Telling the truth about trade

Ricardo Lagos Weber

At times of global crisis, governments are naturally inclined to implement policies to protect their citizens. No government can stand idle in the face of massive market failure.  At the same, a line needs to be drawn to prevent these policy decisions from descending into protectionism. The risk of retaliation is high even when measures are consistent with international obligations but discriminate against foreign suppliers, subsidiaries or workers. It seems reasonable to legislate that subsidies be spent at home. But is it reasonable to grant such assistance on the condition that only nationals are hired (or national supplies used)?  Or to legislate that if any adjustment is required by a company, then it must begin by closing plants abroad?  Such difficult questions must be considered carefully, especially since recovery will require greater and improved international cooperation. Bearing this in mind, progressive leaders should:

Conclude the Doha development round
The priority today is to conclude an agreement that will entrench the achievements already made. Several developing countries have unilaterally liberalised trade and investment regimes. Only a fraction of this has been captured by multilateral commitments (WTO). Thus, these economies have room to legally raise their tariffs up to “bound” levels, going back on twenty years of trade liberalisation. Today, their governments are vulnerable to pressures to use this policy space.  Concluding the Doha round would capture a huge chunk of this unilateral liberalisation in binding trade agreements. The technical work on agriculture and non-agricultural market access has been done. The divergences are not huge. Now is the time for political decisions.  This would provide much needed stability to the multilateral trading system, and allow for moving on with the rest of the agenda at a later stage.

Restore trade financing
Trade flows are being affected by falling world demand. The negative impact of a fall in trade is being felt most strongly by vulnerable developing economies. Therefore, if commercial banks are unable or unwilling (for risk-related reasons) to finance trade, state governments and development banks such as Asian Development Bank, Inter-American Development Bank, Charities Aid Foundation and the World Bank will need  to step in  to restore trade financing.

Use positive incentives to increase domestic demand
Rather than raising tariffs, establishing barriers such as the “Buy American Act”, granting export subsidies such as those restored for the dairy shipments by the EU, or bailing out ailing carmakers, governments should spend their money on positive incentives to increase domestic demand. These include measures such as public works, additional funding and/or tax rebates for small and medium enterprises, employment subsidies, unemployment insurance, and retraining schemes.

Set up a Trade Watch Initiative
This mechanism, suggested by the Centre for Economic Policy Research (CEPR, UK), relies on a global network of independent institutions to provide real-time information on government measures that are likely to discriminate against foreign commerce (i.e. trade in goods and services, investment, overseas subsidiaries, foreign workers, access to finance and government bail-outs). The initiative would bring out monthly reports containing policy-relevant findings and alternatives to protectionist measures. It would rely on a combination of increased awareness and peer pressure to deter states from engaging in beggar-thy-neighbour policies.

Communicate that trade is not the cause of the crisis
Responsible and progressive governments around the world need to demonstrate to their citizens that free trade did not cause the current crisis. The world of finance, which plays a crucial role in the world economy (among other things, by financing trade) should not be demonised.  But we need to find an (understandable) way to tell the truth: that the abuse of financial deregulation in some developed countries gave rise to speculative and irresponsible behavior that ultimately contaminated the real economy. Most people do not have a clear idea of what led to the crisis.  In these circumstances, it is easy to blame “globalisation” (i.e. free trade) and believe that those advocating populist and old-fashioned leftist politics have been proved right. Therefore, it is even more essential for progressives to be firm in defending the benefits of trade and openness.

Ricardo Lagos Weber is the vice-president of the Party for Democracy and former Chilean minister of government affairs