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In Singapore on December 9th, the two-year-old World Trade Organisation begins its first summit meeting. Although governments profess to be committed free traders, their actions still fall short of their words
"FREE trade", wrote Richard Cobden in 1857, "is
God's diplomacy, and there is no other certain way of uniting
people in the bonds of peace." Few politicians since Cobden
have thought of themselves as missionaries for free trade. Yet
now, an odd thing is happening: most of the world's governments
claim to be exactly that. In Singapore from December 9th to 13th,
trade ministers will attend the first ministerial conference of
the World Trade Organisation (WTO)--and
will surely take every opportunity to parade their free-trade
credentials. How justified are their claims?
On the credit side, in the past
few years there have been four main achievements for free traders
to cheer. First, the Uruguay round of the the WTO's
predecessor, the GATT, went further than
any previous global trade deal. Apart from promising to cut tariffs
on manufactures-- which are now down to an average of just 3.8%
in rich countries--governments agreed for the first time to some
liberalisation of trade in agriculture and services. They also
forged new agreements to get rid of some non-tariff barriers to
trade, such as the spurious use of technical and health regulations
to keep out imports. The round, which finished in 1993, also established
the WTO itself, and set up a new mechanism
for settling trade disputes.
This mechanism is the second recent
cause for celebration. Under the GATT,
any member could veto the verdict of a panel set up to rule on
a quarrel--even if it was a party to the dispute. WTO
panels are stricter. They must report within nine months and their
decisions can be overturned only by consensus. Countries found
to have broken WTO rules must either mend
their ways or offer compensation; if they do not, they may face
trade sanctions. So far, the mechanism has worked well. More than
60 cases have been brought. About a quarter have been completed.
Ten of these disputes were settled without going before a panel.
The third encouraging sign is that
more and more countries are joining the world trade club. During
the Uruguay round, many developing countries realised that freer
trade was not a confidence trick by rich countries, but would
actually help their own economies. The membership of the GATT rose from 92 in 1986, when the round began,
to 114 when negotiations ended (see chart).
The WTO now boasts 126 members; another
30 countries, including China and Russia, want to join.
Fourth, trade has been booming.
The WTO estimates that world trade in goods
grew by 8% in volume terms last year, four times the growth of
world GDP. In fact, during the 1990s international
trade has grown far faster than world output, showing that national
economies are becoming ever more closely linked (chart).
Foreign direct investment, another gauge of international economic
integration, is also soaring: last year, estimates the United
Nations Conference on Trade and Development, cross-border investment
flows rose by 40%, to $315 billion.
Against such a background, it may
seem churlish to doubt governments' professions of free-trade
faith. Unfortunately, there are good reasons for such doubt. Since
the completion of the Uruguay round, governments have frequently
acted much as they did under the old GATT:
as downright protectionists on some occasions and as mercantilists
almost as a matter of course. That is to say, the main purpose
of their trade diplomacy has not been to open up their own markets
to imports but to prise open other people's markets for exports.
The opening of home markets is usually seen as a concession to
others, not (as economic logic dictates) as a good thing in itself
because it benefits local consumers and makes both national and
global economies work more efficiently.
The sin bin
The clearest example of the mercantilist tendency is the conduct
of the so-called "unfinished business" of the Uruguay
round. When the round ended, agreement had not been reached on
the following areas of service trade: financial services, shipping,
"movement of natural persons" (trade-speak for letting
in foreigners to supply services on a temporary basis) and telecommunications.
In financial services the Americans,
displeased by the slow pace of liberalisation promised by some
Asian countries, walked away from an agreement just before a deadline
in June 1995 (though several other negotiators, including the
European Union, have kept their offers open and talks are due
to restart next April). In shipping, America's highly protected
and unionised maritime industry virtually sank the talks before
they left port. The issue of letting in foreigners temporarily
has become entangled by political reservations about immigration
as a whole. Few governments anywhere are keen to welcome foreign
workers.
Only with the telecoms deal is there
any sign of hope. After an earlier negotiation collapsed in April
(with Europeans and Asians slow to commit themselves to liberalisation
and with America demanding better access to satellite-communications
markets in developing countries) a recent round of talks has found
several groups, including the Americans and Europeans, making
more liberal offers. Negotiators reckon a deal can be reached
by the new deadline of next February.
Telecoms, though, is an exception.
For the most part, the grudging way in which some governments
are keeping the promises they made during the Uruguay round smacks
of bad faith. In textiles and clothing, for example, trade has
been governed for over 30 years by a system of bilateral quotas.
These quotas are supposed to be scrapped eventually and textile
trade gradually brought into line with WTO
disciplines; meanwhile, the size of quotas is being increased.
But the process, which began in 1995, has been slow. Importing
countries, which tend to be rich, are allowed to keep quotas covering
almost half their trade until 2005. Moreover, they have started
to bring under the WTO system only those
products which are not subject to quotas--thus delaying the effect
of the deal. Not surprisingly, exporters, most of them developing
countries, are up in arms. Doing the bare minimum does not seem
to be the behaviour of committed free traders.
Gauges of good faith
The problems left over from the past, however, are modest compared
with those which are to come. In the next few years the free-trading
commitment of the WTO's members will be
tested by four daunting challenges, some familiar, others new.
Each will give governments the opportunity either to make trade
freer, or to hobble it.
The first challenge is to continue
liberalising trade in goods and services. The WTO
is already committed to some negotiations as part of its "built-in
agenda"--ie, matters begun during the Uruguay round. Negotiations
on further liberalisation of agricultural trade are due to begin
in 1999 and a fresh round of talks on services is due to start
in 2000. Although both these talks are some years away, if history
is any guide it is already a fair bet that they will be difficult.
Agriculture provided one of the trickiest problems of the Uruguay-round
talks-- indeed, the round nearly foundered on it.
There may be progress, though, in
an area of business that was not in those talks. American trade
negotiators have been pushing hard for an "information-technology
agreement" to reduce tariffs on computers, semiconductors,
software and so forth. During last month's summit of the Asia-Pacific
Economic Co-operation forum (APEC) in Manila,
the Americans won the backing of other APEC
countries for a WTO negotiation of the
issue.
The Americans have a chance of getting
their way, but the hurdles remain high. The highest, say American
negotiators, is disagreement with the EU
both over how quickly the Europeans should reduce their tariffs
and over the range of products any deal should cover. In addition,
some Asian countries are hesitant; in Manila, the endorsement
of some APEC members was lukewarm. So information-technology
talks should provide a start for the WTO
in tackling its expanding agenda. But it is likely to be a slow
one.
The WTO's
second big challenge concerns China: on what terms should
it be brought into the trading organisation? China is the world's
eleventh-biggest exporter; without it, the WTO
cannot claim to represent world trade.
Incorporating China presents both
technical and political problems. On the technical side, the difficulty
is to bring a vast, semi-planned, semi-market economy into line
with the WTO's more-or-less free-market
principles. China has been freeing up its trade regime for the
past decade, cutting tariffs and allowing foreign companies to
invest through joint ventures with Chinese firms. But it still
maintains a WTO-infringing array of controls,
including export taxes, import quotas, trade licenses and import
inspections. The Chinese are also determined to maintain a protective
shroud around some "strategic" industries, such as cars.
WTO members
want China's government to set out a clear, and fairly short,
timetable for the removal of all this. They also want an end to
the county's habit of altering its trade regime arbitrarily. On
this last point, China has at least promised to stop making matters
worse. On November 1st, its trade minister, Long Yongtu, promised
to impose no further trade restrictions inconsistent with WTO rules.
The politics of admitting China
is, if anything, trickier, especially in the United States. Chinese
exports to America are subject to the same tariffs as most WTO members, but this privilege has to be renewed
annually. Strictly speaking, renewal depends on China's meeting
a relatively-narrow criterion of not restricting emigration. Politically,
however, the annual renewal depends on China's broad human-rights
record. The Chinese regime seems unlikely to alter that fundamentally,
so the chances of WTO admission actually
depend on both sides agreeing not to make a fuss about what is
going on. Not making a fuss has recently got harder because China's
trade surplus with America has climbed to become as big as Japan's.
The result is that protectionists are finding common cause with
human-rights activists in America to oppose the extension of WTO privileges to China. As an example of the
potential for trade conflict, the Chinese and Americans are already
in a fight over textiles. America cut the import quota for Chinese
goods in September, claiming China had been sending extra clothes
through third countries. The Chinese are threatening to retaliate.
Slippery ground
The third challenge facing the WTO is whether,
or how, to extend its remit into the so-called "new issues"
of trade policy: foreign investment, competition policy and labour
standards. (These issues are not in fact new: they have been discussed
since before the birth of the GATT in 1948.)
None of the issues can be resolved
quickly. They arouse deep disagreement-- and it is easy to see
why. Consider rules on foreign investment first. These would take
the world's trading body directly into tricky areas of national
policy. It may be understandable if an international agreement
prevents one country from slapping a big tariff on the goods exported
by another. But it is less immediately apparent why one country
should not offer some of its own taxpayers' money to a company
from another in order to persuade it to build a spanking new factory
in the first. Nor is it obvious why the host country should not,
say, require foreign investors to employ a certain number of local
managers. What's wrong with that?
The answer is that such shackles
and sweeteners act like tariffs or export subsidies, distorting
the pattern of trade which would have prevailed had the measures
not been in place. In theory, firms can sell in foreign markets
either by sending their wares abroad, or by setting up a factory
in a foreign land and serving the locals directly. In some industries,
the second of these methods is far cheaper than the first. This
is especially so of many services, such as banking, insurance
and retailing. But it is increasingly common in manufacturing,
too. A car, for instance, might contain an engine made in one
country and axles from another, but be assembled in a third. According
to one estimate, transactions within firms now account for about
one-third of world trade.
Yet despite close links between
investment and trade, the WTO currently
has little to say on the subject. Such rules as exist are patchy.
Governments may not, for instance, limit foreign-owned factories'
imports to the value of their exports or insist that foreign investors
use local inputs. WTO copyright rules are
supposed to protect foreign investors' intellectual property.
But countries can and do protect local banks or stockbrokers,
for example, by refusing to issue licences to foreigners. They
can limit foreigners' stakes in broadcasting firms or airlines.
Governments may also insist that foreign investors produce goods
for export as well as for the domestic market.
So it is not surprising that some
people, led by the Europeans and Canadians, want to beef up the
rules. America is prepared to support them, though it wants an
agreement among OECD countries first. Some
Latin American countries are also in favour, as is the WTO's
secretariat, its civil service (this body, which usually stays
neutral on such matters, issued a report in October backing the
idea of a WTO investment accord).
Equally unsurprisingly, many developing
countries, led by India, Malaysia and Tanzania, are viscerally
opposed. They say they are eager for foreign investment but want
to keep the right to set the terms of entry for foreigners. They
feel under no particular pressure to sign up. Even without a WTO agreement, they are not short of investment:
developing countries attracted $100 billion-worth last year (see
chart). China alone received $38 billion.
So a deal hardly looks imminent.
Prospects for an agreement covering
competition policy look no rosier. This, too, is an apparently
domestic economic matter with trade implications. The WTO
is not out to ban all monopolies or create a universal competition
policy. But some of its members do want to apply trade principles
to the regulation of monopolies and mergers: those principles
suggest monopoly policy should not discriminate against foreigners.
Others think the WTO should have a role
because firms could run international monopolies or cartels, yet
be out of the reach of national competition watchdogs.
But, as these differing ideas suggest,
countries cannot yet agree even what facet of competition policy
to discuss. The EU would like to start
work on a common set of principles for national competition policies
(it is always keen on harmonisation). America thinks this would
be largely pointless; it reckons co-operation between national
antitrust authorities will do for now.
The argument for the third new issue,
bringing labour standards into the WTO,
is even weaker. The United States is keen that it should be discussed.
Ultimately, it would like the WTO to enshrine
five "core" labour standards in its rules. These include
a ban on "exploitative" child labour and a guarantee
of trade-union freedom. (Incidentally, world labour standards
already exist, drawn up by the International Labour Organisation:
America has ratified only one of the five in question.)
Not surprisingly, developing countries
want none of this. They fear that, if they promised to abolish
child labour and then failed to keep their word, they would be
vulnerable to retaliation under the WTO's
dispute-settlement mechanism.
So for the time being, the United
States is unlikely to get its way. That may be just as well, for
the intellectual case for a labour-standards agreement is weak.
If forced to improve labour standards, developing countries would
increase their costs and they would export less. That would make
them poorer still, and would surely make labour standards even
worse. Not by accident, however, it would help protect some firms
and workers in rich countries.
The biggest test of all
The fourth big issue is the spread of regional trading agreements.
Almost every member of the WTO is also
a member of such a group, whose numbers are proliferating. The
WTO lists no fewer than 76 free-trade areas
or customs unions set up or modified since 1948. Of these, more
than half have come in the 1990s (see chart).
Evidence of zeal for freer trade?
It would seem so, especially since regional deals sometimes cover
aspects of trade that the WTO does not,
such as investment and competition policy. For instance, the North
American Free-Trade Agreement (NAFTA) has
an investment code; APEC has some "non-binding
principles". The EU and an agreement
between Australia and New Zealand contain common regional competition
policies.
The truth, however, is more mixed.
Yes, scrapping trade barriers within a region can encourage trade
and investment among countries within the club. But it can also
divert trade and investment away from other countries. Japanese
car plants have been attracted to Britain, for example, by the
thought that they can bypass the EU's restrictions
on imports of Japanese cars. And while investment in Mexico has
no doubt been boosted by the thought of tariff-free entry to the
United States, some of this will have been at the expense of countries
outside NAFTA.
No less troubling is the danger
that, just as regional deals can divert trade from one part of
the world to another, so the agreements can have the same sort
of impact on trade diplomats' energies, diverting them away from
the more important business of continuing to liberalise world
trade. There is still plenty to do: on conventional trade, on
new issues and on the admission of China. God's diplomats? One
day, maybe; but not yet.
