Trade liberalisation: Looking beyond the WTO

Financial Express, 15 December 2009

Trade integration has been an important source of prosperity and progress in the last 500 years. Some feel that the project of opening up the world to free trade is mostly finished, based on the extent to which tariffs have gone down and the extent to which goods from across the world are available in stores everywhere. However, the situation is sombre, and freedom of trade in the global economy has effectively worsened in recent decades. To make progress, we need to look beyond the WTO.

What has gone wrong

  1. The failure of the WTO. The last time the countries of the world agreed to make progress on trade reforms was when the `Uruguay round' concluded in 1994. For 15 years after that, the next steps on trade liberalisation have been stalled. The experts in this field are gloomy about progress on this, since the greatest gainers from a more open trade regime -- countries like India -- have failed to exercise intellectual and political leadership. For all practical purposes, the WTO process is dead.
  2. New Protectionism. In the global crisis, industry lobbying for protectionism resurged everywhere in the world. While the old-style protectionist tricks were disallowed thanks to the WTO process, governments worldwide come up with a new wave of protectionism that is WTO compliant. This includes government support to national champions, public sector procurement which forbids buying from foreigners, currency manipulation, etc. The website documents these impediments on an ongoing basis, and it makes for gloomy reading.
  3. The dwindling importance of manufacturing. The focus of trade liberalisation has been on manufacturing, but manufacturing now accounts for just 30% of world GDP. Opening up agriculture to international trade matters to India, where agriculture is a full 16% of GDP. But on a global scale, opening up agriculture is irrelevant because it is a tiny fraction of world GDP.
    The bulk of world GDP is now in services. Hence, for free trade to work its magic on the world economy, what matters is free trade in services. As an example, an Indian producer of mutual fund paper should be able to go to Singapore and sell mutual fund units, as effortlessly as an Indian producer of steel is able to go to Singapore and sell steel. The world is far from this open environment.
    We made a lot of progress, including the establishment of the VAT worldwide, to ensure freedom of movement of manufacturing. But because the footprint of manufacturing in world GDP has gone down sharply in recent decades, the extent to which the global economy practices free trade has actually declined in the last 25 years. Trade liberalisation can now be an engine for world growth by moving towards free trade in services, including finance, law, accounting, consulting, etc. At the same time, we have to accept that the WTO is useless in getting towards this goal.

How can progress be achieved?

The first path involves writing as many encompassing free trade agreements - covering the entire economy and not just manufacturing - as possible. If India will sign strong FTAs with the US, the European Union, the UK, Japan, Korea, Taiwan and ASEAN, then we will bring a good dose of trade into the economy, thus putting competitive pressure and getting gains from trade on a large swathe of the economy. The removal of Indian protectionism in banking -- even if only through a few FTAs - will do a world of good for improving banking services in India.

The best laboratory of globalisation is the European Union, where freedom of movement of goods, services, labour and capital has been achieved to an extent never seen before. A Spanish producer of mutual fund units can go to Germany and sell to a German household without facing any capital controls or regulatory restriction. The EU is hence the most important living example of how openness to trade can be achieved, for the full 100% of GDP.

The idea of the EU can be scaled up. One promising path involves a core of liberal countries setting up an `open architecture' free trade agreement, which ensures comprehensive trade liberalisation, and allowing any country to plug into it. As an example, the Anglo-Saxon countries could come together into such an agreement, hammer out a simple document, and get free trade within themselves. The Anglo-Saxon countries are well suited for such an initiative, given the pre-existing conditions of a liberal economic ethos, and given that they add up to half of the world's GDP.

Once such an FTZ is functioning, entry into this FTZ should be made open to all countries on a voluntary but take-it-or-leave-it basis. As an example, India would have the choice of joining this FTZ - but only if it signs the same comprehensive agreement that all other members have signed.

See the companion piece: Where did the Bombay Club go wrong?.

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