We shun global trade rules at our peril

Over the last half-century, the world has been undergoing a “great convergence,” with per capita incomes in developing countries rising almost three times faster than those in advanced countries.­ But developments in 2013 revealed that the open trade regime that has facilitated this progress is now under grave threat, as stalemate in multilateral trade negotiations spurs the proliferation of “preferential trade agreements” (PTAs), including the two biggest ever negotiated – the Trans-Pacific Partnership (TPP), and the Trans-Atlantic Trade and Investment Partnership (TTIP).

The rules and norms arising from the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have underpinned the export-led growth model that has enabled developing countries to lift millions of people out of poverty. The irony is that large developing economies’ rise to systemic significance is at the heart of the current deadlock in multilateral trade negotiations.

Advanced countries argue that emerging economies should embrace reciprocity and establish trade regimes similar to their own. Emerging economies counter that their per capita incomes remain far lower than those of their developed counterparts, and insist that addressing their enormous development challenges demands flexibility in terms of their trade obligations. The resulting stalemate has impeded meaningful discussion of the main issues – including non-tariff measures, export restrictions, electronic commerce, exchange rates, and the trade implications of climate-change-related policies – raised by an open global economy.

Against this background, mega-PTAs seem poised to re-shape world trade. The TPP negotiations involve a dozen Asian, Latin American, and North American countries, including Japan, Mexico, and the United States; the TTIP would encompass the world’s two largest economies, the European Union and the US; and the Regional Comprehensive Economic Partnership (RCEP) includes 16 Asia-Pacific countries. Japan is also developing an agreement with China and South Korea, as well as a deal with the EU.

Such PTAs are said to have the potential to improve conditions well beyond the borders of the countries involved. If either the TPP or the TTIP produces meaningful reforms to trade-distorting farm subsidies – becoming the first non-multilateral agreement to do so – the benefits will be truly international. But the PTAs that now exist or are being negotiated focus more on regulatory issues than tariffs, and would therefore require participants to reach agreement on a wide range of rules covering, for example, investment, fair competition, health and safety standards, and technical regulations.

This presents a number of obstacles. While some non-tariff measures might be easy to dismiss as protectionist, many others serve legitimate public-policy objectives, such as consumer safety or environmental protection, making it difficult to ensure that they do not conflict with the basic principles of fairness and openness.

Moreover, such agreements can lock various groups into different regulatory approaches, raising transaction costs for domestic traders and making it difficult for external goods and services to penetrate the bloc. Such market segmentation could disrupt supply chains and lead to efficiency-damaging trade diversion.

Finally, the ability of mega-PTAs to set norms that benefit non-participants might prove to be more limited than many believe. Transatlantic trade rules on currency valuation, for example, might leave Japan indifferent. And specific rules to protect intellectual property could do nothing more than prevent Brazil and India from participating.

Overcoming these obstacles will require, first and foremost, some level of coherence among PTAs, with the various deals following roughly similar principles when addressing regulatory issues. Furthermore, if regionalism comes to be perceived as coercive and unfriendly, countries could form defensive trade blocs, leading to economic fragmentation and heightened security tension. To prevent such an outcome, the deals should be relatively open to newcomers and amenable to the possibility of “multilateralization.”

But the need for policy coherence extends beyond the mega-PTAs. Optimal outcomes for international trade require attention at all levels to the interface between trade and a host of other policy areas.

Consider food security. Effective national policies concerning land, water, and natural-resource management, infrastructure and transport networks, agricultural-extension services, land-ownership rights, energy, storage, credit, and research are as important as trade arrangements to transferring food from surplus countries to those in need.

Likewise, regional cooperation on water and infrastructure is critical to improving diplomatic relations and establishing well-functioning markets. And, at the multilateral level, agricultural production and trade is influenced by policies on subsidies, tariffs, and export restrictions (although the latter are not currently governed by strict WTO rules).

Despite the great value of regional cooperation and coherent national policies, a functional multilateral trade system remains vital. In order to reinvigorate multilateral trade cooperation, governments must work together to address unresolved issues from the Doha agenda, such as agricultural subsidies and tariff escalation. To be sure, the agreement reached at the WTO’s recent ministerial conference in Bali represents a boon for world trade and multilateral cooperation.

But governments must expand the agenda to include guidelines aimed at ensuring that mega-PTAs do not lead to economic fragmentation. Future WTO rules on export restrictions could help to stabilize international markets for agricultural commodities. Trade in services could be liberalized further, and industrial subsidies could prevent countries’ green-innovation objectives from getting lost amid pressure to boost employment at home.

Moreover, global rules on investment could enhance the efficiency of resource allocation, while international guidelines for competition policy would serve the interests of consumers and most producers more effectively than the existing patchwork system. Increased cooperation with the International Monetary Fund on exchange-rate issues, and with the International Labor Organization on labor standards, could diminish trade tensions and enhance trade’s contribution to improving people’s lives.

A shared strategy for addressing non-tariff measures would help countries to avoid unnecessary trade friction. And new developments in energy production might facilitate more meaningful international cooperation on energy trade and investment.

All of this would require that emerging economies accept eventual alignment of their trade commitments with those of advanced economies, and that advanced countries accept that emerging countries deserve long transition periods. In 2014 and beyond, all parties must recognize that, in a multipolar world, an international trading system based on an updated set of rules is the least risky means of pursuing their growth objectives. The recent WTO agreement reached in Bali on streamlining border protocols, among other issues, shows that important steps in this direction can indeed be taken.

The opinions expressed here are those of the author, not necessarily those of the World Economic Forum. Published in collaboration with Project Syndicate.

Author: Pascal Lamy, former Director General of the World Trade Organization, is Chair of the Oxford Martin Commission for Future Generations.

Image: A man rides a bicycle past containers at a port in Shanghai REUTERS/Aly Song