Larry Elliott argues that the dragooning of ‘smaller nations by the World Trade Organisation into liberalisation can only benefit richer members
STAFF at the World Trade Organisation (WTO) know when their boss is pleased with them. Renato Ruggiero beams his big Italian smile and says: ‘You have made well your work.’
The sunny side of Ruggiero was evident last week when the WTO ended its first ministerial conference with a show of unity and a clear ‘programme for a further round of trade liberalisation at the turn of the century.
By harnessing the forces of globalisation to the cause of free trade, the WTO director general is confident that the future will bring rising ‘prosperity. He has a dream of putting a phone in every small village, of plugging the world into the information superhighway.
There is no doubting Ruggiero’s evangelical zeal. It has to be recognised, too, that the WTO now wields tremendous clout. It is also a step in the right direction, providing weaker nations with a system based on rules rather than economic muscle.
Nor can it be disputed that free trade can be good for consumers. There are plenty of cases where prices have tumbled after inefficient state monopolies were opened up to a blast of foreign competition.
This, after all, is what the international division of labour is about. ‘Two countries stand to gain from concentrating on what they are good at and trading with each other. ‘That, at least, is the theory. The reality is a lot more difficult, not least because every country in the world, whatever its state of development, is being asked to fit the same model at a frantic pace.
Small countries are being dragooned into a liberalisation process so rapid that there was a strong undercurrent of thought at last week’s meeting that globalisation is merely the rich countries looking after themselves.
The scepticism is well-placed. While ministers from Senegal and Barbados were speaking to a largely empty hall, the Americans and the Europeans were stitching together a deal to open up the global market in information technology (IT).
The IT negotiations underlined a simple fact: for all their talk, the European Union and the United States are not on a crusade for free trade at all. The doctrine of classical free trade stipulates that cutting your tariffs is a good thing, whatever other countries do.
In truth, the US, the EU and Japan are old-fashioned mercantilists who believe that trade is a trial of strength in which the biggest benefits in terms of jobs and growth go to those with the most clout.
The big players, naturally, have a different approach if a smaller country dares to suggest that a big transnational should be denied access. That sort of protectionism has to be stamped out, even if it means the smaller country is thereby prevented from building up its own industrial base.
The counter-argument is that protectionism is, without question, disastrous for jobs and growth. Economists need look no further than the Smoot-Hawley tariff, introduced in the US in 1930, to show conclusively that protectionism equals depression.
Unfortunately, that argument looks less good when held up to the light. The US tariff had been tripled to 40% in the aftermath of World War I, yet productivity and growth soared in the 1920s. The reason, according to revisionist US economists, is that income taxes were cut, increasing the spending power of domestic producers.
By contrast, the Smoot-Hawley tariff was accompanied by a swingeing income-tax increase, and it was this that caused the slump. It is not free trade that delivers productivity gains and growth but ferocious internal competition.
This is an argument that cannot be dismissed out of hand. The United States’s share of exports in gross domestic product has doubled in the past 20 years but productivity growth has fallen. Growth has been sluggish and real wages have dropped.
Here we come to a final point. Even if the increase in trade boosts overall global output, how can we be sure that the gains from that growth are distributed fairly?
Moreover, if the growth has a high but unquantified environmental cost, does it actually represent greater prosperity at all?
As ever, the rich North wants it all. It wants open access to every market while protecting its own agricultural and industrial interests; it wants the South to export like mad to pay off its debts; and it wants developing countries to raise the level of worker rights. And all this must be achieved at zero cost.
There is some hope. Developing countries such as India, Pakistan and Brazil are becoming quite powerful WTO players and are refusing to be pushed aside. But it is a slow process.
Trinidad and Tobago Minister of Trade Mervyn Assam put it nicely when he said: ‘While it is no doubt important to put a phone in every village, many of us here today have far greater responsibilities to our villages. We must put a school, put a road, put a health office, put a notice advising of the use of pesticides so as not to jeopardise market access for exportable goods.’
It was a well-aimed rebuke for the WTO’s director general. Unless Ruggiero, the WTO and the rich countries of the North address the concerns of countries like Trinidad and Tobago they will not ‘make well their work’.