Taking Global Trade for Granted

The WTO's successes are making us dangerously complacent about the future of global trade argues John Hancock
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May 10, 2013

With so many problems facing Roberto Azevedo, the new Brazilian head of the World Trade Organization,  it's easy to overlook his biggest one – the WTO's success. Trade barriers are historically low, trade rules are working, and world trade continues to expand. How to keep countries engaged in the WTO – and rally enthusiasm for freer global trade – when the job seems mostly done?

The GATT, the WTO's predecessor, was a response to the economic "failures" of the 1930s – roller-coaster exchange rates, beggar-thy-neighbour trade policies, hostile regional blocs – which did so much to fuel the outbreak of the Second World War. Together with the IMF and the World Bank, the multilateral trading system was based on the idea that a durable world peace could only be constructed on the foundations of an open, integrated, and prosperous world economy.

The system has succeeded beyond its architects' wildest imaginations. Whereas tariffs averaged a colossal 44 per cent after the war, choking international trade and balkanizing the world economy, today over half of all exports – from coal to computer chips – face no tariffs, while another third contend with "nuisance tariffs" of just 2 or 3 per cent. Service trade is becoming even freer as e-commerce, e-medicine, and e-learning move "friction free" across the world's digital networks. Meanwhile, countries like Canada are unilaterally cutting their remaining tariffs, harmonizing standards, and streamlining border red tape in order to link up to global production chains and strengthen export competitiveness.

Then there's the system's success in bringing the rule of law to international economic relations. Now when countries clash over aircraft subsidies, food additives, or the protection of sea turtles, they battle it out, not in a destructive trade war, but in the WTO's "trade court." Four times as many cases have been handled by the WTO in less than 20 years than by the old GATT in half a century, as countries increasingly use litigation, rather than negotiation, to clarify or strengthen trade rules. And use of dispute settlement is rising fastest among developing countries, underlining the central importance of a rules-based global trade system to their continued export-driven growth.

Meanwhile, the system's continued expansion – from just 23 members in 1947 to 159 today – means that all of the world's major trade powers now operate under a single set of rules. The vast negotiation that brought China into the WTO in 2001 easily eclipsed the current Doha Round of global trade talks in terms of its trade and geo-economic impact. Russia's entry last year will affect its economy and international role just as significantly. The fact that the two giants of 20th century communism made joining the global trading system a cornerstone of their foreign policies underlines just how powerful the WTO's gravitational pull has become.

The clearest indication of the WTO's success is the continued growth of world trade. The wave of protectionism that was predicted after the Great Recession has not materialized. On the contrary, world exports have almost doubled since 2000, growing at twice the rate of global output. And developing countries' exports have grown fastest of all, symbolized by China overtaking Germany as the world's top exporter. Never has the world been more knit together by trade than it is today.

But success has also created problems. The immediate problem is how to persuade countries to continue liberalizing trade when it's both less urgent – because so much is already free – and harder to negotiate – because the toughest issues have been left until the end. There's still work to be done on everything from sky-high agricultural barriers to ruinous fish subsides. But these last redoubts of protectionism are putting up the stiffest resistance, and world has stopped believing (if it ever did) that the sky will fall if another WTO deadline is missed.

A bigger problem is that the WTO faces new challenges – from climate change to exchange rates to resource competition – that are less about making the world economy more open than about managing the open world economy we've created. Instead of grand trade bargains and the mercantilist exchange of tariff concessions, these new challenges require patient technical co-operation on transnational regulation, and increasingly involve deep co-operation with other global institutions. But trade officials, like old generals, tend to fight the last war. After eight major trade liberalization rounds spanning a half century of unbroken success, it's hard to accept that these can't go on forever, that the free trade battle has largely been won, and that new approaches are needed.

This underscores the biggest problem of all. Having achieved an open and integrated world economy – the "globalization" that wartime planners dreamed of – there's a danger that we will begin to ignore or even undermine the international system on which it was built. Businesses pay little attention to the WTO, convinced that technology and markets are sufficient to sustain globalization. Politicians have disdain for messy, slow-moving multilateral institutions, believing that bilateralism offers a quicker route to success and glory. The irony is that countries can engage so promiscuously in bilateral and regional deals today precisely because the world economy is already so open, thanks to a secure foundation of multilateral rules.

How long will that last? The protracted global downturn, rising trade and currency frictions, and the seismic shift in economic power from North to South are putting new strains on the global trading system just as the world seems to be losing interest.

Fred Bergsten of the Peterson Institute once suggested that trade liberalization is like riding a bicycle: if you stop moving, you fall off. The era of giant trade liberalizing rounds has effectively ended. Will the WTO also fall over? Or will it find new ways of reinforcing its relevance and advancing trade cooperation? The biggest challenge facing Azevedo is to shake us out of our complacency – and to remind everyone that the global economy is only as strong as the global institutions that underpin it. It would be sad indeed if it took another global catastrophe to bring the world back to multilateralism.