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Home > Business Strategy Viewpoints > Globalization, Challenges and Threats—Where Will the WTO and Free Trade Go?

Business Strategy Viewpoints

Globalization, Challenges and Threats—Where Will the WTO and Free Trade Go?

by Mike Moore

Introduction

Mike Moore is the Special Adviser to the UN Global Compact for Business and Development. He was Prime Minister of New Zealand in 1990 and Director-General of the World Trade Organization (WTO) from 1999 to 2002.

He has had a distinguished career in politics and was the driving force behind important changes in the WTO. His term at the WTO coincided with momentous changes in the global economy and multilateral trading system. He is widely credited with restoring confidence in the system following the setback of the 3rd Ministerial Conference held in Seattle in 1999.

While maintaining the organization’s focus on trade liberalization, Mike also gave particular attention to helping poor countries participate effectively in the multilateral trading system. He introduced initiatives to enhance the WTO’s image and deepen its relations with civil society resulting in 10 new members joining the WTO during his tenure.

Mike was the youngest Member of Parliament elected in New Zealand in 1972. He was an active participant in international discussions on trade liberalization. As Minister of Overseas Trade and Marketing, he played a leading role in launching the Uruguay Round of GATT negotiations.

Mike is a distinguished author and recipient of many global honours.

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Globalization, Challenges and Threats—Where Will the WTO and Free Trade Go?

The past 60 years have seen more wealth created than the rest of history put together. The United Nations Development Programme reports that poverty throughout the world has been reduced more in the past 50 years than the previous 500 years. The past decade has been the most successful in human history by sustained economic development. Why, then, is globalization so controversial? Because those with privileges seldom surrender them without a fight. The Doha Development round and China joining the World Trade Organization were the high points of my time as Director-General of the WTO. The Doha round would add well over one trillion dollars annually to the world economy, and it would be producers in poor countries and consumers in rich countries who will do the best.

Agricultural subsidies in the EU, US, and Japan are a simple wealth transfer from the poorest consumer to the richest producers; these subsidies hurt Africa and Latin American growers the most. Rich countries spend one billion dollars a day to make food dearer. Competition and trade not only allocate resources more efficiently, but are major contributors to driving out corruption by exposing crony, phony capitalists who always prosper when they get close to politicians and bureaucrats. Competition and efficiency are important drivers, by using resources more wisely to help the environment. Where foreign investment is encouraged, evidence abounds that investment creates more and better paid jobs, and raises revenue for government. When there’s so much evidence of these virtues, it’s not time for us to lose our nerve.

The global economic crisis has brought leaders together and they have urged that the Doha Development round progress. Good. But well-meaning words and communiqués are not enough. It sounds grand to tell ministers and ambassadors in Geneva to work harder—what needs to change are the instructions from capitals. Agriculture, as always, is the problem. The now famous G20 Meeting in Washington, DC, was heralded as a sign of the shift in power, with creditor nations like India, Russia, Saudi Arabia, and China, at last getting a seat at the table and given the respect they deserve. It’s laughable that Belgium has more influence at the IMF than China. It’s dangerous, too. Some talk of another Great Depression coming out of this crisis. Not so, not in the same way. World trade collapsed by 70% in the late 1920s, now we have the WTO which prevents such extreme immediate populist action. In the 1930s, there were a series of destabilizing devaluations. It’s impossible to imagine France putting up tariffs on German exports, or Italy preventing currency movements. We have the EU and the Euro. So far, so good.

The World Trade Organization has played a major role in building a predictable, rules-based system that’s helped drive the global economy forward, creating and spreading wealth.

The generation that emerged from the devastation of the Second World War and the Great Depression pledged “never again.” They dreamed of creating a new kind of global order based on common and universal values—of law, co-operation, shared prosperity, and individual rights. They launched the Marshall Plan where, for the first time in modern history, the victors rebuilt their former enemies—the opposite of what had happened under the ill-fated Treaty of Versailles. They created international institutions that, a half-century later, are a bedrock of our global order: the UN, the IMF, the World Bank, and the GATT, now the WTO. This system was the embodiment of a revolutionary idea. That free markets, the free co-existence of nations and peoples—were the surest guarantee of peace. And that a free world could, in turn, only be built on the foundations of the international rule of law. It is sometimes easy to forget, when even the Cold War is a fading memory, how spectacularly successful that idea has been.

National governments cannot ensure clean air, and a clean environment, run an airline, organize a tax system, attack organized crime, solve the plagues of our age—AIDS, poverty and genocide—without the co-operation of other governments and international institutions.

Just joining, and the process of joining, the WTO sends an important signal about the rule of law and how a government seeks to manage its future. It means bringing its commercial law into a globally accepted system of norms. Membership can be used as an outside lever to drive up domestic reforms that are necessary. China famously used the WTO membership as a measurement, a step-ladder, to lift its economy, and cement in its rules and systems.

The WTO is not imposed on countries. Countries choose to participate in an open, rules-based, multilateral trading system for the simple reason that it is overwhelmingly in their interest to do so. The alternative is a less open, less prosperous, more uncertain world economy—an option few countries would willingly choose.

The multilateral trading system’s expansion is remarkable. It began with just 23 members in 1947. The WTO now has nearly 150 members, including, recently, China. This also explains why members have repeatedly agreed to widen and deepen the system’s body of rules. The multilateral trading system was initially concerned mainly with trade in goods, and it was based not on a permanent organization but on a provisional treaty, the General Agreement on Tariffs and Trade (GATT). By the end of the Uruguay Round in 1994, the system contained sweeping new rules for services, intellectual property, subsidies, textiles, and agriculture. It was also established on a firm institutional foundation, the new WTO, with a strengthened mechanism for settling disputes. The most recent round, launched in Doha in November 2001, has development issues at the center. No other international body oversees rules that extend so widely around the world, or so deeply into the fabric of economies. Yet at the same time, no other body is as directly run by member governments, or as firmly rooted in consensus decision-making and collective rule. The multilateral trading system works precisely because it is based on persuasion, not coercion—rules, not force. That’s why it’s difficult and painfully slow.

Two fundamental principles underpin the equal rights of WTO members. One is the principle of nondiscrimination. The WTO treats all members alike, be they rich or poor, big or small, strong or weak. Central among these rules is the “most-favored nation” obligation—which prevents WTO members from discriminating between foreign goods, or treating products from one WTO member better than those from another—and the “national treatment” rule—which obliges governments to treat foreign and domestically produced products equally. Nondiscrimination has been key to the multilateral trading system’s success. Preferential trade blocs and alliances, by definition, exclude and marginalize non-member countries. This not only hurts the countries themselves, but can be harmful for the system as a whole. The multilateral trading system—based on a uniform set of international rules under which all countries are treated equally—was designed precisely to avoid a world of inward-looking trade blocs and self-destructive factionalism. From a national perspective, the principle of nondiscrimination has also allowed countries to liberalize their economies and integrate into the world trading system at their own pace and space.

The WTO has a binding dispute settlement system—a “world trade court”—with a possibility of appeal. No other global institution has a system of managing differences by a binding legal system. It works; no government, mighty or modest, has ever ignored a ruling.

This is a jewel in the multilateral architecture that is sidelined at great cost. Trade will always advance and the large numbers of bilateral and regional deals being struck are a direct response to failure to advance the current Doha round. They are not free trade agreements, but “preferential” trade agreements. They offer privileges to some and discriminate against others, creating trade diversion, e.g. US beef into Korea, but not Uruguay beef.

They create new inefficiencies, new rules; none have really addressed agriculture, all have dangerous exemptions and none have a binding disputes mechanism. Dangerously, some have put into play, rules that they couldn’t get at the WTO.

The WTO talks failed in Geneva in 2008, in part because of the demand of some big developing countries to have rules against export surges. That’s without proof of damage to local production, no disputes system. What small countries can stand up to India, China, Japan, or the US and EU when they insist on selfish conditions in a bilateral or regional situation? Especially if a competitor nation gives in. It puts dangerous powers, new levers, in the hands of politicians. How can I explain that Australia could do a deal with the US but not New Zealand? Because the US didn’t appreciate our foreign policy? The global economic crisis may make leaders and governments re-think. At the time of writing, they are calling for movement over the Doha round. Let’s see. This is a work in progress, failure or reversal is just too dreadful to contemplate.

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