Ask the expert: Plan B for world trade

Do you agree with Fred Bergsten’s view that the credible launch of a free trade area of the Asia-Pacific region (FTAAP) could save the world trade system? Should America and Asia form an Asia-Pacific free trade zone, excluding Europe and others? And what effect could the launch of an FTAAP have on getting trade co-operation back on track?

Mr Bergsten answers your questions below

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When the projected gains to poor low-income countries from a successful Doha round accrue to $16bn (World Bank), are there really any benefits from free trade for less developed countries who may be damaged from opening their ‘young’ economies up? (Considering that their tariff revenues are approximately $50bn a year and their comparative advantage is in agriculture which is subject to highly volatile and declining commodity prices.)
Shehan Mohamed, Hertfordshire, UK

Fred Bergsten: Our studies here at the Institute for International Economics show that eliminating global barriers to trade of the developing countries, including among those countries themselves, could lift 200m people out of poverty and increase annual income for the group by $500bn. There would of course be the usual distribution effects within individual countries but the benefits would overwhelm the costs. About one-half of these gains would come from agriculture but the other half would accrue from manufacturing and perhaps services, though the latter is not included very effectively in the quantitative estimates.

One of the objectives of the exercise is of course to help poorer countries diversify their economies, both within agriculture and out of it into other sectors, including to limit the volatility that now adds to their development difficulties.

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I believe the launch of FTAAP could in theory be excellent for east Asia and north America. ASEAN +3 doesn’t have the advantage that the EU has as a regional trading zone and it could really bolster its economies even further. But don’t you think that this type of agreement could push regionalism to the forefront and put a world trade deal on the back burner?

Secondly how realistic could such a trade deal be? There are so many issues just among the Asean members: Burma’s human rights record, Korea and Thailand’s rice disagreement etc. Not to mention the US Administration’s closing window to sign trade deals without asking for authority.
Arash Nazhad, Canada

Fred Bergsten: There is a legitimate debate over the impact of an FTAAP on the global trading system in general and the Doha round in particular. Some observers share your view that Apec pursuit of a mega regional trade pact would undercut the multilateral approach.

I totally disagree for two reasons:

First, serious Apec pursuit of an FTAAP would be so jarring to non-members that they would be virtually forced to “sue for peace” by reviving the Doha round and thus the global system. As indicated in my article, this is precisely the dynamic through which the Uruguay round, the last major multilateral negotiation, was revived and brought to successful conclusion.

Second, the Apec countries with their global trading interests would continue to promote multilateral liberalisation. There is no chance that they would choose to sit behind a “fortress Asia Pacific”. To the contrary, they would take their regional liberalisation to Geneva and offer to broaden it to whatever other countries were willing to adopt similar policies. This is in fact the historical record of the largest regional bloc in history, the European Union, which was always ready (except perhaps in agriculture) to generalise its liberalisation to the rest of the world on a reciprocal basis.

It is certainly true that there are a number of hurtles to an FTAAP, including the several that you mentioned. These difficulties of course pertain to multilateral and bilateral trade negotiation as well. I suspect there would be better chances for resolving them in a regional context and would note especially that a realistic prospect for an FTAAP would be just the kind of ammunition needed by the US Administration to win Congressional approval for extension of the President’s Trade Promotion Authority.

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How would you respond to those who claim the current situation is simply a first step in the world moving past free trade into a fair trade era?
Robert Burney, US

Fred Bergsten: The global trading system, and the trade policies of virtually all countries, have always had to strike a balance between “free trade” and “fair trade”. The domestic politics of virtually all countries require a perception that trade is “fair” if they are to permit it to be “free” or even “freer” through international negotiations. The current situation is no different from this traditional pattern although the wide-spread backlash against globalisation, including in the United States, requires an even clearer demonstration of “fairness” to support domestic approval of new liberalisation.

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It was supposed that the WTO is a one member one vote, democratic and transparent organisation but it proved otherwise. Do you think the failure of the Doha trade talks is good for poor developing countries?
Nasir Aziz

Fred Bergsten: The WTO is indeed a wholly democratic and transparent organisation. That indeed may be one of its problems as it has proven extremely difficult, if not impossible, to reach agreement among 150 countries. Even the most effective leadership from the larger trading nations no longer seems to work as it did in all previous multi-lateral rounds.

In any event, the failure of Doha is very bad news for poor developing countries. Our studies at the Institute have shown that moving to global free trade could lift 200m people out of poverty and increase income of the developing countries by 500bn dollars annually. Even the more limited liberalisation envisaged through Doha would be enormously helpful for them. The great irony is that some of the poorest countries, including India as the only poor nation within the G6 steering committee, have been among the most recalcitrant to liberalise themselves sufficiently to bring the negotiations to success.

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Apec even in its heyday was a nonstarter. How does one put his faith in enlarging the Apec as FTAAP as an arrangement to arrest proliferation of FTAs or RTAs? How will it serve the interests of countries which are outside its orbit? FTAAP may well end up as an animal driven by the US to serve US interests. Will the US give up NAFTA and many other trading arrangements it has entered into?
K. Subramanian, India

Fred Bergsten: Apec was very successful in promoting trade liberalisation during its early years. As indicated in my article, it played a pivotal role in reviving the Uruguay round and driving it to a successful conclusion. It took the lead in negotiating the Information Technology Agreement in 1996, which freed half a trillion dollars of global high-tech trade. It agreed to negotiate the elimination of all tariffs in nine key sectors, in the teeth of the Asian financial crisis in 1997, though that effort floundered a year later.

One key advantage of the FTAAP is that it would subsume the large number of existing FTAs in the region. Even more importantly, it would pre-empt the further proliferation of FTAs that is otherwise inevitable with the collapse of the Doha Round. As one of those existing FTAs, NAFTA and other US agreements (as with Australia and Singapore) would presumably be rolled into an FTAAP.

An FTAAP would serve the interests of non-Apec countries only if those countries then saw the wisdom of reviving Doha and achieving meaningful liberalisation on a global basis. One of the chief purposes of launching an FTAAP, as emphasised in my article, is to provide an incentive to its non-members to restore the multi-lateral effort.

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Doesn’t it also apply to the dormant FTAA (Free Trade Agreement of the Americas) negotiations? The US resisted making any deal on agriculture with Brazil and the other Latin American countries pending the Doha deal. Won’t the US have to yield on agriculture in an FTAAP, and will whatever the Asians get on US agriculture be enough for the Latins?
Nancy Birdsall, Center for Global Development, Washington DC

Fred Bergsten: My proposed strategy does not apply as effectively to a Free Trade Area of the Americas as much as to a Free Trade Area of the Asia Pacific. First, the latter is much larger in economic and trade terms, and would thus provide greater benefits for both the countries involved and the world economy as a whole. Second, Brazil and some of the other Latin American countries have been greater naysayers in the Doha negotiations than the Asians so would be less likely to cooperate effectively in a “Plan B”. As for Latin America benefiting from US liberalisation of agriculture with the Asians via an FTAAP, they could probably do so only via participating in a renewed Doha Round and making adequate concessions of their own.

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The FTAAP as an alternative to multilateral trade liberalisation under the Doha round seems interesting. But the divergences of the economies with Apec, especially the different level of development and the overlapping of their trade structures, would probably make it hard to generate a sensible package of trade liberalisation deal within that group. Moreover, even if one differentiate the Apec into developed (Japan, Singapore) and developing (ASEAN except for Singapore), there is a China factor involved in group. How realistic is the FTAAP in by 2010 or 2015 ?
Peter Chow, City University of New York

Fred Bergsten: There are certainly substantial divergences among the Apec economies but no more so than among the economies of WTO members or many regional free trade agreements such as NAFTA and even the European Union. The poorer members would certainly have to be offered longer periods to phase in their liberalisation and perhaps greater flexibility to exempt a few products from it. However, the Apec leaders had these considerations fully in mind when they committed themselves to “free trade in the region” back in 1993-94 and resolve the problem by setting target dates of 2010 for the richer countries and 2020 for the poorer.

As for China, it is indeed a major factor but the prospect of fully eliminating its substantial remaining trade barriers would be an important incentive for both rich and poor Apec members. As for an ultimate completion date, I suspect that something like 2020, the original Apec target for the developing countries, would now be the most realistic for the entire enterprise.

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How does the proposed free-trade area, excluding almost the entire continent of Europe and India, become a free and fair trade arrangement, particularly when the preferential benefits flowing from this dispensation bypasses the countries left out?
G.Srinivasan, New Delhi, India

Fred Bergsten: My proposal for a Free Trade Area for the Asia Pacific would not be either free or fair toward Europe or India. Those countries would be fully included under the Doha Round in the WTO but their own unwillingness to offer meaningful liberalisation of their own policies has contributed substantially to its indefinite suspension and possible total failure. My alternative idea is therefore decidedly a second best but, as indicated in my article, would be considerably better than a total absence of new trade momentum and would hopefully serve to bring those countries back to the multilateral negotiating table.

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It seems to me that a fair global trade policy should include Africa, being that it has an abundance of natural resources. Do you think including Africa in the current trade agreement, would help the continent become more stable and prosperous in the future?
Michael Glennan, Lynbrook, NY

Fred Bergsten: A fair and productive global trade policy should indeed include Africa. One of the fundamental purposes of the Doha round was in fact to help that continent as the poorest of all regions. The problem is unfortunately that many of the African countries themselves, and several other poor countries including India, have been unwilling to participate constructively in the Doha negotiations and thus contributed to its indefinite suspension. It is a deep irony that the huge potential benefits of the round for poor countries and poor people are being undermined to a significant degree by the recalcitrant policies of poor counties themselves.

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First of all I would like to thank you for your inspiring article. However, I have severe doubts on the feasibility of that scenario: Why should the US deliver something in the agricultural sector in the Apec negotiations when they were unwilling (or unable) to deliver in the DDA? Why should the US Congress be favourable to the extension of the President’s TPA for the negotiations of an ATAPP when in general it seems more than doubtful that a new TPA will be achieved easily during the next year?
Bernhard Kluttig, Germany

Fred Bergsten: Thank you for your kind comment on my article. My answer to your question is that I believe the United States is both willing and able to deliver meaningful reform on agriculture in the Doha Round but only on the condition, that has not been met, of full reciprocity from the other WTO members including the European Union and a number of developing countries outside East Asia. I believe the US would be willing to deliver the same liberalisation within a free trade area of the Asia Pacific if the other Apec members were willing to reciprocate fully from their sides, which there is a strong prospect that they would. The Congress would in turn be willing to extend the President’s Trade Promotion Authority for an FTAAP that promised such a payoff just as it would be ready to extend TPA for the Doha Round if it offered a similarly positive prospect.

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With the failure of the Doha round, to what extent do you think that in the end there was a perception that if there was to be any significant amount of liberalisation of agriculture then the biggest and most immediate winners (in terms of increased values sold to the EU, US, Japan etc) would be countries like Australia, New Zealand, Canada, and Argentina, rather than developing countries? Do you think this meant that the key parties had to go further with agriculture liberalisation than they could sell to their own primary industry groups in order to get a ‘development’ dividend for the developing world?
James Blake, Moscow

Fred Bergsten: There is no doubt that large food exporting countries like those you cite would be major beneficiaries of agricultural liberalisation in the Doha round. Poorer countries would benefit too, however, and even small increases in their farm exports could be extremely beneficial for their modest economies. It is nevertheless true that the large countries that maintain major impediments to agricultural trade need to go “the extra mile” to achieve the basic objectives of the Doha Development Agenda and thus disappointing the poorer countries for a second time, as occurred in the Uruguay round, and thus perhaps leading them to turn their backs on the global trading system.

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With each passing year, I think war in east Asia seems much more likely. After the Olympics in 2008, China could move on Taiwan. The fury provoked in China and Korea by Koizumi’s continued visits to the shrine of Japanese war criminals including Tojo cannot be underestimated. Within 10 years, Japan will likely go nuclear to counter the North Korean threat. How would these gathering signs of war impact upon this proposed free trade area? It should be noted that these increasing tensions are occurring simultaneously with closer economic ties between these nations, so the argument that such an organisation would help to remediate these tensions seems rather weak.
Matt, San Francisco, California

Fred Bergsten: I do not share your alarmist view about the risk of war in east Asia. It is true, however, that the hostility between China and Japan will inevitably play an important role in determining the course of all initiatives for closer cooperation within the region. To date, however, the two countries seem to be cooperating fairly closely on regional monetary affairs (notably the Chiang Mai Initiative) and participating actively in official studies of trade agreements.

You are correct that economic ties between China and Japan are intensifying rapidly, which I infer would strengthen rather than weaken the prospects for their participating in the same economic arrangements. I suspect, however, that these considerations might tilt both countries toward the proposed free trade area of the Asia Pacific, since it would include the United States and other non-regional countries that might dilute their hostility, rather than an arrangement limited to east Asia itself like the proposed 10+3 or 10+6.

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Background

“The indefinite suspension of the Doha Round creates major risks for the world economy. There is urgent need for a “plan B” to get world trade policy back on track.”

So writes Fred Bergsten, director of the Institute for International Economics, in the Financial Times.

Mr Bergsten argues that a new trade strategy should have three major 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 continued proliferation of preferential deals among pairs and small groups of countries.

The best candidate for this, argues Mr Bergsten, is for leaders of the Asia-Pacific Economic Co-operation forum to launch a FTAAP when they meet in Hanoi in November.

Achievement of an FTAAP, Mr Bergsten believes, 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 conceivable outcome of Doha, which at best seeks modest reductions in market impediments, he writes.

Mr Bergsten says that the US and China would be the natural leaders of an FTAAP process and could simultaneously improve the prospects for resolving their ongoing bilateral trade tensions through such a regional framework.

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