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Trade and the Global Economic Crisis: "If It's Not Part of the Solution, It's Part of the Problem"

by Jeffrey J. Schott, Peterson Institute for International Economics

Remarks presented at the APEC symposium, "Addressing the Economic Crisis, Preparing for Recovery," Singapore
July 17, 2009


This year marks the 20th anniversary of the Asia Pacific Economic Cooperation (APEC) forum. Over the past two decades, the 12 founding members have broadened the scope of regional economic cooperation, contributed importantly to the conclusion of multilateral trade accords, and expanded membership to China, Russia, and seven other countries. Annual APEC summits, inaugurated by Bill Clinton in 1993, have become a critical venue for addressing both economic and political problems confronting the region and the global community. The Asia Pacific region has prospered, and APEC members now represent more than 58 percent of world trade and more than half of global output.

Anniversaries are nostalgic occasions, and often instructive as well. APEC's early years, 1989–91, witnessed sharp declines in global growth and trade. Growth in global GDP fell from 3.7 percent in 1989 to 1.5 percent in 1991; world trade volume (goods and services) fell by almost as much (from 8.1 percent to 4.3 percent). To be sure, these were not as precipitous as the contractions that we have experienced since 2007 and not as pervasive across countries—North America and Europe went into recession but emerging Asia continued to prosper, especially as the Chinese economy began its dramatic take-off in the early 1990s. Look back to the initial APEC ministerial declaration in Canberra in 1989 and you will see an agenda broadly similar to what senior officials are discussing this week in Singapore: world and regional economic developments, global trade liberalization, regional cooperation, and the future of APEC. At that time, APEC ministers recognized "the extent to which the economic prospects of regional economies are interconnected" and thus emphasized "the importance, both for the region and the world economy, of a timely and successful outcome to the Uruguay Round" and agreed to meet in September 1989 "to consider how to unblock any obstacles to a comprehensive and ambitious MTN [multilateral trade negotiations] result."

As the baseball philosopher and New York icon, Yogi Berra, famously fumbled: "It's déjá vu all over again." Only more so—global economic conditions are far worse and trade and trade negotiations in much deeper decline than two decades ago.

We are now suffering through the worst economic recession since the Great Depression. While the latest monthly data provide some welcome news, it is still too early to predict a robust recovery from the sharp declines of the past few quarters. Indeed, earlier this month, the International Monetary Fund (IMF) predicted that world output would decline by 1.4 percent in 2009 before weakly rebounding in 2010. US GDP is projected to fall by 2.6 percent, a terrible result except when compared to the much larger declines in Japan (6 percent) and the euro area (4.8 percent). The global recession would be even worse except for the significant gains in China and India (albeit down sharply from peak growth levels earlier this decade).

The precipitous drop in global demand, coupled with the seizing-up of trade finance last fall, has taken its toll on international trade, the life-blood of many APEC countries. Trade has plunged by 24 percent over the past two quarters, about four times as fast as the decline in global output. This is in stark contrast to the experience of the past 50 years, during which trade increased about three times as fast as output. The latest IMF data predict that the volume of world trade in goods and services will decline by 12.2 percent in 2009 and will not grow much in 2010. Most APEC members are reporting 20 to 30 percent declines in exports in 2009 compared to 2008 and only a few foresee a return to double digit export growth in 2010, even from this year's depressed levels. Given the fragility of global economic conditions, we need to ensure that we don't make a bad situation worse by restricting opportunities for trade and investment.

That is easier said than done. There is a lot of pressure to do so, and policymakers will continue to face protectionist pressures for two related reasons: First, unemployment will continue to rise even after the economy stabilizes and begins to recover, since firms are cautious about adding to payrolls until their order books are on firmer footing. Even with modest economic growth reemerging in 2010, it will take some time to get back to the levels of output achieved before the current recession began. Second, to remedy those problems, politicians understandably want public funds deployed to increase local jobs and benefit local companies, and thus insist that national stimulus programs favor projects with high domestic content. The US program is illustrative of this problem; unfortunately, it is being emulated by China and other APEC countries.

To be sure, the G-20 summit declarations in Washington (November 2008) and London (April 2009) pledged to avoid new protectionism. The London summit leaders agreed not to raise "new barriers to investment or to trade in goods and services, impose new export restrictions, or implement World Trade Organization (WTO) inconsistent measures to stimulate exports" through the end of 2010. In addition, they agreed to notify the WTO and "rectify promptly" measures inconsistent with that pledge (though to date no G-20 country has done so). And it is well worth noting that APEC members account for about half of the G-20 participants.

Overall, the G-20 participants have done better than expected but not as good as they should have done, given the depth and breadth of the global crisis. Some G-20 members violated the pledge before the ink was dry on the Washington summit declaration and several of those measures remain in force. The trade standstill was misunderstood and misapplied. Some countries took it simply to mean "honor WTO obligations." But under WTO rules, countries can "legally" impose a wide range of protectionist measures via antidumping and safeguard provisions; moreover, in areas where WTO disciplines are incomplete or absent (e.g., government procurement), countries can discriminate against foreign suppliers without worry about WTO censure. In fact, many of the standstill violations fall into this latter category. That's why WTO negotiations are needed to strengthen multilateral disciplines over such actions!

But the basic point is straightforward: Amid global crisis, the objective should be to avoid measures that distort international trade and investment, whether WTO legal or not, because such actions inhibit global recovery today and clog the arteries of prospective growth going forward.

Last December, other trade experts and I called for the WTO and the World Bank to closely monitor these developments and "name and shame" countries that violated their summit commitments. To his credit, Pascal Lamy took up the task—at least the naming part. The WTO now issues quarterly reports on the financial and economic crisis and trade-related developments; the latest report released this week noted an uptick in restrictive measures (especially antidumping) but voiced relief that actions were not as widespread as feared. In addition, trade experts in academia and think tanks have initiated a new web site, globaltradealert.org, as a clearinghouse for information on new trade-distorting measures. By putting a spotlight on prospective abuses, public monitoring of G-20 policies has helped constrain a surge of new protectionist measures.

How should APEC members respond to the siren protectionist song of their domestic lobbies? Few politicians want to emulate Odysseus and bind themselves to the masthead to prevent yielding to temptation; better to curry political favor and provide subsidies and trade protection for domestic industries. But if governments follow that course, they risk "tit for tat" responses that could undercut the nascent recovery.

Instead, let me suggest three trade policy guidelines for consideration by APEC governments: Do no more harm; do some good via Doha; and complement Doha with ongoing APEC initiatives on energy, the environment, and regional economic integration.

First, do no more harm. Broaden the standstill pledge along the lines of the recent G-8 summit in Italy, whose leaders agreed to "refrain from taking decisions to increase tariffs above today's levels," faithfully implement the pledge, and "rectify" existing transgressions. But tariffs are not the main problem. Domestic subsidies potentially can be far more distorting to international trade and investment, particularly in the auto sector. For that reason, APEC should also monitor national auto policies to ensure that financial aid to firms in this sector does not result in new market access barriers.

Second, do some good by accelerating the Doha Round negotiations. Hard times are not conducive to concluding a global trade deal—that's why political leaders will be cautious about engaging in end-game negotiations until the economic environment is much improved. But hard times are often good times for propelling those talks forward. The Tokyo Round responded to the first oil shock in 1973 and turmoil in financial markets; the Doha Round itself was born amid widespread recession and political distress following the terrorist attacks of September 2001. In like fashion, the current bad times could actually promote the revival of the Doha Round by compelling political leaders, as part of their overall response to the economic crisis, to forestall new doses of debilitating protectionism and open new opportunities for trade and investment.

What needs to be done? The key is to top-up the Doha pay-off in agriculture, manufactures, and services. The APEC members of the G-20 should take the lead. The aim should be—as the G-8 recently pledged—"to reach a rapid, ambitious, balanced, and comprehensive conclusion…on the basis of progress already made, including with regard to modalities."

What is currently "on the table" in Geneva, while significant, is not sufficient to ensure the political support needed to ratify and implement a prospective deal. The reason is simple: Most participants assume that, consistent with the draft modalities, many products important to them will not be subject to significant liberalization and that little will be done to liberalize trade in services, so they have diluted their own offers accordingly. But with some discretion in the use of the ample flexibilities allowed by the modalities, coupled with additional reforms beyond the modality cuts and enhanced offers on services, the major trading nations could put together a more valuable Doha package—one that would command support by farmers, industries, and workers in both developed and developing countries.

There are numerous ways to achieve this result. Clearly, major trading nations have to agree to reduce restrictions on trade in specific service sectors; that is an essential component of any prospective Doha deal. The nonagricultural market access (NAMA) results need to focus on "topping up" liberalization in targeted sectors. Let me offer a concrete example. Eliminating tariffs on environmental goods (based on the World Bank product list) could increase world trade by more than $8 billion annually as well as contribute to parallel efforts to mitigate global environmental and energy problems. No country should be asked to commit ab initio to reforms on particular products or services, but all should recognize that the final outcome must include commercially significant reforms—or the deal won't close.

In addition, ministers should include two new items in the final Doha Round package. The first deals with climate change. We are already witnessing political pressures in the United States and Europe to provide protection via subsidies and import restrictions to help firms offset the higher production costs that will arise due to carbon taxes and regulatory mandates. APEC members should take the lead in foreswearing such actions by pushing for a "peace clause" in which WTO members agree not to institute new trade restrictions based on the carbon content of imports for several years. The purpose of such a commitment is straightforward: to avoid measures that could create obstacles to the negotiation of a global post-Kyoto regime.

The second item should be a "built-in" agenda of initiatives that WTO members would agree to pursue immediately after the entry into force of the Doha accords, following the precedent of the Uruguay Round. This agenda should comprise at least three items: rules on subsidies and border levies taken pursuant to current and prospective multilateral environmental agreements (e.g., a new code of conduct on climate change issues), rules on border measures to clarify the scope of national security exceptions under GATT Article XXI, and WTO institutional reforms.

Working out the details in all these areas will take time to negotiate, even if talks fully reengage this fall. One should not expect a final Doha package of trade reforms ready for political decision until late 2010 or 2011.

The third guideline focuses on APEC. New initiatives to liberalize trade should not be limited to the peaceful shores of Geneva. For two decades, APEC has pursued trade initiatives that both complement Geneva negotiations and set precedents for broader WTO accords. APEC members should continue these efforts, with initiatives on energy and climate change at the top of the list. Particular attention also should be given to sectoral initiatives that facilitate "green growth" and the diffusion of information technologies by expanding market access for goods and services and by extending technical and financial assistance to developing countries so they can take full advantage in these areas.

Let me conclude with a few words on APEC and regional economic integration. Prime Minister Lee Hsien Loong of Singapore gave a prescient speech in Washington two years ago on the occasion of the 60th anniversary of the US-ASEAN Business Council. He noted that APEC needed to accelerate the process of building consensus on the long term vision of regional economic integration and then start incremental construction by "melding" (rather than harmonizing or docking) together core groups and legally binding pacts. Singapore has been one of the foremost pioneers in advancing regional integration—both within ASEAN, between ASEAN and its Northeast Asian partners, and across the Asia Pacific region. The evolving Trans-Pacific Partnership, built on the ideas first put forward by George Yeo more than a decade ago, could provide a foundation for "melding" the various pacts that now crisscross the region.

I believe the Trans-Pacific Partnership (TPP) could be pursued in a way that accommodates the various proposals for regional integration already under discussion in APEC. As my colleague Fred Bergsten suggested earlier this week, the TPP could be constructed as a bridge uniting efforts to integrate Pacific Asia and the Asia Pacific regions. This topic merits priority attention by APEC members as they advance their work on trade in the coming years.

Thank you for your attention. I hope you find these remarks useful as you prepare for the important series of APEC and WTO meetings in the coming months.


RELATED LINKS

Speech: Should APEC Focus on Trade Liberalization? May 6, 2010

Speech: The Future of APEC and Its Core Agenda December 9, 2009

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Policy Brief 09-16: Pacific Asia and the Asia Pacific: The Choices for APEC July 2009

Policy Brief 07-2: Toward a Free Trade Area of the Asia Pacific February 2007