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Future of free trade in question

WASHINGTON—Is free trade dead?

From 1948 forward, the world has slowly but steadily opened up to freer trade as countries negotiated rules governing the flow of goods, services and investment. Now this entire order is in question, following last week's collapse of global trade negotiations.

The complex global talks potentially affect sugar farmers in Minnesota and Florida, Washington apple growers, Texas cattlemen, North Carolina furniture makers, California software developers, even Alaskan fishermen.

So when World Trade Organization chief Pascal Lamy announced Monday in Geneva that he was suspending global talks, it raised this question: Is this a pause in a contentious negotiation or the end of an era? No round of trade negotiations has ever ended in failure since the creation of the General Agreement on Tariffs and Trade, the first world-trade agreement, in 1948.

"That's a good question. I don't know whether anyone has the answer right now," said Donald Phillips, a former U.S. trade negotiator and now an adviser to the American Sugar Alliance, which represents U.S. sugar growers.

When GATT began, there were 23 participating countries, and world exports totaled about $50 billion. Today, the WTO, which oversees global trade, boasts 149 member nations. Global exports last year exceeded $10.7 trillion. No nation gained more from free trade over the past half-century than the United States, where the steady rise in living standards was fueled in part by ever-expanding sales of U.S. products abroad and imports of foreign-made goods.

There were certainly setbacks during the eight previous rounds of global trade negotiations. But never has there been a round so contentious from the outset as the latest "Doha round," named after the capital of Qatar, where talks began in November 2001.

Ostensibly, the Doha round is focused on boosting the fortunes of developing countries by promoting the exports of their goods, mainly agricultural. But that requires opening the heavily protected agriculture markets of the rich—namely the United States, European Union and Japan—to imported farm products.

The talks also seek to open global markets more to manufactured goods, as well as adopt new rules and access for various services. That's vital to U.S. banks, insurers, accountants and software developers.

But it's been impossible to move on these secondary issues because developing nations insist that agriculture, their most competitive sector, must be dealt with first.

Each successive world trade negotiation has grown more complex. Economic historians note that over the past four decades, there's been a gap of a decade to 13 years between most new global agreements. The last successful negotiation, called the Uruguay Round, concluded in 1994. Twelve years have elapsed since then, prompting concern about a lack of consensus on expanding free trade.

"What most economists wouldn't want to see is a backslide into protectionism like in the 1930s ... when the global trading system collapsed," said Kris Mitchener, an economic historian at California's Santa Clara University. "Part of the fear (today) is that there's been good momentum since 1948."

Rules already agreed to by the 149 WTO members make a severe backslide improbable. But even free trade's most ardent supporters are concerned.

"There's no way the system will roll back; rolling back is virtually impossible. Moving forward is really the issue. Can we really move forward?" said Jagdish Bhagwati, a Columbia University economist, free trade supporter and author of the popular book "In Defense of Globalization."

Some experts believe trade may have reached a turning point.

"I think we might be seeing the high-water mark of the WTO," said Gary Hufbauer, a trade expert at the Institute of International Economics in Washington.

Hufbauer anticipates a shift in emphasis rather than a slide back into old-style protectionism. Preferential trade will trump free trade. Instead of global talks to create rules that apply to all, countries will seek bilateral and regional trade agreements, such as the North American Free Trade Agreement, which are mutually beneficial to their members but don't apply to the rest of the world.

"That will be the dominant game for the next decade or longer, perhaps even if we get what the trade ministers call a successful Doha round," Hufbauer said.

That could work against some U.S. exporters and favor others. An agreement between the European Union and Brazil, say, could disadvantage U.S. exporters of farm equipment to Latin America or U.S. exporters of soybeans to Europe. Similarly, a deal between the United States and Asian economies could hurt the Europeans and Brazilians.

The net result could be trade promiscuity, where the playing field is no longer level for all, but favors some. Economic relations between countries could grow more complex and uncertain. Nationalistic frictions over trade in the 1930s helped fuel the tensions that led to World War II.

Offering a real-world example, Hufbauer pointed to U.S. tax law. Currently, companies can take deductions for software purchases, independent of where the software was developed. But there's no world trade rule that could prevent Washington from granting that deduction only for software developed in the United States, excluding software developed through outsourcing to India.

And India could easily retaliate in a tit-for-tat trade war.

"That's just one example of the kind of thing that is not now covered by the WTO," Hufbauer said. "It's those areas where I would expect protectionism to come on, more than an established (free-trade) area, like automobiles or chemicals."

The suspension of the Doha talks comes against the backdrop of a global backlash against free trade and, more generally, globalization. U.S. politicians, concerned about a yawning trade deficit, have threatened to retaliate against China; several member nations of the European Union voted last year to reject an EU constitution that envisioned further expansion of EU membership; and Latin American nations rejected the creation of a hemisphere-wide Free Trade Area of the Americas.

Absent an unlikely compromise in the next few months that revives the Doha negotiations, international trade may grow more complicated. But it won't be held back, predicted Donald Mackay, a former Canadian trade negotiator who's now an analyst with Canada's Center for Trade Policy and Law.

"Wal-Mart is China's eighth-largest trading partner. (Apple Computer CEO) Steve Jobs is going to keep pumping out those terrific little iPods. ... International transportation is becoming increasingly more efficient. All those sorts of things on the ground are going to ensure that trade is going to increase at phenomenal levels," Mackay said.

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(c) 2006, McClatchy-Tribune Information Services.

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