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The Misery of the WTO: For a Reinvention of World Trade

by Tilman Santarius Wednesday, Apr. 15, 2009 at 1:15 AM
mbatko@lycos.com

The crisis of the WTO has two causes: a lack of trust and an ideological prejudice. A lack of trust exists because the countries of the North judge trade with two standards: free trade for the South and protectionism for their own economies.

THE MISERY OF THE WTO

For a Reinvention of World Trade

By Tilman Santarius

[This article published in: Blatter fur deutsche und internationale Politik 6/2008 is translated from the German on the World Wide Web, http://www.blaetter.de/artikel.php?pr=2845]



The international trade system is now mired in its deepest crisis in decades. The problems are so numerous that whether the Doha round of the World Trade Organization will soon officially end or negotiations continue without meaning has almost become irrelevant after many years of very strenuous negotiations.

For a long time the WTO itself has been under question, not only the Doha round of negotiations. Countries still join the WTO and its dispute resolution authority resolves trade conflicts between member countries. However the negotiations over further development of the trade rules have come to a standstill. Since its founding in 1994, the WTO has broken down again and again in a standstill or failure of negotiations. The ministerial conferences in Singapore (1996), Geneva (1998) and Hong Kong (2005) had no significant results. The conferences in Seattle (1999), Cancun (2003) and the discussions in Brussels, the seat of the WTO, in 2005 and 2007 completely broke down…

The crisis of the WTO has two causes: a lack of trust and an ideological prejudice. A lack of trust exists because the countries of the North, the triad US, EU and Japan, judged trade with two standards or measurements. They demand free trade with countries of the South and simultaneously insist on protectionism and subsidies for their own economies (in agriculture). They do not carry on negotiations without hypocrisy since they always promise poverty reduction, development chances and prosperity for all.

The ideological prejudice appears in that the preeminent goal of the negotiations is always free trade and economic growth. Strategies of an ill-considered economic growth entail immense social and ecological problems since they accept the exploitation of local communities and the natural environment. The WTO will overcome its crisis when it stops following a rigid free trade ideology and faces real problems. When it solves the problems on the multilateral plane that states cannot tackle in single-handed efforts, it will regain a consensus of the community of states on its usefulness.

In the following I will describe five very urgent problems that could be landmarks for the reinvention of a multilateral trade organization. Whether a reorganization of the WTO in this direction would be politically possible is uncertain.

HUMAN RIGHTS BEFORE MARKET ACCESS

In the past the WTO (like previously GATT) focused bi-national and regional free trade agreements and international financial institutions [the International Monetary Fund (IMF) and the World Bank with their structural adjustment programs] on dismantling trade barriers and opening markets. This is based on the economic theory according to which tariffs, quotas and other market access barriers keep prices on the market high and also protect inefficient producers. On the other hand, the liberalization of trade should help inexpensive suppliers to always prevail on all markets. This free trade strategy ignores that a “repression business” (Cf. Gero Jenner, Die arbeitslose Gesellschaft. Does Globalization Endanger Prosperity? Frankfurt 1997) can start that deprives people of their foundations of production and essentials of life. This is clear in trade with agricultural products. In many countries of the South, cheap imports of food displace domestic production in farming and cattle breeding from the market and drive farming operations to ruin. For example, Indonesia a decade ago had a functioning agricultural system that basically guarantees the self-sufficiency of the country. Total imports of food greatly increased through a trade liberalization forced on the country in the course of the Asian financial crisis; soybeans even increased around 50 percent. In the area of soy production alone, two million people had to abandon soy cultivation. (Arze Gilpo and J. Ignacio, Public Service Intervention in the Rice Sector in Indonesia. Implications in Food Security and Farmers’ Livelihood, 2005).

It seems obvious a world trade organization committed to the public interest would protect human rights and fight poverty. The WTO does not even acknowledge on paper the human rights canon of the United Nations, let alone be committed to their active conversion. Governments must demand back greater possibilities vis-à-vis the current rules of international trade to control the stream of products, services and direct investments when rights of existence and potential development are at stake. (Kevin P. Gallagher (ed), Putting Development First: The Importance of Policy Space in the WTO, London 2005). In today’s rapid globalization, import controls are usually more important for countries than export promotion. Therefore more flexibility must be granted countries in using tariffs, quotas and price- and quantity-based protective mechanisms.

That the larger national trade possibilities are not misused and imports suffer unjustified discrimination, there must be monitoring on the multilateral plane. This often succeeds in the settlement of disputes in the WTO. However future-friendly trade organization must first monitor legitimate national protective interests in norms, not in disputes instead of merely helping the interests of exporters as in the past.

SUSTAINABLE MARKET ACCESS

At present trade streams are only judged according to their monetary value, not their ecological and social quality. In economic theory, the quality of a product or service is only shown by the price. Therefore the rule of so-called like products is in force in the WTO. Like products may not suffer discrimination on account of their different production process. For example, two T-shirts may not be given different tariffs or import quotas even if one of them was manufactured with child labor or from cotton that contaminated the environment and poisoned agricultural laborers through massive use of pesticides.

Such undifferentiated trade encourages a location competition and low production costs. Businesses shift their manufacture to countries where wages, resource prices, environmental-, health- and social standards are lowest and the products can be re-imported on the solvent markets of the transnational consumer class. For them, shifting the costs for maintaining the infrastructure or preserving the environment to the general public, externalizing their production costs, is an operational success. As long as trade streams are only differentiated by their price and not their quality, globalization will also be an externalization strategy for businesses optimizing their production factors.

However the current practice of the WTO has exceptions from the “like-product” rule. Diamonds from civil war regions and refrigerators with chlorofluorocarbons destroying the ozone layer may not be traded. What is an exception today must become the rule. In fact, trade will first be the motor for ecology and justice when products are differentiated according to their production methods. Textiles from sweatshops that violate the rights of women, meats from livestock breeding factories that use growth hormones or electricity from fossil-powered power plants that heat up the environment must be financially burdened as long as trade with these goods and services cannot be entirely stopped. Trade with socially and ecologically sustainable goods must be promoted.

Countries must be allowed to use quality-criteria regarding access to their markets. Such a system of “qualified market access” (Hannes Lorenzen, Qualified Market Access. How to include environmental and social conditions in trade agreements. EcoFair Trade Dialogue Paper No.5, 2007, www.ecofair-trade.org) will actively favor imports produced in an ecologically and socially sustainable way compared to conventional goods when the same standards are in effect in one’s country. Then a country that promotes sustainable agriculture can put high tariffs on the import of foods from industrial production. A climate protection program that obligates the automobile industry to the production of gas-saving cars also requires importing economical cars. In this way, countries could choose which kinds of imports help them to make their own models of production and consumption more future-friendly. Finally, access to foreign markets for exporters must be understood as a privilege that must be earned by observing high social- and environmental standards. In a transition phase, businesses from developing countries should be helped in fulfilling these standards.

PREVENTING CRISES OF TERMS OF TRADE

While 50 countries in 2005 had enormous balance of trade surpluses led by Germany, China, Russia and Saudi Arabia, 14 countries showed balance of trade deficits, most strikingly the US, Great Britain, Spain and Turkey. Deficits and surpluses that cannot be structurally avoided can be balanced over the years through freely floating interest rates. If that does not happen, the balance must be sought through corresponding measures. Countries that always export more than they import gain surpluses in foreign currencies while countries that always import more than they export easily fall into a currency shortage. If capital does not otherwise flow into the land through investments, these countries could become debtor states.

According to economic theory, a devaluation of the currency of a country, making exports more competitive internationally and realizing added revenues in currencies follows a currency shortage. However this cycle often does not function in reality – because many countries on account of an existential import-dependence are forced to tie their currency to the US dollar or the euro. They must become indebted to foreign countries to pay for their imports. Poorer countries have to battle with chronically negative trade balances; some of them cannot raise enough currency for essential imported goods like medicines or food. While countries declared their economic bankruptcy in the financial crises in Mexico (1994), several Asian countries (1997/1998), Argentina (after 1999) and many other larger and smaller financial crises, a trade system indifferent to equalization of balances had disastrous consequences.

John Maynard Keynes, who led the negotiations establishing the Bretton Woods institutions in the 1940s, proposed a mechanism in which an independent international agency, the International Clearing Union (ICU), should bring about a trade balance equalization between the nations (Susan George, Back to Keynes in the Future, in: Le Monde diplomatique, 1/2007). The ICU should introduce a new currency, the Bancor, to pay for all the imports and exports on the world market. A certain overdraft facility should be available to every country in exchanging their currency for the Bancor. If this were exceeded, the ICU would impose a penalty interest on the country. A penalty interest could be imposed on countries with balance of payments surpluses like Germany so they could contain their surpluses or confiscate surpluses from a certain level and finance spending for the international common good (programs on poverty reduction, financing UN institutions and others).

Although Keynes’ proposal sounds incredible today as then, the growing balance deficits of many countries including the US could lead to a worldwide economic instability in the not-too-distant-future with equalization of trade balances in the interest of the powerful states and countries with an export surplus.

SYSTEMIC PREFERENTIAL TREATMENT FOR POORER COUNTRIES

Today’s world market is like a soccer league on a field where hobby soccer players must play uphill against Munich professionals. In world trade, strong and weak players play in the same league. The rules favor the strong countries that devised the rules and double standards. Many countries of the South, from Kenya to Indonesia and Cameroon to Chile, were forced to open their markets for the industrial goods of the North while the US, Japan, the EU and other industrial states levied high tariffs on agricultural goods and in addition maximized their own agricultural production with massive subsidies. In the past, many countries of the South became losers of world trade because of protectionism on the agricultural market along with economic hegemony on the market for industrial goods and services.


A study on estimating consequences of the present Doha round of WTO negotiations predicted most least developed countries, especially countries of Africa’s Sub-Sahara, will be losers again with the next liberalization push in world trade while the greatest economic profits will be pocketed by the industrial states and several up-and-coming threshold countries (Sandra Polaski, Winners and Losers: Impact of the Doha Round on Developing Countries, Washington 2006).

Even economists who believe in the theory of free trade are convinced that developing countries competing with economically strong countries need a sufficiently long transitional phase in which they can protect their markets and be granted a one-sidedly favorable market access by industrial countries (cf. Joseph Stiglitz and Andrew Charlton, Fair Trade for All. How Trade Can Promote Development, Oxford 2005). Since developing countries joined the GATT in the 1960s, they have always demanded a world trade policy granting them start-up advantages in light of their economic weaknesses. However the so-called special- and preferential treatment that they should be awarded only consisted of partial correctable measures and was never carried out comprehensively.

On the other hand, fairness would be commanded when the rules of the WTO systematically favor weak states. To that end, the special- and preferential treatment must change to a “systemic special treatment.” In other words, it must become an integral structural characteristic of the trade regime (cf. Wolfgang Sachs and Tilman Santarius, Slow Trade-Sound Farming. Trade rules for a global future-friendly agriculture, Berlin and Aachen 2007).

Thus countries can be classified according to different criteria – like extent of poverty, per capita income, share in world trade and so forth – and different categories. A land with average income like Algeria would then experience a special treatment by the EU while Algeria on its side would be obligated to special treatment toward Niger. This classification would help reduce the gulf between North and South and also contribute to equalizing the fast growing inequality between the developing and threshold countries.

ENSURING FAIR COMPETITION

Concentration processes occur in national and local markets if politics does not intervene. The bigger the market, the greater the problem. The worldwide liberalization of the financial and commodity markets since the end of the 1970s encouraged a concentration of businesses that was not possible up to then. As a result, several hundred transnational conglomerates arose whose annual sales surpassed the gross domestic product of whole countries. For example, the world company Walmart had sales of 8 billion in 2006 while the gross domestic product of the 42 heavily indebted developing countries (HUPC) together only amounted to 2 billion.

Secondly, the number of small enterprises and vulnerable producers compared to the market giants increased simultaneously with the “consolidation” of national markets into a common global market. The largest agricultural corporation in the world, the US Cargill Corporation, shares the business of wheat, corn, chicken and many other products with only a handful of rivals. These enterprises can utilize their market power and the dependence of millions of farmers worldwide to manipulate prices, strip off surplus from the agricultural economies and dictate standards making impossible for small producers to keep pace (Sophia Murphy, Concentrated Market Power and Agricultural Trade, EcoFair Trade Dialogue Discussion Papers No.1, 2006, www.ecofair-trade.org.). In the area of computer production, a few transnational corporations together controlling almost 99 percent of the manufacture of laptops regularly change their suppliers after a few years to realize maximum profit margins while their suppliers and employees in Malaysia, Indonesia and Mexico fall behind powerless and jobless (cf. Irene Schirper and Esther de Haan; Andreas Manhart and Rainer Griesshammer, Social Effects of the Production of Notebooks, Freiburg 2006). In world trade, fairness is obviously lacking between countries and between market actors.

On the international plane, no independent institutions counteract the formation of monopolies and cartels on the world market. A “monopoly commission” that controls international mergers, buyouts and takeovers is urgently necessary.

The world trade regime that prescribes fairness and sustainability will ensure a well-balanced distribution of profits. The Fair Trade movement could be a teacher here. For over three decades, top-flight products at fair prices for the producers were offered with high social standards in the production process. Should not fair trade agreements be made the condition for all businesses participating in world trade?

The problems and challenges in a globalized world obviously make indispensable a strong multilateral trade organization. Regulating, not deregulating trade streams, is imperative. Where human rights are at stake, protective national interests should be set above the interest of exporters. To succeed, the transition to the solar economy should encourage socially- and environmentally-friendly trade contributing to the stability of financial- and currency markets. Chronic cumulative trade balance deficits and surpluses should be prevented to reduce the gap between poor and rich nations. Weaker countries should be granted advantages. Capital formation and market concentration should be monitored to prevent unfair competition of strong market actors.

In its present institutional state, the WTO does not fulfill the prerequisites for this framework. The Doha round will not be a success. When the round of negotiation breaks down once and for all, there may finally be a change for a fundamental reform of the trade rules. If this occurs, future historians in retrospect will see the breakdown of the Doha round as an advance or progress, not as a setback.

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