[Viewpoint] Running in place on trade

NEW YORK - Meetings of G-20 leaders regularly affirm the importance of maintaining and strengthening openness in trade. June’s G-20 summit in Toronto, although not very effusive on trade, did not back away from it. Yet talk is cheap, and the open-mouth policy of (generally pro-trade) pronouncements has not been matched by action.

The paradox is that this has been good for holding the line on protectionism. After all, actions are also necessary to “roll back” open trade. So we have largely stood still, to use a bit of trade jargon.

But lack of trade activism has also meant that we are not moving forward with trade liberalization. The long-standing Doha Round of multilateral trade negotiations seems to have been put on indefinite hold.

That governments did not break out into protectionism after the global financial crisis surprised many. In retrospect, it is easy to see why. Policy is driven by three “I’s”: ideas, institutions and interests (i.e., lobbies). In all three of those dimensions, protectionist policy was hemmed in.

Progress in economic thinking after 1929 initially led to the argument that, in a depression, tariffs are justified because they would divert insufficient aggregate world demand to one country’s goods at the expense of others. But everybody could play that game, and did, saddling the world economy with tariffs that hurt everyone while stifling growth. The solution was to forgo protectionism and increase aggregate demand instead. This lesson has been well learned.

Institutions have also helped. Following the passage of America’s Smoot-Hawley Tariff in 1930, countries raised trade barriers in a tit-for-tat frenzy, with no rules or institutions to constrain them. The architects of the postwar global order therefore established the General Agreement on Tariffs and Trade (GATT) in 1947, which embodied such rules, as does the World Trade Organization, which absorbed and expanded the GATT in 1995. Indeed, no country has defied WTO rules in the current crisis.

Of course, we might still have yielded to pressure for protectionist measures, especially as WTO rules leave open the possibility of such a response. Thus, for instance, bound tariffs (i.e., agreed ceilings) allow countries to raise actual tariffs, which are often lower, without restraint. What has prevented the eruption of WTO-compliant trade wars has been the changed structure of the world economy, which has created strong anti-protectionist interests.

Thus, when the U.S. Congress enacted “Buy America” provisions for public procurement, many U.S. firms, such as Boeing, Caterpillar, and General Electric - all fearing retaliation in their foreign markets - lobbied successfully to moderate the legislation.

The Doha Round ought to profit from some of these fundamental forces that favor open trade. Indeed, conventional wisdom holds that, during a depression, citizens become risk-averse and will not support liberalization. But with many people now aware that their jobs depend on trade in a closely integrated world economy, polls in the US and elsewhere show continued support for free trade.

While the Doha negotiators have settled many important issues, final negotiations stalled last year owing to U.S. refusal to cut its agricultural subsidies and India’s insistence on special safeguards to prevent exposing its millions of subsistence farmers to unfairly subsidized U.S. competition.

Today, domestic politics in the U.S. and India has left America as the only stumbling block to progress. The last election freed India’s Congress Party of its coalition with the Communists, who opposed freer trade, and thus increased the flexibility of pro-trade Prime Minister Manmohan Singh. But the last election in the U.S. ushered in a Democratic congressional majority that is indebted to trade-fearing unions, thus constraining the pro-trade President Barack Obama.

Obama also faces falling support from business lobbies in manufacturing and services - sectors that are demanding more concessions from other nations. His silence on Doha at the recent G-20 summit was deafening.

So, how do we move forward on trade? One solution, favored by some Washington think tanks, is to keep going and ask for more liberalization. But that would mean several years of re-negotiation. By then, the Doha Round would probably be dead.

The other option is to close the round by resolving the U.S.-India discord. Mutual concessions can be crafted that ensure negligible political fallout. This would also require improvements in concessions by the major developing countries, and by the U.S. and the European Union on services.

The problem is that lobbyists in Washington would reject this modest solution if the Doha Round were the end game. So, part of the solution would have to be a declaration of another round to negotiate new aspirations and demands. We could even call this the Obama Round. After all, Obama should have to live up to his Nobel Prize as a multilateralist!

*The writer is a professor of Economics and Law at Columbia University.
Copyright: Project Syndicate, 2010

by Jagdish Bhagwati