Does free trade still matter?
Trade is an engine of growth, promoting innovation and increasing standards of living. For the past 20 years the World Trade Organization (WTO) has led the way to trade liberalization. But with the progress of negotiations slowing, major countries are now pursuing regional agreements. Is this the right approach to meet the challenges of our complex globalized world? Creating Chemistry asked Karl Brauner, PhD, from the WTO, and Professor Daniel Hamilton of Johns Hopkins University in Washington, D. C., USA.
Creating Chemistry: Why is global trade important?
Karl Brauner: Trade is the instrument by which companies and countries engage on the world market. The evidence shows that the more a country engages on the global level, the higher the standard of living is in that country. You can see this very clearly if you compare the Northern European countries or North America with North Korea.
Daniel Hamilton: Trade has important effects within countries as well as between them. It encourages competition, which tends to promote more innovation. It means companies need to be more efficient, and that usually leads to better products. Over time, more open societies have better paying jobs for their workers. Consumers benefit because they can choose a wider variety of goods and services at lower prices. All of that tends to increase standards of living.
What are the WTO’s major achievements?
Brauner: We are the organization that sets the rules multilaterally for trade globally and we can enforce them. Our dispute settlement system has handled more than 500 cases; we have a compliance rate of more than 90 percent and you get a court decision in a much shorter time span than you would get in national courts.
Hamilton: I absolutely agree that the WTO presides over a global system of rules that are almost universally accepted and respected. Its dispute resolution system remains a gold standard and tariffs today are quite low on the majority of trade. But the organization is now facing a whole series of crises that will really challenge its role.
“If you negotiate a deal and your society isn’t ready to embrace it, it’s all for naught.”
Professor Daniel Hamilton
What are those challenges?
Hamilton: The nature of trade has changed significantly in recent years. Think about the digital economy. By some measures digital trade has eclipsed trade in real goods. What are the right rules to govern that sort of trade? Then there’s the development of global value chains, where trade is a series of tasks that are performed in a whole range of countries. Today, you can’t really say that something is “made in Germany” or “made in China.” You need different rules to take account of these new realities, which are about regulatory regimes and how differences between countries affect those flows.
Brauner: There are many more relevant players today. In the past, you might have been able to reach agreement with maybe four countries, and they would be able to move the rest of the membership along. Now this is no longer possible. You have to consider a much wider group. And the involvement of civil society is more intense than it was in recent years, with the anti-globalization and trade-critical trends. Democratic governments cannot take positions against a highly vocal civil society.
Why do trade agreements cause controversy?
Brauner: The benefits of trade, just like any economic or technological change, affect different parts of the economy and different stakeholders in different ways. Certain industries come under completely new competitive pressure. It could make them more efficient or it could put them out of business. I think where we have failed in the past is that we have not acknowledged that there are losers. We have only looked at aggregated figures and shown that the national economy, if it’s open, benefits.
Hamilton: It used to be that negotiations took place in closed rooms. But if you negotiate a deal and your society isn’t ready to embrace it, it’s all for naught. Given that so many different parts of the economy are affected by these negotiations, there needs to be a way for citizens and various parts of the economy to have a voice in this, including critical voices.
How are trade negotiation strategies evolving in the face of these challenges?
Hamilton: The new trade agenda is emerging more in bilateral and plurilateral agreements, such as the Trans-Pacific Partnership (TPP) between the United States and Asia and the Transatlantic Trade and Investment Partnership (TTIP) between the United States and European Union, with the sort of deep integration that goes beyond tariff reduction and finds ways to deal with non-tariff barriers: new kinds of rules to deal with concerns like the environment and climate change, labor, food scarcity, animal welfare and consumer pressures.
Brauner: It’s true that bilateral negotiations allow you to be more focused, but these approaches have important limitations. In the case of extended global value chains, for example, each agreement may have its own protocol on proof of origin, and managing all those protocols eventually becomes so burdensome that companies don’t attempt to make use of the deal. Nor must we forget that these big regional deals have not been concluded yet.
“It’s true that bilateral negotiations allow you to be more focused, but these approaches have important limitations.”
Karl Brauner, PhD
Can regional trade agreements be a stepping stone to multilateral free trade, or are they a barrier to progress?
Brauner: I think they are both. When a regional or bilateral agreement is concluded, you generate freer trade among those partners. But during these negotiations, the countries involved cannot offer anything on the multilateral level because they must make these offers exclusively to their partners. However, the way that these agreements encourage countries to remove certain obstacles in their trade may also make it easier to bring this level of liberalization to the multilateral scene. Once problems have been overcome in bilateral agreements, countries can negotiate the same subjects at a multilateral level more easily.
Hamilton: The political dynamic has changed fundamentally. Brexit has sparked a new debate about the United Kingdom’s future trading relations. Donald Trump wants to renegotiate NAFTA, kill the Trans-Pacific Partnership, raise tariffs on China, and strike bilateral trade deals. The United States and European Union need to reposition themselves to compete in the changing global economy, but the outlook for regional or multilateral trade agreements now looks cloudy.