreements over "banana trade, location-based food names, and biodiversity-related patent rules." (Bridges)

Some advances have been made, but there's still a whole lot of negotiating to do. It also probably doesn't help that India's Trade Minister won't be there for the first two days as he's participating in a vote of confidence in the Indian Parliament. India has been a critical player in the Doha Round. Still, the WTO's Director-General, Pascal Lamy (pictured above right), put the odds of success "above 50%" in late June and has since indicated that they have marginally improved.

Why does all of this matter? One, freer trade is a positive-sum game in that all participants benefit to some extent. Second, reduced agricultural market distortions will help improve long term price stability and food supply, which is particularly salient given the recent global food crisis. Additionally, improved agricultural market access and tariff reductions are also beneficial for farmers in developing countries who simply cannot compete with first-world farmers at present. There are other significant benefits as well: for a quick summary, I recommend this Reuters FACTBOX.

One of the more sophisticated critiques of the drive to complete this round is something I like to term the "small-potatoes argument." It goes something like this: "tariffs are already low, and the gains to be had are relatively small, so why is Doha so important?" It's a valid point and actually speaks to the success of previous GATT/WTO rounds in lowering tariffs and improving market access. But Doha will bind tariffs at a lower rate and lock-in gains.

I also believe that the institutional legitimacy of the WTO is on the line here, especially given the rapid acceleration of economic regionalism as an alternative. If Doha doesn't deliver, it's not difficult to imagine the WTO's gradual decline and the marginalization as an international institution. (I hope to return to this theme  of regionalism vs. multilateralism in a future post, but for now, I would encourage anyone who's curious about it to read this brief article.) Others, such as the nonpareil Dani Rodrik, have argued that globalization (including multilateral trade) proponents need to pursue a broad public "legitimacy-enhancing strategy" instead of pushing through further trade deals aimed at improving market access. I would agree that further public buy-in is essential to sustaining economic globalization in the long run, but at this particular moment, I'm more focused on and rooting for a successful conclusion of Doha. 

And I hope you are, too.