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 on the march in Southern Africa

Interesting news that might have slipped under the radar: this past weekend, the Southern African Development Community (SADC) officially launched a free trade area (FTA), as outlined in its Regional Indicative Strategic Development Plan (RISDP). The free trade zone encompasses 12 countries and nearly 250 million Africans, and they don’t plan to stop there. The plan calls for a customs union by 2010 (free trade with a common external tariff), a single market by 2015 (customs union plus free movement of goods, labor, services, capital), monetary union by 2016 (all currencies fixed to one another with the goal of creating a single currency and monetary policy), and a single currency and central bank by 2018.

The idea behind the SADC’s FTA is to promote regional economic integration, create trade, enhance collective bargaining power, and encourage the development of economies of scale. This is pretty standard stuff for an FTA. It could make the SADC a more attractive place to do business because of the expanded tariff-free zone. But corruption, regional political instability, and violent risks are still rife. I do also wonder about the trade creation claims (how much intra-SADC non-commodities trade goes on right now?) I’d be curious to see some figures on export penetration from China and other countries to see if trade diversion is a real concern. Once the member nations progress to a customs union, one indicator would be if the tariff schedule for basic manufactures and agricultural products in the common external tariff framework is suspiciously high.

Nonetheless, I see this as largely a positive development. With the exception of South Africa, many of these countries are poorly integrated into the multilateral trading system and are indifferent traders. Perhaps regional economic integration will be a shot in the arm. Yes, I realize that this leaves me open to criticism given my position on regional trade agreements, but we shouldn’t let the perfect be the enemy of the good in such situations. (I promise I’ll write that post detailing my thoughts about economic regionalism very soon.)

I’m most concerned about the ambitious timeline for further regional integration. A customs union should be doable, but after that further integration becomes enormously difficult. We’re talking about liberalizing capital flows, immigration policies, and investment regulations, among other things. These are difficult technical issues which require sustained (and highly competent) government commitments to successfully execute. And a monetary union? Is the SADC an optimal currency area? And do the member states have the monetary discipline (or, for that matter, capacity) to fix their respective currencies and establish a convincing peg?

We should remember that the world’s preeminent economic and monetary union took more than 40 years to progress from the Treaty of Rome to the introduction of the euro. And this was put together by some of the world’s most advanced countries. Considering that the perfect can be the enemy of the good, I do hope that the SADC’s over-ambitious plans don’t cause an otherwise encouraging project to fall apart.

Pakistan's rudderless course

Anonymous sources within the Indian government have finally come out and said what everyone in the international community is thinking: it is "negotiating with an elected Pakistani government that has little influence over the country’s more powerful army and spy agency."

It is true and it is scary. Much the same way generals will control Zimbabwe regardless of the political agreement there, the democratically elected government of Pakistan lacks the strength to control the country.

Even scarier than the thought of Pakistani hardliners destablizing the entire region (while in control of a nuclear bomb, no less) is that the government's actions suggest they do not care that they are not really in control. They are more than happy to build political capital and rake in the benefits.

Instead of tackling rampant inflation, securing their border, or quelling Kashmiri dissent, Yousaf Raza Gilani (with many others) has worked for the impeachment of Musharraf. Given the historical tension between the two parties in control, it is really no surprise that this is all they can agree on. But given the leadership void and seemingly "rudderless" path Pakistan is following, it would be nice to see the government take needed action. I just hope it does not come to the other choice.

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."

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.