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December 19, 2008

Emerging Market Countries Lead Global Free Trade Efforts

By Ian Bremmer and Sean West

WTO Director-General Pascal Lamy's decision last week to not call Doha trade round negotiators back to Geneva is being touted as evidence that G20 leaders were less than truthful in their Nov. 15 rejection of protectionism.

Global leaders were not lying when they re-asserted their commitment to free trade at the G20 -- they rightly acknowledged that global markets need a sign of optimism now more than at any other time during the last eight years of negotiation.

Antagonistic domestic constituencies, however, have thwarted comprehensive, multilateral deals, and this most recent setback was predictable despite the optimistic G20 rhetoric. The truth is that emerging market countries (EMs) haven't been able to wait for Doha -- and they will continue to lead the world toward trade liberalization even without it.

Developed countries have a status-quo bias as they experience fewer gains from increased liberalization. Consequently, the Doha Round, which seeks to expand global wealth through a single comprehensive liberalization package, has suffered greatly from lack of U.S. leadership on the issue.

Though the Bush administration is ideologically committed to free trade, it failed to use moments of global or domestic approval to push the issue. While President-elect Barack Obama is less protectionist than many think -- and more likely to favor multilateral approaches to global issues than his predecessor -- domestic interests will constrain the new administration's ability to lead on the issue.

Obama ran a campaign that was a modern-day extension of the rural nostalgia rhetoric of earlier times. He ran on industrial nostalgia, with sound bites like: "The fight for manufacturing's future is the fight for America's future." Labor unions coughed up $400 million in support of the Democrats and Obama's pledge to secure American jobs. Already, the core policy issue he has addressed since winning the election is saving the U.S. automobile industry -- even as discussions of a new global financial architecture unfold.

While Obama is instinctively supportive of trade, don't expect early compromises on manufacturing liberalization, where a clash with India and China is expected once Doha talks progress past agricultural sticking points. And on agriculture, he has consistently been supportive of U.S. farm subsidies. Still, in short, Obama's not a protectionist -- but he's going to find it hard to lead on trade.

Yet, Doha's languishing isn't simply an American story. Europeans jealously guard their farm subsidies, instead favoring to focus on liberalizing other sectors. The fragile Indian government cannot compromise on farm issues in the run-up to May 2009 elections, though it continues to be supportive of services liberalization. China sided with India on the special safeguard mechanism that caused the collapse of a July ministerial-level attempt to conclude the round, and recently has taken action to subsidize exporters -- though Beijing clearly wants to negotiate agreements that will further open export markets. While Japanese manufacturers favor freer trade, their power is too diffuse to counterbalance a skeptical agricultural lobby. Brazil may be the only power player that truly wants to open up agricultural trade -- but don't expect a Brazilian compromise on manufacturing.

Though a meaningful resolution to Doha is far-off, EMs remain on a liberalization trajectory that will pull developed countries toward freer trade. India, Brazil and China are seeking regional and bilateral agreements, and the U.S., E.U. and Japanese negotiation of agreements, primarily with EMs, is proceeding apace.

From an economic efficiency perspective, bilateral and regional trade agreements are less desirable than multilateral agreements. But from a political perspective, these agreements allow governments to isolate sectors where it's politically possible to liberalize. At the same time, governments can steer clear of negotiating reductions in contentious areas.

Free trade is expanding despite a Doha deadlock, but the impetus to liberalize is far stronger in EMs, because they are experiencing rapid growth and desperately need new markets. Over the last decade -- the better part of which witnessed consistent inability to conclude Doha -- Brazil's, China's and India's trade openness grew by at least 80 percent and their most favored-nation applied tariff rates have fallen.

Similarly, though at a lesser rate, trade openness has grown and tariffs have fallen in developed economies. This is because growth in developed economies is slower and these economies are already relatively open, making it much harder to liberalize further. Those interests that have remained subsidized or protected have historically lobbied hard for the privilege and are unwilling to give up easily.

While G20 leaders confirmed that they will continue to move more slowly on Doha than their renewed commitment implied, imagining the world is moving away from freer trade is incorrect. The only endgame for Doha is a lowest-common denominator agreement that does relatively little to increase global wealth because it seeks to placate a growing number of domestic interests -- and even this is still years off. In the meantime, EMs will continue to lead global trade toward real liberalization progress through other arrangements.

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