Remake trade through a US-EU trade partnership

Susan Ariel Aaronson 01 October 2010

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Americans may be from Venus, and Europeans from Mars; we clearly have different views about the role of government in the domestic and global economy. But Americans and Europeans have long collaborated to expand trade, enhance human welfare, and encourage employment. The US and European post-war planners wrote these objectives into the preambles of the ITO and the GATT, and they were repeated in the WTO.

But clearly the WTO system (and related policies and institutions) do not always work for all of the world’s people. The World Bank reports that more than 1 billion people go to bed hungry each night; and many lack access to opportunities, education and even the bare necessities to sustain life. Meanwhile, since the global financial crisis of 2007, a growing number of Americans and Europeans have reduced economic opportunities. Some 10% of Americans are officially unemployed; 1 in 7 Americans live in poverty, and the US cannot meet its bills without overseas borrowing. In Europe, although the rate varies widely among the EU 27, unemployment is also around 10%, and some 17% of the population is at risk of poverty (Eurostat). While trade liberalisation is not to blame for these circumstances, these conditions make Americans and Europeans less positive towards trade liberalisation and the WTO.

In 2008, in recognition that the system was not working in support of trade, development, and employment, EU officials called for a broad rethink of the global architecture that would “meet the needs of the 21st century.” The leaders of the G20 agreed during their 2008 meeting in Pittsburgh, although they said nothing about revamping the WTO. They agreed “to refrain from raising barriers or imposing new barriers to investment or to trade in goods and services, imposing new export restrictions or implementing World Trade Organisation inconsistent measures to stimulate exports and commit to rectify such measures as they arise.” And they vowed to weigh international spillovers of their domestic policy actions, such as financial stimuli”.

Some two years later, policymakers still espouse collaboration and coherence, but do little to make it a reality. In fact, rather than coordinating policy, many countries are acting unilaterally, trying to boost exports by pushing down their currencies, and using domestic stimuli to maintain jobs. Thus, in response to Dr. Cernat’s call for feedback to the EU’s trade policy, this American calls on Europeans and Americans to rethink their trade policies. Together the US and EU have enormous political, moral, and economic clout. As partners, we might steer the world back towards a coherent approach to multilateral trade liberalisation that addresses development and employment.

Ironically, both the US and Europe bear responsibility for moving the world away from multilateral trade liberalisation. During the Bush Administration, the US reoriented trade liberalisation efforts towards only those nations willing to make governance agreements addressing not just trade, but investment, intellectual property rights, labour rights and environmental policies. America’s actions inspired many other nations to focus their efforts on negotiating preferential trade agreements. Our failure to work collaboratively has international repercussions. As economist Fred Bergsten (2002) noted, “The EU is the source of the world's greatest trade discrimination—which will increase sharply as its membership expands—and the hub of the most extensive set of preferential deals with non-members. Europe badly needs the outside pressure of global commitments to implement essential internal reforms, especially in agriculture. That outside pressure comes primarily from the Americans.” But Americans have been focused on currency and trade issues with China and when we focused on negotiations, policymakers put their efforts towards preferential trade agreements, rather than the WTO.

Instead, the EU and the US should take the following three steps:

  • Move the trade liberalisation process away from preferential trade agreements and towards the WTO.

The focus on preferential trade agreements has had several unanticipated side effects. Instead of stimulating a renewed commitment and deeper concessions at the multilateral level, countries began to focus less on the WTO as a platform, and more on using the leverage of their own markets to attract free trade agreement partners. But this approach no longer makes sense. Although the US and EU have large markets, we now compete with China, India, and Brazil for markets and trade agreement partners. Moreover, the cumulative effect of these agreements has undermined both the effectiveness of the WTO and its fundamental principle of most favoured nation (nondiscrimination among nations). The focus on preferential trade agreements has not helped expand trade for all countries; many smaller (or poorer markets) have not been invited to negotiate these preferential agreements. The citizens in such nations are thereby less able to reap access to global markets compared to their counterparts in larger or richer nations. Meanwhile, these preferential trade agreements are probably not good for business. Traders have less security of market access. Every one of these free trade agreements has preferential rules of origin, and their complexity and diversity may distort sourcing decisions. Finally, these bilateral regional agreements often contain tighter standards for intellectual property and transparency, and broader standards for issues not covered in the WTO such as labour, the environment, democratic decision-making, and investment. As a result, the world now has a mish-mash of global trade governance, where some nations adopt higher standards on some of these issues some of the time. It would be better for the US and the EU to work together at the WTO to make a broader approach to trade liberalisation a goal of the WTO. But in order to expand the scope of the WTO, policymakers must first meet their promise of fully integrating developing countries into the WTO.

  • Work globally and at the WTO to coordinate trade and development policies.

After the 2001 terrorist attacks, the US and the EU argued that the world must work to make trade and development policies more coherent. Then US Trade Representative Zoellick and EU Trade Commissioner Lamy (2010) wrote an op-ed arguing that "Trade policy must…make a material difference to the poorest of the world's populations." They stressed that the World Bank must do a better job "building developing country capacity" to implement trade rules, which often require these countries to make expensive and difficult governance choices. They warned that if industrialised countries didn't provide greater market access for developing country goods and services, "we shut their doors on their future," hinting it was our future as well. But the two did not offer significant enough incentives to get big developing countries to play ball. The US, EU and other industrialised countries didn’t deliver on their promise to make the Doha Round focus on development. The EU and the US can rescue the round by rethinking it as a two tiered negotiation. The first tier would truly focus on the needs of developing countries—rethinking how to facilitate negotiations that provide market access for all, as well as a new approach to capacity building focused on empowering small farmers and business owners in the developing world. As an incentive, the US and the EU could jointly announce that while they could not alter agricultural or health and safety standards, they would reduce all tariffs for developing country commodities provided that all developing countries agree to wider market access commitments. They could also agree to a new common approach to trade preferences, based on the EU’s incentive based General Scheme of Preferences (GSP)+. This program provides incentives (lower tariffs) to developing countries which implement international conventions on human rights, labour rights, good governance, and sustainable development. Instead of providing such benefits nationally, the major sources of GSP (the US, EU, Canada, Australia, Japan, New Zealand, Norway and Switzerland) should develop a uniform WTO based approach. After so doing, the EU and the US might find more support for a more ambitious round.

  • Finally the US and the EU should work to make trade and employment policies more coherent.

In 2009, the ILO (2010) reported that some 212 million of the world’s able bodied workers were unemployed. Such high unemployment threatens political stability and thus, policymakers in almost in every country have made job creation and job maintenance their top priority. They recognise that investors will go where the skills, infrastructure, and incentives are most attractive and most effective. Although job creation is not a zero sum game, where the jobs gained in one nation are lost in another, how a nation creates or preserves jobs can have implications for the terms of trade in another. Although jobs lost to trade and technology changes are normal, policymakers must find ways to ensure that job creation strategies in one country doesn’t beggar jobs in another—such strategies must not be trade distorting. China provides a prominent example of why we need to address this question internationally and cooperatively.

Since the downturn, many countries including China have developed policies to maintain jobs and attract investment. China is not only the most populous country and the second largest trading nation. China has more than 750 million workers, some 26% of the world’s total. Each year the work force increases by some 10 million workers. However, many observers, including the Nobel Prize winning economist Paul Krugman argue that Chinese policies to maintain employment are trade distorting. Although wages in many areas and sectors in China have been rising, they stress that China manipulates its currency, provides generous albeit GATT illegal subsidies, and ignores its own labour laws to maintain low-wage export oriented production. Moreover, because China is an opaque authoritarian regime with a huge and growing market, some fear that China cannot be reined in by the WTO.

The US and the EU should use this situation to build a global discussion about the relationship between trade and employment policies. The WTO is the right place to have this discussion, because as noted above, it is based on the idea that nations have a responsibility to collaborate in the fields of trade and investment to create employment at both the national and international levels. Since 2008, the WTO has worked with the ILO on trade and employment issues. The G20 asked the WTO to monitor the trade distortions of domestic stimuli as part of its trade policy review process; the EU and the US should partner to encourage the WTO to examine how employment policy choices may affect trade. In so doing, they may again bolster the WTO (Aaronson forthcoming).

In sum, Americans and Europeans can make the system we designed meet our 21st century needs only if we collaborate. The challenges we face today are also an opportunity to make the system more coherent and finally meet the goals of expanding trade, enhancing human welfare and increasing employment.

References

Bergsten, C. Fred (2002) “A Competitive approach to Trade,” Financial Times, 14 February.

Lamy ,Pascal and Robert B. Zoellick (2010), “In the Next Round”, Financial Times

ILO (2010), “Global Employment Trends”, January.

Susan Ariel Aaronson (forthcoming) , “How China’s Employment Problems Became Trade Problems,” Global Economy Journal

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Topics:  EU policies International trade

Tags:  trade policy, EU, WTO

Research Professor and Cross-Disciplinary Fellow, Elliott School of International Affairs, George Washington University

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