The Balance of Trade

Article excerpt

The world appears to be breaking up into three regional trading blocs. But the terms of engagement for each bloc vary widely. And where does the WTO fit in?

The World Trade Organisation (WTO) is `alive and functioning' says Dr Vincent Cable, director of International Economics at Chatham House. Yet, in the past two years, there have been a series of dramatic new initiatives to try and create regional free trade areas (FTAs) in North America and the Asia-Pacific region. Do these initiatives herald the demise of an open world trading system and the transition to a more conflictual, tripolar system of trading blocs? Or can British companies have some faith in the durability of the multilateral principles embodied in the new World Trade Organisation (WTO)?

The contents of the recently completed Uruguay Round agreement suggest that the WTO has developed more bite: the agreement has more than doubled (from 20% to 44%) the share of non-agricultural imports by industrialised countries that will be free of duties. The agreement also drew the two most contentious sectors in world trade, agriculture and textiles, into the multilateral orbit, through "tariffication" of agricultural price supports and an agreement to abolish the Multifibre Arrangement on textile trade by 1 January 2005. The agreement extended GATT competence over three increasingly important areas of the world trading system: the trade in services, which now accounts for over 25% of world trade; the protection of intellectual property rights (IPR); and trade related investment measures. The agreement also stipulates that WTO members must phase out selective safeguard arrangements such as voluntary export restraints (VETs) and the procedures for dispute settlement have been strengthened considerably. All existing and new international GATT trading rules now come under a single institutional framework: the WTO. Members of the WTO can no longer choose the areas where they participate. They must accept all GATT provisions, with just four exceptions: govemment procurement, civil aviation, bovine meat and dairy products.

Nevertheless, the WTO still faces an uphill struggle to ensure that countries live up to their far-reaching pledges in the agreement. It must continue negotiations on the unresolved issues of telecommunications, commercial aircraft subsidies, and trade in audiovisual services. The use of anti-dumping duties (ADDs) must be stemmed before these replace tariffs as the barrier of choice among a growing range of countries seeking to protect domestic producers. The WTO must also tackle the growing sense in the West that the lack of global environmental standards and standards for workers' rights provides less developed countries (LDCs) with an unfair trading advantage over OECD countries. The EU trade commissioner Sir Leon Brittan has warned that unless the WTO finds a way to fold these issues into the agreements, `we are open to protectionist demagogy, for example to the effect that other countries exploit child labour in order to increase European unemployment.' A further problem facing the WTO is how to incorporate China into the system. After absorbing Hong Kong in 1997, China will be the world's fourth largest exporter and its continued exclusion from world trade rules would lead to a deepening of complex bilateral arrangements.

While the WTO digests the Uruguay Round, what scope is there for an increase in trading ties between countries in the same geographical region? Contrary to the WTO's multilateral approach, the perceived advantage of Free Trade Areas (FTAs) is that they permit countries to choose their closest trading companions. Ideally, members of an FTA should be economically homogenous either in trade patterns or in levels of economic development. Countries can then reap the benefits of an expanded market base, while minimising the problems that tend to flow from the desire of one nation's manufacturers to relocate to the markets of other FTA members with lower labour costs. …