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World Trade After 9-11

By Jock O'Connell

This article appeared in the Sunday Forum section of the Sacramento Bee on November 4, 2001.

Next Friday, representatives of more than 140 nations will gather under the auspices of the World Trade Organization in Qatar to try to establish a framework for a new round of multilateral trade negotiations.

There are high hopes that this WTO summit will help restore order to the international trading system, which appears to have lost its bearings over the past year. The eagerness of those who champion free trade and globalization to initiate a new round of trade liberalization talks is eminently understandable. The last such meeting - two years ago in Seattle - was a spectacular folly, disrupted by riotous street demonstrations and derailed by irreconcilable differences among the 130 nations represented there. If the Qatar summit fails to yield any appreciable progress, globalization could go the same way as the similarly ballyhooed New Economy.

The prognosis, however, is not especially encouraging.

For one thing, the U.S. is sending a politically hamstrung delegation to Qatar. Despite a spare-no-hyperbole campaign by business groups and the White House, Congress has not given the president Trade Promotion Authority, formerly known as "fast track." By conferring TPA, Congress commits itself to approving or rejecting any trade agreement negotiated by the executive branch within strict time limits and without adding any amendments. Although TPA is not an essential prerequisite for U.S. participation in the upcoming summit, the life of U.S. Trade Representative Robert Zoellick would be much less aggravating if he were free to negotiate new international trade agreements without fear of subsequent congressional nit-picking.

Not all of those attending the WTO summit are enthusiastic supporters of globalization. Some have philosophical or cultural reservations. Others are just puzzled and uncertain about what happens next. After a decade of steady growth and following a record-setting 12.4 percent growth rate in 2000, the pace of international trade had slowed to an arthritic maunder even before the events of Sept. 11. Here in California, evidence of a contracting global economy began showing up in declining export totals this past April. By August, the state's exports were running nearly 20 percent below the level of the same month a year earlier.

Apart from China, every major national economy that has not officially sunk into a recession is desperately trying to fend one off. This in itself is a novel experience. Historically, sheer distance had buffered one country's economy and business cycles from another's. Since widely dispersed markets are not supposed to tank all at once, exporters could generally count on finding a market for their goods somewhere over the horizon. By integrating the world's economies, globalization had effectively deprived foreign trade of this crucial attraction. So what a recent report from the International Monetary Fund inelegantly described as a "synchronized downturn across all major regions" could be interpreted as both a symptom and an indictment of globalization.

Of course, something like this had occurred during the Great Depression of the 1930s. Back then, though, the worldwide economic doldrums were largely self-inflicted, the product of a veritable arms race in protectionist measures that effectively throttled international commerce.

This time around, though, the economic pandemic spread rapidly in spite of very significant strides in liberalizing trade.

One major reason for the current malaise is the peculiar pattern globalization followed over the last decade. Corporations in key industries from automobiles to virtually every segment of the broad technology sector established intricate global supply chains that sliced up the production process into specific tasks. The tasks were assigned to plants in whichever city, state or country that could best do the job at the lowest cost. But as these chains grew, so too did much of the global economy's dependence on consumption in the United States. According to some recent estimates, the U.S. economy alone accounted for approximately 40 percent of the cumulative growth in world GDP in the five years ending in mid-2000.

By last summer, however, that dynamo had sputtered to a virtual standstill, and America's economic slowdown was swiftly exported to virtually every corner of the globe. While not entirely unanticipated, this was still a disturbing development. As Morgan Stanley's chief economist, Steve Roach, observed in a recent newsletter article: "A U.S.-centric cyclical dynamic is hardly a testament to the greater balance in the world economy that globalization was supposed to bring."

Then came the attacks on the World Trade Center and Pentagon. In very short order, the men from al Qaeda revealed how extraordinarily vulnerable the global trading system is to disruption.

They also imposed what amounts to a new "security" tax on international commerce. According to the latest analysis by Prudential Securities, pretax profits for companies in the Standard & Poor's 500 index are likely to drop by an average 2.5 percent in 2002, simply because of higher insurance prices. For the kinds of technology companies that dominate so much of California's economic landscape, risk insurance premiums are expected to soar by over 44 percent next year.

Not surprisingly, corporations around the world have been busily rethinking strategy as they look for the best way of balancing the old advantages of doing business internationally with the hugely different matrix of costs and risks that has emerged since Sept. 11. At the very least, the resourcefulness of global supply chain managers trying to meet the "just-in-time" delivery schedules that had become a hallmark of successful business operations worldwide is being tested as never before.

Even if the meetings in Qatar produce a workable agreement on a new round of trade negotiations, it may be on terms quite different from anything seen in the past. Critics have long charged that the United States, along with Japan and the larger European economies, have manipulated the rules of the WTO to suit their own purposes.

There is no question that globalization has had a distinctly trilateral look to it. But that may change very soon, especially with the entry of China into the WTO. On Oct. 23, the so-called "Group of 77" - which actually represents more than 130 developing countries - issued a joint statement with China putting the wealthiest nations on notice that steps aimed at alleviating the plight of the poorest countries should be at the center of the agenda in Qatar.

If, as seems virtually certain, the more numerous developing countries begin acting more assertively in promoting their economic agendas, it follows that the values and goals Western industrialized nations have emphasized in the past may no longer prevail in WTO forums. That prospect offers little comfort for those groups seeking stronger measures to deal with human rights, environmental protection, intellectual property rights, financial system reforms and greater transparency in rule-making procedures.

Ironically, the most formidable resistance to further trade liberalization measures may come from ballot boxes and opinion polls, not from demonstrators in the streets. In many developing countries, the stiffest opposition to market liberalization comes from the middle classes. What the Viennese economist Joseph Schumpeter called capitalism's "creative destruction," the continuous scrapping of the old for the new, does not distress the poor - whose plight can scarcely become more miserable - so much as it alarms those who hang precariously onto jobs in subsidized industries or bloated government bureaucracies.

Here in the U.S., political support for free trade policies could very well become collateral damage in the current war against terrorism, especially if the extraordinary display of patriotism that has been the source of so much national pride lapses into its more cantankerous cousin - a full-blown, raise-the-drawbridge, seal-the-borders bout of xenophobia. Combined with an overabundance of grim news on the domestic economic front, the strain of coping with the stalking menace of more terrorist atrocities could soon leave the American public in a militantly protectionist mood.

As a 19th century finance minister in France is reputed to have observed, cannon fire is not good for markets. Neither is ambiguity, which, unhappily, is a glut on today's market. Whether the WTO summit next weekend can chart a progressive new course for international commerce is an open question. At least we won't have to wait long for the answer.

For information about the author, click on Jock O'Connell