August 15, 2006 6:37 pm

Plan B for world trade

The indefinite suspension of the Doha round of world trade talks creates big risks for the world economy. A new explosion of discriminatory bilateral and regional agreements is likely to substitute for global liberalisation. This will inevitably erode the multilateral rules-based system of the World Trade Organisation. The backlash against globalisation will generate more protectionism in the vacuum left as momentum towards wide-ranging reduction of barriers ceases, especially as the world economy slows and global trade imbalances continue to rise. Financial markets will become more unstable as international economic co-operation breaks down further.

Hence there is an urgent need for a “plan B” to get world trade policy back on track. That strategy should have three key objectives: to spur the revival of Doha; to offer an ambitious alternative to restart the process of liberalisation on the widest possible basis if that primary goal fails; and to counter the proliferation of preferential deals among small groups of countries.

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The best candidate for this is for leaders of the Asia-Pacific Economic Co-operation forum to launch a free trade area of the Asia-Pacific region (FTAAP) when they meet in Hanoi in November. The 21 Apec members account for more than half the world economy and almost half of world trade. The group includes most of the world’s most dynamic economies.

Apec leaders committed themselves to achieve “free and open trade and investment in the region” at their initial summit meetings in 1993 and 1994. They pursued that goal effectively over the next few years, but the effort has faltered of late. Apec’s business advisory council has thus recommended since 2004 that the leaders undertake an in-depth study of how to realise their ambitions by negotiating an FTAAP. If Doha continues to languish, the study could be commissioned in November and negotiations begun under the chairmanship of pro-trade Australia in 2007.

Achievement of an FTAAP would have huge positive effects on global output. Realisation of anything close to free trade by half the world would deliver much larger benefits than even the most ambitious outcome of Doha, which at best seeks modest reductions in market impediments. The distributional impact would be quite different from a multilateral deal: the gains would accrue to Apec members while many outsiders would suffer from trade diversion. But the net outcome would be far superior to a world without substantial new liberalisation or one with a panoply of additional bilateral preferential accords. Indeed, one of the key advantages of the FTAAP is that it would sweep together the smaller deals already in place and head off those that will otherwise ensue.

An important element in the picture is a possible east Asia free trade area, whose creation is virtually certain to accelerate with the demise of Doha and erosion of the WTO system. Japan’s new proposal for a “pan-Asian comprehensive economic partnership” would expand this idea to include India, Australia and New Zealand. Either of these would create a new Asian bloc that, along with the European Union and the North American Free Trade Agreement, would produce a tripolar world with all its inherent instabilities.

By contrast, an FTAAP would embed these Asia-only arrangements in a broader Asia-Pacific framework. It would prevent the creation of a new division across the Pacific, with its adverse security as well as economic consequences for relations between east Asia and the US. The US and China would be the natural leaders of an FTAAP process and could simultaneously improve the prospects for resolving their bilateral trade tensions through such a regional framework.

But would the launch of an FTAAP revive the prospects for Doha or, as some charge, further undermine them? The last global trade negotiation, the Uruguay round, missed its initial deadline in 1990 and was suspended for three years because the EU was then also unwilling to reform its farm policies. In November 1993, the first Apec summit shocked the world with its commitment to achieve free trade. Less than a month later, the EU suddenly embraced enough agricultural liberalisation not only to revive Uruguay but to bring it to a successful conclusion. When asked to explain the abrupt change in their position, top European negotiators replied that the decisive element was the Apec decision because it “showed us you had an alternative that we did not”.

The leverage of an FTAAP in 2006-07 would be much greater than that of the Apec declaration in 1993. Operational results would be foreshadowed and thus generate much stronger inducements for countries outside Apec to restore the multilateral track. A broader group of naysayers would be jolted into supporting the global approach, including India and Brazil as well as the EU, because they would be so adversely affected if “plan B” were to supplant Doha. The prospect of eliminating most of Asia’s trade barriers would also provide a powerful incentive for the US Congress to extend President George W. Bush’s negotiating authority, which will expire next summer and doom any chance of reviving Doha unless there is a strong tangible reason to keep it alive. Credible launch of an FTAAP could thus save the global trading system, whether it restored Doha or itself became a second-best but still powerful engine of new liberalisation for the world economy.

Can “plan B” save world trade? Fred Bergsten will answer your questions in an online Q&A - post a question now

The writer is director of the Institute for International Economics in Washington DC

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