European Affairs

Four Risks Facing the Trading System     Print Email
Sherry M. Stephenson

Reviewed by Sherry M. Stephenson
Globalisation Under Threat: The Stability of Trade Policy and Multilateral Agreements.
Edited by Zdenek Drabek.
Edward Elgar Publishing: 2001
256 pages

The benefits of free trade seem so clear: a general increase in wealth (although not equally distributed to all) and, following upon it, greater concern about non-economic issues (e.g., working conditions, the environment), coupled with more resources to address them. Why then is the debate about the benefits to be derived from free trade so divisive, and why are the foes of globalization so passionate in their hostility?

Partly because in prosperous societies people seem to be more interested in bringing about greater equality than in raising further the level of prosperity. Partly because so many of the issues that concern the everyday lives of people (e.g., working conditions, the environment) are now perceived to be intertwined with trade and put at risk by liberal trade policies. As a result, the open multilateral trading system that has brought the world so many benefits is seen to be under threat.

Zdenek Drabek has put together an interesting collection of articles on this very topical subject of concern to the world trading community. This volume focuses on four threats identified as the most important to globalization, specifically: poor macro-economic policies, and the introduction of labor, environmental, and competition policies into the trade policy agenda.

The book is a most interesting read and the contributions of experts in each of these areas are of top quality. The layman can skip over the graphs and equations, while the main points made in each of the chapters come across clearly and eloquently.

The editor's opinion on whether the multilateral trading system can withstand these four threats varies according to the issue. Labeling the labor and environment threats as constituting the most dangerous, Drabek states that the other two issues - macro-economic instability and distorted competition - are "dormant" threats that can be ignited into "active" threats if not handled with care.

Criticizing the failure of governments to develop comprehensive multilateral agreements or universal rules to cover labor, environment, or the competition issues (as they have in the area of trade), Drabek feels that it will be too much for the World Trade Organization to incorporate elements of these areas into its rules.

Arguing that maybe the WTO could handle some aspects of competition policy, he states that, "In sum, and on balance, while trade, labor and environment issues are closely linked, the links as well as the environmental and labor issues themselves are best served in their appropriate institutions - outside the WTO."

The major weakness of the book derives not from the fault of the editor or of the various authors, but from the fact that it was conceived and written before two major events of late 2001, namely the successful conclusion of the WTO Ministerial Meeting at Doha in November, and the breakdown of Argentina's economy in December.

Both these watershed events have thrown new light on the relative seriousness of the threats provided by the issues highlighted in the book to the multilateral trading system. A volume written just a few months later would have most likely read somewhat differently.

The launch of the new Doha Development Round has served to remove or lower the threat to globalization and the multilateral trading system from three of the four issues. In the chapters on trade and labor, Arvind Panagariya, W. Max Corden and Neil Vousden conclude eloquently and without reservation that a logically consistent case for a link between trade and labor standards does not exist. They put forward many arguments to show the fallacy of such reasoning.

Nevertheless, a few developed countries were for many years actively seeking to make a link between trade and labor in the WTO. In the Doha Ministerial Declaration, this threat has been convincingly put to rest for the indefinite future, as more than 140 WTO Members reaffirmed that labor issues were best left to the International Labor Organization, a body which is carrying out work on the social dimension of globalization.

An accommodation in the opposite direction was found for the environment and competition. Unlike the labor issue, Trade Ministers agreed in Doha to encompass these two areas within the WTO ambit. As part of the Doha Development Round, negotiations were launched at the end of last year on the relationship between WTO rules and specific trade obligations in existing multilateral environmental agreements, and negotiations on trade and competition will be undertaken after the WTO Ministerial Conference in fall 2003. In the post-Doha world, these two issues should pose less of a threat to globalization as they are further discussed and understood by the trade policy community, and by the public at large.

The issue that has been shown to represent time and again a great danger to globalization, and which has been recently underscored by the crisis in Argentina is that of macroeconomic policy. The danger to trade policy of poorly conceived and poorly executed macroeconomic policies, including particularly exchange rate policies, is very real.

In a chapter on exchange rate overvaluation and trade protection, Howard J. Shatz and David G. Tarr present evidence that overvalued currencies lower economic growth. They find that about half the countries in the world maintain fixed exchange rate systems, with one-fourth of all countries applying exchange rates that are overvalued by 10 percent or more (sometimes exceeding 100 percent). They conclude that an overvalued exchange rate is a "root cause of protection."

This conclusion is supported by the work of Piritta Sorsa, who concludes that a more §exible exchange rate policy in the process of development might have changed the terms of trade in favor of tradable goods and reduced pressure for protection in four transition economies (the Czech Republic, Hungary, Poland and the Slovak Republic).

The authors of both chapters argue that §exible exchange rates help to avoid the pressures of slipping into trade protectionism. However, part of the problem also lies in addressing crises once they arise. Neither the authors nor Mr. Drabek treat this issue, or suggest how to ensure that the international financial institutions coordinate with the WTO to deal with the economic crises of inappropriate macroeconomic policies.

The last chapter, by Peter Holmes and Alasdair R. Young, takes a realistic look at the challenges the WTO faces in incorporating into its ambit new issues that are "behind-the-border," that is domestic regulations governing services, investment and competition.

They highlight the experience of the European Union in the difficult trade-offs that must be made in a globalized economy between liberalization and regulatory sovereignty, and discuss how the EU has developed its internal regulatory regime for goods, services, investment and competition policy. They caution however against transposing the EU model to the WTO level because of legitimacy problems and the necessity for a certain degree of commonality in national regulatory approaches.


This article was published in European Affairs: Volume number III, Issue number II in the Spring of 2002.