The Future of World Trade

from the Wall Street Journal

While the television cameras were focused on the violent demonstrations outside the Hong Kong Convention and Exhibition Centre last weekend, another form of violence was being wrought inside. Negotiators agreed a text that may portend the end of the World Trade Organization (WTO) as a forum for negotiations on trade liberalization -- at least in its present form.

The declaration at the end of the Hong Kong Ministerial meeting splits the world into essentially two groups: rich and poor. In this two-tier world, the rich nations liberalize their markets with one another and also open their markets to goods from the poor nations. But the poor nations maintain their trade barriers through various exceptions. As such, the declaration paradoxically accepts the premise that poorer countries might be adversely affected by liberalization of their own markets and, on this basis, justifies the perpetuation of the dirigiste, protectionist policies that have kept them poor. It thereby undermines a central purpose of multilateral trade negotiations, which is to enable parties to remove barriers by bargaining out their vested interests.

Under the auspices of the General Agreement on Tariffs and Trade (GATT), from 1947 to 1994 the beggar-thy-neighbor protectionism that characterized the inter-war period was gradually reversed. As a result, trade increased substantially among the members of the GATT, bringing economic growth in its wake. With the conclusion of the Uruguay Round in 1994, administration of the GATT and associated agreements was transferred to the WTO. Because previous rounds had proceeded at an often rather slow pace, the WTO was given a mandate to hold Ministerial meetings every two years, the purpose of which was to continue the process of liberalization.

Sadly, these biennial meetings have become a hostage to fortune -- with anti-trade activists using them as a vehicle for promoting their misguided ideas both inside and outside the meetings. In 1999, the Seattle Ministerial failed to establish a framework for beginning a new Round. In large part this was because the EU refused to accept proposed language on negotiations for the removal of agricultural subsidies. But many journalists gave credit to the protesters, who had disrupted proceedings by rioting outside the convention center.

The subsequent Ministerial, at Doha, Qatar, in 2001, took place only two months after the tragic events of Sept. 11. In that context, there was enormous pressure to agree to a new Round. Nevertheless, for several days, ministers wrangled over the alleged impact on health of the Agreement on Trade-Related Intellectual Property Rights (TRIPs), which had become a totemic issue for some of the poorer countries. In the end, an agreement was hammered out which accepted the dubious premise that patents inhibit access to medicines in poor countries. Having been diverted by this issue, trade ministers accepted a very broad "single undertaking," which included the so-called Singapore Issues: investment, competition, government procurement and trade facilitation.

These issues then became a sticking point at the Cancun Ministerial in 2003. All but one of the issues, trade facilitation, were removed from the negotiations but still no agreement was reached and the talks broke down amid bizarre signs of jubilation on the part of some of the poorer nation representatives. Attention then shifted to the core issues of trade in agriculture, manufactured goods and services. But negotiations proceeded very slowly, with the EU refusing to budge on the key issue of agricultural subsidies. In return, other countries pushed for slower liberalization in the area of services and manufactured goods.

Sadly, in the push to get a deal, trade negotiators in Hong Kong accepted the lowest common denominator. Not only will liberalization in all major areas proceed slowly, but the poorer countries are for practical purposes exempted from liberalization in a broad range of goods and services. In other words, the vested interests in those countries will continue to be protected at the expense of entrepreneurs and the poor in general.

Moreover, the poorest countries are to be given "aid for trade" -- a euphemism for bribes to be paid by taxpayers in rich countries to the trade ministries in poor countries -- which may well do more harm than good. Even aid given for a specific purpose is "fungible" -- because it frees up other money to be used for more dubious purposes.

This is a fundamental departure from an underlying principle of the GATT, that of non-discrimination. It also contradicts the stated purpose of this "Development Round" of negotiations. Estimates by the World Bank, OECD and Oxford Economic Forecasting put the dynamic gains from full liberalization of trade at between $800 billion and $1.2 trillion per year -- with a substantial portion of that going to poorer countries. A more recent estimate of the probable gains from the current Round, based on a slightly more ambitious earlier text, suggests $300 billion per year or less, with a much smaller proportion going to poorer countries. If the current text is a guide, the Round will lead to substantial gains for richer countries in a decade or so; but many poorer countries will see little if any benefit.

We have now had a decade of biennial WTO Ministerials -- and they have achieved little aside from offering opportunities for Marxists, mercantilists and misanthropes to vent their opposition to voluntary exchange, specialization, the division of labor, and economic and technological progress.

It is time to rethink how multilateral liberalization proceeds. Since the WTO does a good job of administering the agreements within its ambit, it might be best to limit its role to such administrative tasks. The failure of its recent Ministerial meetings means that multilateral liberalization is, in any case, slipping out of its grasp. Instead we are witnessing an explosion of bilateral and regional agreements, as countries seek other ways of pressing forward with trade liberalization.

In the light of this, it may now be time to consider forming a new group of countries devoted to liberalizing on the basis of non-discrimination, much as was the case with GATT when it was originally founded. All parties would commit to the same package, with no exceptions, and the rules would be clear and simple. That new grouping could take as its model Hong Kong, which liberalized unilaterally and in the past 50 years has gone from being dirt poor to filthy rich.

Mr. Morris is executive director of the International Policy Network (www.policynetwork.net) and the author of "Just Trade: The Moral Imperative of Eliminating Barriers to Trade" (2005).