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Will Doha make the WTO irrelevant?

By Peter Morici
web posted March 5, 2007

Rumors abound in Washington that the stalled Doha Round of World Trade Organization negotiations soon will be resurrected. At stake are large cuts in farm aid, manufacturing tariffs and better rules for trade in services. Yet no one should believe that success will do much to reduce America's huge trade deficit or shore up shaky public trust in free trade policies.

The General Agreement on Tariffs and Trade was established in 1947 to reduce tariffs among a small group of World War II allies with compatible legal and economic institutions—Japan was not admitted until 1955. Eight rounds of tariff cuts imposed pain on workers exposed to new competition, but reductions were implemented gradually to ease transitions to new opportunities in export and supporting industries.

As importantly, these nations traded within the context of the Bretton Woods system of fixed exchange rates, managed by the International Monetary Fund. This system did not permit sustained, large balance of payments problems, like the current U.S. trade deficit, without significant macroeconomic and exchange rate adjustments.

The success of multilateral trade liberalization resulted in the 1994 creation of the WTO. It includes virtually all nations participating in global commerce and establishes rules for national policies beyond tariffs, such as patents and copyrights, industrial subsidies, taxation, and health and product standards when these impede trade.

In 2001, China joined the WTO with more than 100 million underemployed peasants, without a modern system of commercial law, and with many hold-over institutions from a centrally planned economy. For example, state owned banks permit Beijing to channel capital and workers into targeted industries on a massive scale A misstep in negotiating with China can rock industries globally with a speed and force GATT founders never conceived.

The Bretton Woods system is gone, and nothing has replaced it. The United States, EU and other industrialized countries permit their currencies to float against one another. Meanwhile, China and other Asian governments manipulate foreign exchange markets to maintain undervalued currencies, enjoy huge trade surpluses, and displace workers from manufacturing jobs in Europe and North America without offering them decent opportunities in new export industries.

The failure to effectively manage the assimilation of China undermines support for free trade in many western democracies. Free trade may provide cheap electronics at Wal-Mart, but that is little comfort to manufacturing workers pushed from $30 per hour jobs into positions offering a third that scale. And to finance large annual trade deficits, the United States has amassed a $6 trillion foreign debt, which carries an interest cost of $2000 per U.S. worker each year.

Regarding exchange rates, the WTO defers to the IMF but the IMF has no power to act. Currency manipulation is not on the Doha Round agenda.

In recent years, technology and concentration have transformed global markets. Ten, five or even two companies dominate industries such as in aircraft, automobiles, software, some media, and even antiques—consider what eBay has done to the auction business.

These days, access to technology trumps capital for ensuring national prosperity. Antitrust and competition policy, and the regulation of foreign multinationals have become critical levers of economic statecraft.

Consider how the EU Commission regulated the Boeing-McDonnell Douglas merger to neuter the competitive consequences for Airbus. Should we be surprised that China has announced it will get into the business of reviewing mergers of foreign companies?

Consider how China is shrewdly building auto and software industries where it lacks the underlying skilled labor and supporting industries by requiring GM, Microsoft and others to train engineers and develop local suppliers.

Currency manipulation, competition policy and the regulation of foreign investment are the new devil's workshop of trade policy but the Doha Round agenda is silent on these issues. Instead negotiations are locked in a tussle over farm subsidies, which is not likely to be resolved satisfactorily.

The real danger to a vibrant global economy and the legitimacy of the WTO is that negotiators will paper over the agriculture issue, open up markets for manufactures and services, and leave policymakers in China and elsewhere a free hand to employ the new tools of protectionism and disrupt markets on a massive scale with impunity.

This would push up the U.S. trade deficit, stoke populist cries for protection, and render the WTO irrelevant. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

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