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Instability feared without world trade deal

“If we don’t buy all that stuff from China, they’re not going to buy it themselves, no matter how much the government spends.”

– Economist Richard Baldwin

World Trade Organization (WTO) members need to lock in existing levels of liberalization rather than pushing for further gains, or they jeopardize a Doha trade agreement and risk damaging political stability and global commerce, trade economists said Dec. 10.

Failure to reach a deal in the next few weeks would leave trade rules on the basis of the previous Uruguay round, signed in 1994. Since then many countries have unilaterally cut tariffs and subsidies from agreed levels, but have the right to push them back up to those ceilings, or “bound” rates.

“There is now a pronounced risk of backsliding by countries which could be done in an entirely WTO-legal manner, said Simon Evenett, professor of trade at St. Gallen University, at a seminar to launch a book on protectionism.

Leaders of the G20 rich and emerging nations called last month for an outline deal in the WTO’s Doha round by the end of this year, to counter protectionism and boost the world economy in the face of the financial crisis.

WTO director general Pascal Lamy is considering whether there are enough prospects of success given negotiating differences between major powers to call a meeting for this week.

In reverse

Evenett noted India’s current tariff averages about 10 per cent, and was last at its permitted ceiling of 50 per cent in 1989. The same applies to most other big emerging markets.

“So if India were to go back to charging what it could do under its WTO obligations, we would reverse essentially 20 years of reform,” Evenett said.

A study last month by the International Food Policy Research Institute said more than $1 trillion in world trade could be at risk if the Doha round is not concluded soon, including $728 billion in lost sales as tariffs rise to maximum allowed levels (all figures US$).

Rich countries have the scope to pay out much higher agricultural subsidies than they spend in actual outlays, while WTO rules allow members to impose extra duties on goods that are dumped, or sold for below their price at home.

So even if countries do not engage in an all-out trade war, as followed the notorious U. S. Smoot-Hawley tariff that contributed to the 1930s Great Depression, there is plenty they can do to protect their economies from trade competition.

“Congress is entirely capable and in a mood of protectionist backlash which would be at the fringes of the WTO obligations of the United States,” said Richard Baldwin, a professor at the Graduate Institute of International Studies in Geneva and former staffer on the U. S. Council of Economic Advisers.

Another spectre from the 1930s is the risk of competitive devaluation, as countries desperately seek to make their exports more attractive, economists said.

One big factory

Social and political stability in China and other emerging countries in Asia depends on manufacturing as they modernize. But output relies on exports, with little local demand, Baldwin said.

“If we don’t buy all that stuff from China, they’re not going to buy it themselves, no matter how much the government spends, he said.

Modern supply chains mean Eastern Asia is one big factory, so disruption to one country would spread through the region.

“That multiplier effect, because of the role of manufacturing, could lead to instability in quite a spectacular way,” Baldwin added. “It’s a threat.”

In the circumstances, calls by U. S. business lobbies to reject a Doha deal that fails to open up new business opportunities, for instance by creating duty-free zones for some industries like chemicals, miss the point, economists said.

Jeffrey Schott, senior fellow of the Peterson Institute for International Economics in Washington and former U. S. trade negotiator, said this was short-sighted for two reasons.

“One is they do not value properly the risk… that the status quo is not sustainable and that there could be a reversal. And two they certainly do not estimate properly the systemic risk of not having a successful Doha round and the costs that that would have over time,” he said.

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