JEAN PIERRE-LEHMANN. The Clouds of Imminent Trade War Are Looming

In the conclusion of her outstanding book on the First World War (The War That Ended Peace) historian Margaret MacMillan asks whether, as many have argued, war in 1914 was inevitable. She refutes this view; the final sentence of the book contains these four words: “There are always choices.”

As things currently stand in September 2017, the question would seem to be not whether there will be a trade war, but when. Geopolitical dialogue has broken down, the institutional fabric of the global trade regime (the WTO) has collapsed, liberalism is in retreat, while populism, nationalism and, consequently, mercantilism and protectionism are on the rise. And there is of course one Donald Trump. But, note should be taken, as Thierry Malleret has put it, that “President Trump is not an accident, but the symptom of a profound crisis”. In fact, the origins of the narrative of the 21st century trade war lie with choices made in September 2003 on the occasion of the failed WTO ministerial talks in Cancún, exactly fourteen years ago, by Donald Trump’s predecessor’s predecessor: George W Bush.

A quick chronological revision.

In the wake of the Second World War, as part of the institutional innovation and reform of global governance – IMF, World Bank, etc – the GATT (General Agreement on Tariffs and Trade) was launched on 1 January 1948. It was a tremendous initiative that played a crucial role in the peace and prosperity of the West. Between 1948 and 1995, there were eight so-called rounds of trade liberalising negotiations between the participating countries; the last one being the Uruguay Round (UR).

From September 1986 when the UR was launched in Montevideo to April 1994 when it was concluded in Marrakech and January 1995 when the World Trade Organisation was established, the world underwent the profoundest speediest transformations in human history. I insist on the combination of “profoundest” and “speediest”. Between the time when China launched its amazing market reforms (“socialism with Chinese characteristics”) to the fall of the Berlin Wall, the planet experienced a series of revolutions that affected all aspects of the human condition: technologically, geopolitically, demographically, socially, ecologically and economically.

What happened in the global trade regime is an illustration of the “governance gap”, so eloquently described by Jean-François Richard in 2002 publication High Noon, that occurs between the exponential changes in technology, demography, markets and society, and the plodding linear pace of mentalities and institutions.

A quick chronological update.

As noted above, in the context of general global euphoria, what George HW Bush (father) had termed the “new world order”, in January 1995 the WTO was established. In the November/December 1999 WTO ministerial meeting in Seattle there was an attempt to launch the Millennium Round. In fact, there occurred the first really massive anti-globalisation demonstrations by the “protest community”, with the result that talks had to be abandoned and delegates returned to Geneva with their tails between their legs. Then WTO Director General said he hoped the WTO would not become the “League of Nations of the 21st century world economy” – ie moribund, impotent and irrelevant. What amazingly prophetic words they turned out to be!

Qatar, a recent member of the WTO, offered to hold the next ministerial meeting in its capital, Doha, much to everyone’s relief, in November 2001. The general expectation (including mine) was that the talks would fail, as it became clear that the chasm between the established prima donnas of the world trade stage – notably what was known as the Quad, consisting of Canada, EU, Japan and US – and the new actors, the so-called “emerging nations”, was too wide and hence unbridgeable. Then in September of that year a colossal black swan intervened, the Saudi Al Qaeda attack on the World Trade Centre. In a rare moment combining panic and global solidarity, it was strongly felt that the launch of a Doha Round had to succeed. And indeed, it was duly launched on 13 November; to add a flourish to the occasion it was decided it would be officially known as the “Doha Development Agenda” (DDA).

What an embarrassing farce it turned out to be.

The following rendez-vous was in Cancún in September 2003. I was there, as a witness, pretty much immediately convinced that this would be going absolutely nowhere. Indeed the Cancún talks collapsed and all subsequent attempts to revive the DDA failed. Whether the DDA was in reality still born or died in childhood in Cancún, the fact remains that it is dead even though the death has not been declared. Thus, the corpse is rotting away and will be briefly exhumed at the next WTO ministerial meeting due in Buenos Aires in December this year.

As the DDA was never officially declared dead, there has never been an official autopsy.

Why did it die?

There is the governance gap phenomenon. While the world had changed exponentially beyond recognition and the stage was populated by new actors and props, the world of trade negotiation did not change. Basically, Doha was seen as a continuation of Uruguay. There was a dramatic failure to adjust mindsets and behaviours to the new realities. What struck me at Cancún was that there was no dialogue, only multiple Tower of Babel-like monologues. I compared the Cancún stage to the great 1921 play by the surrealist Italian playwright Luigi Pirandello, Six Characters in Search of an Author, whereby six actors know they are supposed to be on the stage, but have no idea what the script is, hence meet and exchange meaningless words, so the play ends as it begins. That was Cancún.

While the DDA was supposed to herald a new global liberal age, in fact the established players – the Quad – played mercantilist hardball. This in fact had been the name of the game in the previous GATT rounds. But the GATT was a cosy club of like-minded member states, basically the Western powers plus docile Japan, joined by their economic umbilical cords as one of the means of forestalling the Cold War. The WTO was a completely new ballgame, but the adjustments were not made. The mercantilist mood that came to pervade, in fact poisoned the DDA to death.

Inflexible dogma, however, continued to prevail. There were profound transformations, but no profound discussions. The idea that possibly major fundamental paradigms might have to change was rejected. There were a number of external proposals for transformation and adjustments to the new realities. Some of them were quite good. But there never was a plan B. They were submitted and then accumulated dust on shelves. Those who dared to say that the DDA might be dying were excoriated.

Part of the problem, I was convinced, was that too much mould had accumulated on the walls of the WTO – which is in the same building as was the GATT. This was further exacerbated by the incestuous bubble that Geneva can become. Also Geneva is too much in Europe, inevitably heavily influenced by European assumptions and policies. In the new global age, it could be appropriate to locate the WTO in a more globally dynamic setting than the sleepy banks of Lake Geneva. I wrote several articles arguing that the WTO should be moved to Hong Kong; near where the action is.

It is still the eleventh hour. A trade war is imminent, but not inevitable. It will depend on choices made in the course of the next few weeks, months at most. That governance gap between the exponential changes in global markets and the linear mindsets of the trade policy agendas has to be bridged rapidly.

Jean-Pierre Lehmann is emeritus professor at IMD, founder of The Evian Group, and visiting professor at the University of Hong Kong

 

 

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3 Responses to JEAN PIERRE-LEHMANN. The Clouds of Imminent Trade War Are Looming

  1. Geoff Edwards says:

    It is not clear Jean-Pierre, what is your conclusion or proposition. Would you agree that the Doha Round was built on false assumptions about the universality of comparative advantage in trade; and required dismissal of insights from a host of other disciplines such as development studies, intergovernmental relations, sociology, geology and climate science?

    I don’t know where to start pointing out the fundamental flaws in Doha’s and the WTO’s assumption that trade is necessarily economically beneficial; or that economic benefit necessarily trumps all other considerations. One can argue from logic, from evidence or from theory.

    Logic first. For example, in a climate-constrained or petroleum-constrained world (well known at any time after IPCC of 1990), it makes no sense to fly bottled water from one continent to another. In a world where competition squeezes farmers anyway, it makes no sense to ship orange juice from Australia to Brazil while destroying the livelihoods of Australian orchardists.

    Looking to statistics, the evidence of the economic benefit of open trade evaporates. Australia has experienced a worsening trade deficit with every country (or nearly every country) with which it has a free trade agreement. Our foreign debt is larger per capita than Argentina’s when its currency collapsed in 2001 and more of our productive assets are now owned offshore than ever, funnelling a stream of dividends and profits offshore. Dynamic benefits? Fiction.

    In any case, the entire theory of comparative advantage which is the usual defence of economists challenged about trade is false. Ricardian free trade theory (1817) was developed in a world where there was no or little capital exchange between countries. Now billions of dollars are flicked around the world daily at the speed of electronics, completely undermining the theoretical basis of trade advantage.

    So lacking a justification in logic, evidence or theory, on what grounds do our economics policy elite and political leaders persist in pursuing a policy that is as barren as a dry gully. Merely asserting and benefits of free trade does not make them happen.

  2. Julian says:

    I’m with you Geoff – particularly as to the author’s lack of a discernible conclusion.
    I suspect the essay may be part of a larger whole in which the author (inter alia) may lament the inexorable rise of nationalism and self-interest – to the extent that trade between countries must now be considered equally a matter of defence and foreign affairs. Overall, I think your conclusion is correct – viz, “Merely asserting and benefits of free trade does not make them happen.”

  3. paul frijters says:

    I looked up the trade figures, and what does one find? World trade is up around 2% each year for the last 5 years. Container trade is up 30% from its peak just before the GFC. Economies are growing, people are escaping poverty, and bilateral/regional trade agreements are coming thick and fast.

    So who is going to have a trade war with whom?

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