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BUSINESS

When Free Trade Went on Siesta: The WTO Cancun Trade Talks

By Jean-Marc F. Blanchard, Ph.D.
Senior Consultant, KWR International


On September 15, global trade talks in Cancun, Mexico ended without an agreement. The breakdown of talks does not bode well for the future of the Doha Round, the latest series of World Trade Organization (WTO) talks designed to produce a greater liberalization of the global economy. Many worry that the lack of a trade deal is hindering economic growth and reducing confidence. In a pique, U.S. Trade Representative Robert Zoellick opined “some countries will now need to decide whether they want to make a point or whether they want to make progress.”

According to various news reports, two issues sank the negotiations. First, the developed world, particularly European Union countries, would not compromise on the issue of agricultural subsidies. They simply could not bring themselves to make significant reductions in subsidies now running an incredible $300 billion per year. Second, the developed world called for a liberalization of foreign investment rules to improve transparency, reduce red tape, and open government procurement. Developing countries, led by Brazil, China, and India, were unwilling to move forward without meaningful cuts in agricultural subsidies. Moreover, they never warmed to the idea of new foreign investment rules because of the potential adverse consequences of such rules for their domestic industries.

For cynics, the talks produced one agreement, a concurrence on the merits of protectionism! In truth, the meeting had one noteworthy accomplishment. Specifically, there was an agreement authorizing developing countries to import generic versions of vital drugs—e.g., those needed to deal with epidemics like HIV/AIDS—without contravening WTO intellectual property protections, provided that importers meet certain conditions and sellers take measures to prevent exports to developed countries.

WTO delegates will be meeting again in Geneva in December, but it is hard to imagine how they will achieve the goal of a new global trade deal by the end of 2004. In fact, it is possible that free trade has gone on an enduring siesta. One reason is that the U.S. seems to have abandoned the leadership role it has played in the past. Another reason is that the democratization of foreign economic policy has made it more and more difficult to advance the agenda of an open international economy. A third reason is the changed geopolitical environment. This makes economic tradeoffs in the name of national security less likely.

Ever since the establishment of an open international economic order in 1945, the United States has played a lead role in promoting it. It has cajoled, threatened, and bribed other states to get them to reduce tariffs, to eliminate non-tariff trade barriers, and to accept new items on the global free trade agenda. The U.S., however, no longer seems willing to assume such a role. The weakness of the last three American Presidents has made them wary of alienating constituencies that might provide the crucial margin of victory in close Presidential elections. This dynamic is shown vividly in President George W. Bush’s decision in March 2002 to dramatically increase tariffs on foreign steel. Moreover, the U.S. continues its heavy subsidization of large farms.

Frustrated by the lack of progress at the global level, U.S. policymakers have increasingly turned to bilateral and regional negotiations, arenas where the consensus of 146 WTO members is not required and the U.S. can use its political and economic power to strike favorable deals. The evidence indicates the U.S. will maintain such a strategy. Such arrangements, though, are not as beneficial for world trade as global deals and have the potential to produce a series of closed trade blocs.

Compounding the problem, global trade negotiations have become much more democratic. The democratization of globe trade has occurred because of internal changes within countries, the activism of non-governmental organizations, and the structure of WTO negotiations whereby a complete consensus is required for the conclusion of trade deals. This development increases the number of players who can veto trade deals, injects time, organizational, and material burdens into the trade negotiation process, and restricts secret side-payments. The democratization of global trade clearly is positive from a procedural standpoint, but not necessarily for the future of free trade and investment.

The last factor that bodes poorly for an open international economy is the changed geopolitical situation. Many forget the Bretton Woods system came into being not only because the U.S. and its allies wanted to promote capitalism, but also because they wanted to avoid the protectionist mistakes of the 1930s, mistakes they believed fueled the Great Depression and World War II. Beyond this, open trade benefited from the willingness of the U.S. to tolerate European and Japanese protectionism if it facilitated the containment of the Soviet Union. Such geopolitical imperatives no longer exist. Hence, there is a reduced inclination on the part of the U.S. and others to accept disadvantageous trade structures.

In total, the prospects do not look good for a further opening of the international economic system. How might companies respond to this changed setting? Clearly, it will be critical to exploit whatever leverage one’s home government has to gain access to other markets. Furthermore, it will be essential to draw upon knowledgeable individuals who can facilitate access to foreign markets. Finally, it will be advisable to direct attention to those countries that actively embrace the liberal trading order.


Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Jane Hughes, Marc Faber, Jonathan Lemco, Russell Smith, Andrew Thorson and Robert Windorf



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