Trading Our Way Out of Crisis

Pascal Lamy, Director-General of the World Trade Organization.

GENEVA – Global trade contracted in 2009 at a rate not seen since the Great Depression, and those paying the heaviest price are those who can least afford it. So, when trade ministers from the World Trade Organization’s 153 members gather in Geneva later this month, the issue of how the WTO and the global trading system can help the poorest countries will be high on the agenda.

Driven largely by collapsing domestic demand and production levels, but also by a shortage of affordable trade finance, trade volumes will fall by more than 10% this year. Whether trade will recover next year is an open question. Despite some evidence that trade volumes grew over the summer, recovery has been patchy – and so fragile that a sudden shock in equity or currency markets could once again undermine consumer and business confidence, leading to a further deterioration of trade.

The world’s poorest countries face the greatest hardship when trade languishes. They do not have the luxury of cobbling together fiscal-stimulus packages or rescuing ailing industries in order to cushion the shock brought about by the economic crisis. For them, trade represents a huge share of overall economic activity and is unquestionably the best avenue for exiting a crisis that has hit them hard.

The irony is that trade has collapsed just when these countries were becoming increasingly active in global markets, with their exports rising by more than 20% during this decade. For nations that depend on trade, the sharp drop in exports this year was crippling. Since the crisis began, export earnings of the world’s poorest countries are down $26.8 billion, or 44%.

The WTO Ministerial Conference later this month will provide an occasion to consider the best ways to generate growth and alleviate poverty in these countries. Concluding the Doha round of trade negotiations by the end of 2010 – as world leaders have said they wish to do – is one of them. A Doha deal represents one of the most valuable tools at our disposal to help meet the United Nations’ Millennium Development Goals.

Frankly, all of us already know what needs to be done. Yet the Doha Round has fallen victim to basic misunderstandings – first, about why countries trade, and, second, about how they trade.

Countries trade, first and foremost, because it is in their interest to do so. It is in a country’s interest to lower its import barriers so that it has cheaper access to goods and services that it cannot produce competitively. Trade increases competition and keeps inflation in check. In this way, trade can raise living standards. Moreover, countries that lower their import barriers also end up exporting more.

The reluctance of trade negotiators to pursue what is in their obvious self-interest reflects another, more serious misunderstanding about the manner in which nations trade. Consider United States-China trade in iPods. Every iPod that the US decides not to import means a $150 “decline” in China’s recorded exports, though only about $4 of that value is actually added in China. Japan, which contributes about $100 in value, suffers far more from China’s supposed decline in exports. Clearly, the words “made in” mean something very different from what they meant 20 years ago. Our production processes are so globalized that a country’s import tariffs could well penalize imports from one of its own global companies.   

For many countries, particularly in the developing world, reducing obstacles to trade is insufficient for fuller participate in the global economy, because they also need to build their capacity to trade.

That is the central aim of the Aid for Trade initiative. Despite the economic crisis, Aid for Trade donor contributions to help the less fortunate have risen 10% per year since 2005, and major donors are on track to meet or exceed their pledges for future funds. Several major countries have agreed to increase their contributions this year to building infrastructure, productive capacity, and know-how in the developing world.

But Aid for Trade is no substitute for the market-opening opportunities and improved rules promised by the Doha round. WTO members have already agreed that rich countries – and developing countries that are in a position to do so – would open their markets completely to 97% of exports from the world’s poorest countries, and dramatically reduce duties for those products where barriers remain.

As a result, cotton subsidies, which depress prices and displace African exports, would be sharply curtailed, and cotton exports from poor countries would receive duty-free, quota-free treatment in rich-country markets. All trade-distorting farm subsidies would be slashed by 70%-80% in the major subsidizing countries. New rules on streamlining customs procedures would sharply reduce transit times. We must make progress on this agenda.

What is frustrating is that we are tantalizingly close to a deal which, according to the Washington-based Peterson Institute for International Economics, would deliver global economic benefits of $300-$700 billion annually. But, to reap these benefits, we must close the deal. The next Ministerial Conference ought to signal that we are ready to do so.

Project Syndicate

Post-Crisis World Institute