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(01/14/00 - Szamosszegi) It's Time To Think Small On Global Trade

It's Time To Think Small On Global Trade

Andrew Szamosszegi
Szamosszegi is senior research associate of the Economic Strategy Institute.
854 words
14 January 2000
The San Diego Union-Tribune
B-11:1,7; B-15:2
(Copyright 2000)

Trade negotiators are on the ropes. Reeling from the body blows of the failed Seattle meeting and enduring unflattering press coverage, they may be tempted to come out swinging with big ideas for re-invigorating the trade liberalization process. This would be a mistake. Their best bet, paradoxically, is to think small.

The process of trade liberalization is inherently difficult. Though economic theory is clear that the economic benefits of liberalization outweigh its costs, in the real world it is the costs of market opening that are often the most visible. Consequently, propelling liberalization forward has not been easy. It took eight rounds of multilateral negotiations to create the World Trade Organization, the body that just remotely resembles the broadly empowered International Trade Organization proposed during the 1940s.

There were three factors that moved the process forward. First, the two dozen countries represented in the early negotiations were like-minded in recognizing the benefits of market opening. Second, the United States had the diplomatic and economic chits to make the process of liberalization enticing to other countries.

Finally, and perhaps most importantly, the negotiations actually produced results: trade barriers were substantially reduced and many of the countries that exported aggressively saw their living standards rise. Consequently, today's World Trade Organization has 130 member countries and another three dozen countries are trying to get in.

These factors are no longer catalysts. Because the WTO is so big, its members no longer see eye-to-eye on key issues. There are deep differences on whether to incorporate labor rights and environmental standards in the WTO, and on how much to reduce agricultural subsidies.

Washington no longer has enough trade or diplomatic "goodies" to offer in exchange for further liberalization. For instance, it is not entirely clear what the European Union would "get" in return for dramatically reducing its massive agricultural subsidies.

The past effectiveness of the multilateral framework has sowed the seeds of ineffectiveness. Government officials and policy wonks have correctly observed that the WTO now resembles the United Nations, an organization rarely lauded for its efficiency. Consequently, it is not entirely surprising that the Seattle gathering ended in a stalemate.

Where do we go from here? The conventional wisdom holds that a new round can begin after the U.S. presidential election. Unfortunately, it is not entirely clear how a new president could change the circumstances that doomed the Seattle meeting.

Others have suggested a WTO-plus, a group of like-minded countries that would handle issues that the broader WTO cannot. However, the WTO-plus formulation could cost the United States key support. For instance, Europeans and Japan are more likely to agree with each other on agricultural subsidies than to agree with the United States, which has more in common with developing countries on this issue.

Moreover, a WTO-plus committed to labor rights and environmental standards would be isolated from most of the developing world. Yet without developing countries, few concrete gains can be realized.

The Kyoto Protocol on greenhouse emissions underscores this shortcoming. The 160 countries that negotiated the accord are bifurcated into advanced and developing countries. The protocol specifies reductions only in advanced countries. Thus, developing countries, expected to produce the bulk of future emissions, are not committed to do anything.

Rather than going for the knockout punch of a WTO-plus, it may be wiser for negotiators to liberalize incrementally, one sector at a time. This targeted approach has the advantage of flexibility. The automobile industries of the United States and the European Union, for example, could harmonize standards if they wish, but they would not be bound to agree on agricultural issues or e-commerce.

Once an accord is reached, U.S. auto makers could in turn promote the deal with their counterparts elsewhere, perhaps in the Asia- Pacific Economic Cooperation forum. As major traders and producers of cars, Asian countries would naturally benefit from adopting the same standards as their western competitors. Countries that are not major producers would benefit as well, because harmonization would reduce some of the costs associated with parts trade, thereby leading to lower prices for consumers.

Sectoral liberalization is already under way. Agreements have been concluded in financial services and information technology products. U.S. and European firms in a variety of industries are working toward agreements that would grease the wheels of trade on both sides of the Atlantic. Members of the Asia-Pacific Economic Cooperation forum, which includes the United States, nearly agreed to market opening in six industrial sectors, but were hamstrung by Japan's insistence on protecting its forestry and fishery sectors. Despite this setback, sectorial liberalization in Asia remains on the table.

Make no mistake, the gains from sectorial agreements will not match those of previous comprehensive trade rounds. Nevertheless, with prospects for such a round dimming, it makes sense to think small. Targeted negotiations can ensure that countries and industries which support market opening are not held hostage by others who do not.

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