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TAMU ECON 452 - Economist8b

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All free traders now? The Economist 7 December 1996“In Singapore on December 9th, the two-year-old World Trade Organization begins itsfirst summit meeting. Although governments profess to be committed free traders, theiractions still fall short of their words.”'Free trade', wrote Richard Cobden in 1857, 'is God's diplomacy, and there is no othercertain way of uniting people in the bonds of peace.' Few politicians since Cobden havethought of themselves as missionaries for free trade. Yet now, an odd thing ishappening: most of the world's governments claim to be exactly that. In Singapore fromDecember 9th to 13th, trade ministers will attend the first ministerial conference of theWorld Trade Organization (WTO)-and will surely take every opportunity to parade theirfree-trade credentials. How justified are their claims? On the credit side, in the past few years there have been four main achievements forfree traders to cheer. First, the Uruguay round of the WTO's predecessor, the GATT,went further than any previous global trade deal. Apart from promising to cut tariffs onmanufactures-which are now down to an average of just 3.8% in rich countries –governments agreed for the first time to some liberalization of trade in agriculture andservices. They also forged new agreements to get rid of some non-tariff barriers totrade, such as the spurious use of technical and health regulations to keep out imports.The round, which finished in 1993, also established the WTO itself, and set up a newmechanism for settling trade disputes. This mechanism is the second recent cause for celebration. Under the GATT, anymember could veto the verdict of a panel set up to rule on a quarrel-even if it was aparty to the dispute. WTO panels are stricter. They must report within nine months andtheir decisions can be overturned only by consensus. Countries found to have brokenWTO rules must either mend their ways or offer compensation; if they do not, they mayface trade sanctions. So far, the mechanism has worked well. More than 60 cases havebeen brought. About a quarter have been completed. Ten of these disputes weresettled without going before a panel. The third encouraging sign is that more and more countries are joining the world tradeclub. During the Uruguay round, many developing countries realized that freer tradewas not a confidence trick by rich countries, but would actually help their owneconomies. The membership of the GATT rose from 92 in 1986, when the roundbegan, to 114 when negotiations ended. The WTO now boasts 126 members; another30 countries, including China and Russia, want to join. Fourth, trade has been booming. The WTO estimates that world trade in goods grew by8% in volume terms last year, four times the growth of world GDP. In fact, during the1990s international trade has grown far faster than world output, showing that nationaleconomies are becoming ever more closely linked. Foreign direct investment, anothergauge of international economic integration, is also soaring: last year, estimates theUnited Nations Conference on Trade and Development, cross-border investment flowsrose by 40%, to $ 315 billion. Against such a background, it may seem churlish to doubt governments' professions offree-trade faith. Unfortunately, there are good reasons for such doubt. Since thecompletion of the Uruguay round, governments have frequently acted much as they didunder the old GATT: as downright protectionists on some occasions and asmercantilists almost as a matter of course. That is to say, the main purpose of theirtrade diplomacy has not been to open up their own markets to imports but to prise openother people's markets for exports. The opening of home markets is usually seen as aconcession to others, not (as economic logic dictates) as a good thing in itself becauseit benefits local consumers and makes both national and global economies work moreefficiently. The sin bin The clearest example of the mercantilist tendency is the conduct of the so-called'unfinished business' of the Uruguay round. When the round ended, agreement had notbeen reached on the following areas of service trade: financial services, shipping,'movement of natural persons' (trade-speak for letting in foreigners to supply serviceson a temporary basis) and telecommunications. In financial services the Americans, displeased by the slow pace of liberalizationpromised by some Asian countries, walked away from an agreement just before adeadline in June 1995 (though several other negotiators, including the European Union,have kept their offers open and talks are due to restart next April). In shipping,America's highly protected and unionized maritime industry virtually sank the talksbefore they left port. The issue of letting in foreigners temporarily has becomeentangled by political reservations about immigration as a whole. Few governmentsanywhere are keen to welcome foreign workers. Only with the telecoms deal is there any sign of hope. After an earlier negotiationcollapsed in April (with Europeans and Asians slow to commit themselves toliberalization and with America demanding better access to satellite-communicationsmarkets in developing countries) a recent round of talks has found several groups,including the Americans and Europeans, making more liberal offers. Negotiators reckona deal can be reached by the new deadline of next February. Telecoms, though, is an exception. For the most part, the grudging way in which somegovernments are keeping the promises they made during the Uruguay round smacks ofbad faith. In textiles and clothing, for example, trade has been governed for over 30years by a system of bilateral quotas. These quotas are supposed to be scrappedeventually and textile trade gradually brought into line with WTO disciplines; meanwhile,the size of quotas is being increased. But the process, which began in 1995, has beenslow. Importing countries, which tend to be rich, are allowed to keep quotas coveringalmost half their trade until 2005. Moreover, they have started to bring under the WTOsystem only those products which are not subject to quotas-thus delaying the effect ofthe deal. Not surprisingly, exporters, most of them developing countries, are up in arms.Doing the bare minimum does not seem to be the behavior of committed free traders. Gauges of good faith The problems left over from the past, however, are modest compared with those whichare to come. In the next few years the free-trading commitment of the


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TAMU ECON 452 - Economist8b

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