World Trade: Keep the markets open

Asia’s financial crisis coincides with this year’s fiftieth anniversary of the multilateral trading system. Trade policy and open markets are crucial to avoiding deeper distress worldwide. The global economic system for the information age must answer global needs - a challenge as great as that faced by the founders of the system a century ago.

The World Today Published 1 February 1998 Updated 7 December 2018 3 minute READ

It would be difficult to exaggerate the contribution of the multilateral system to the remarkable changes in the world economy over recent decades. The walls between East and West have collapsed, in part because the Soviet system could not meet the challenges of technological change and global integration. Divisions between North and South have also blurred, as developing countries have increasingly abandoned import substitution and protectionism for freer markets and open trade.

When China and Russia join the World Trade Organisation – and I have every expectation they will – all major economics will be in a single market system. If the challenge of the Cold War era was to manage a world divided, our challenge in the post-Cold War era will be to manage a world of deepening interdependence.

Asia’s current financial crisis is, in many ways, the first major test of this new interdependent economy. The immediate focus is on the financial stability of a number of Asian economies – and recent efforts by the both because of currency devaluations and the need to finance external debts. Not only will this increase import pressure on sensitive sectors and industries in the advanced economies, it will also challenge developing economies exporting similar products, especially those which have not devalued.

At the same time, the imports of East Asian countries are likely to shrink because o0f slowing growth and declining purchasing power – though possibly not as much might be expected, as these countries are also highly dependent on intermediary inputs and raw materials from abroad. Any such decline will particularly affect the East Asian economics because over half their exports are within in the region.

The effects will also be felt in the rest of the world – especially in the US, the European Union and Japan. As East Asian export markets shrink, growth in supplying countries will be affected – though it is too early to predict what these effects may be.

Trading on

Global institutions have a key role in keeping markets open and preventing contagion. The immediate task is to restore confid e n c e in the financial systems of South East Asia, but we must be aware that one important consequence of the crisis will be in the trade arena. And part of the solution to the problems must be a trade solution; our situation is very different from the nineteen-thirties when the absence of multilateral trade rules and commitments contributed to the downward spiral from financial crisis to trade crisis to generalised economic chaos.

First, and most obviously, the World Trade Organisation (WTO) provides a powerful bulwark against protectionist pressures. The strengthened rules and dispute settlement process make it extremely difficult and costly for countries to ignore their commitments and obligations. A more real concern is what might be termed creeping protectionism – any unwarranted or excessive use of safeguards, antidumping actions or other discretionary policy to block international competition. Secondly, the WTO can help to advance and anchor economic reforms in the affected economics. An obvious and timely example is the Financial Services Agreement reached last December, at the height of South East Asia’s crisis.

One of the main causes of the crisis is financial sector weakness. Strengthening prudent regulation and supervision and developing open and transparent financial services are key factors for rebuilding confidence.

Liberalisation has a valuable role to play. If closed financial systems are inherently opaque and unresponsive, open systems have a built-in incentive to be transparent and prudent – if only because they are under the scrutiny of depositors and shareholders. The Financial Services Agreement offers a way for these countries to reinforce and lock-in financial restructuring without compromising sound macroeconomic and regulatory policies.

A third priority is to continue the momentum towards universal membership. And this means completing the 32 accession negotiations currently underway without compromising the basic rules, rights and obligations. The successful accession of countries such as China and Russia would obviously enhance the WTO ’s ability to provide a stable foundation for global trade – particularly in times of economic stress. Membership would also help these countries to secure some of their key economic relationships in a rule-based system.

Fourth, we are approaching the WTO ’s Ministerial Conference and the 50th anniversary, a valuable opportunity to lift our sights to the challenges of the next fifty years. In addition to the negotiations already scheduled for the new century in agriculture, services and intellectual prope r t y, some are already looking to widen the scope of future talks.

Fragile web

Modern economics work on a vast and complex network of interrelationships which depend an infrastructure of rules, laws, and institutions. This fragile web is expanding across national frontiers – through flows of trade, capital, technology, information, ideas, and people. More and more, global stability will rest on the ease and security with which economic activity can move across borders.

The central challenge of our new global age is perhaps this: whereas governments answer mainly to national constituencies, increasingly the economic system must answer to global needs. The experience of the WTO, and the way it works through binding commitments reached by consensus, guides us on how these gaps might be bridged. Building on this – and expanding it to other policy areas which now transcend borders – will not be easy. Yet if Asia’s current turmoil is any indication of the risks of inaction, the challenge of building a more stable international system is clearly well worth the effort.

Current problems notwithstanding, I remain optimistic about the future of the global economy. I am convinced that there is a growing understanding of the importance of openness – especially in this new knowledge-driven economy – and a strengthening consensus that open trade offers the best path to growth and modernisation.

Borderless flow

We are also coming to recognise the realities of interdependence. In 1950, only 7 per cent of world output was trade related; today the figure is 23 per cent, and the Organisation for Economic Cooperation and Development (OECD) predicts it could approach 50 per cent by 2020. And these figures cannot capture what is perhaps the most powerful force for integration in the new world economy – the borderless flows of knowledge, information and ideas.

This level of global interdependence does not make protectionism impossible. But it has transformed the world economy in ways that makes turning inwards – retreating behind protective walls – infinitely more difficult and immeasurably more costly.

Looking at the multilateral trading system at fifty, it is clear is that we have not reached the end of a process – rather we stand at the very beginning of a whole new phase of internationalism. We are living through a deep and rapid transition towards a very different world. No doubt there will continue to be periods of instability and turmoil. No doubt we will continue to feel uncertainty and apprehension – in both advanced and developing countries.

This year we have an opportunity to send a political message about the reality of global transition, and the unprecedented opportunities it offers. We can reaffirm our political will to move towards a better system of global governance – for developed and developing countries alike. It is an opportunity to be as creative in shaping the institutions of an increasingly borderless economy as our forefathers were half a century ago in building the post war international system. The great promise of the new global age demands nothing less.