The failure of trade negotiators for the U.S., EU, Japan, Brazil, India and Australia to achieve significant breakthroughs on groundwork for a new WTO agreement at two days of meetings in London that ended last Saturday night should make analysts begin to think about a deal not being completed. Moving toward more open trade is important even without a new WTO agreement prompting change.
Two approaches to working through trade issues are obvious. The first is continued litigation under existing WTO rules. From Brazil’s complaint against U.S. cotton programs to the U.S. case against China on taxes on semiconductors, bringing cases against other nations is standard trade policy action in the WTO. From the creation of the WTO in 1995 through the end of 2005 335 cases have been filed with about 40 percent of them resulting in a formal dispute ruling. The others have been settled through consultations or remain in prolonged discussions. The U.S. already has plans to step up litigation with China with or without a new agreement. Some analysts have argued that a new agreement is too complex to negotiate and litigation is the only way to move toward freer trade. Others have said that litigation is only for relatively narrow issues and larger ones must be solved through negotiations.
The second approach is to continue to pursue bilateral and regional free trade agreements that include all or almost all goods and services. The U.S. has been aggressive in pursuing these agreements while also pushing a multilateral agreement at the WTO. The U.S. has nine free trade agreements in force and another ten in various stages of development. Countries with which the U.S. has free trade agreements account for 54 percent of U.S. exports in goods. The downside of this approach is the potential to create a patchwork of agreements that reduces the economic efficiencies of increased trade.
There are many other options to choose from. Countries can work one-on-one with a specific product. Last week the U.S. and the EU signed an agreement for trade in wine between the two countries. This was the result of 20 years of negotiations, and enough problems remain unsolved that another round of negotiations will begin within 90 days. EU wine exports to the U.S. are a $2.4 billion industry and account for 40 percent of the EU’s wine exports. Most trade issues have a much lower profile and several issues may need to be bundled together to offer advantages to both countries.
The bundling approach could be used on a larger scale. Two or more countries could work out agreements on an industry or multi-industry basis. The U.S. and Canada achieved an agreement on automobile production and trade in the 1960s over 20 years before the Canadian-U.S. Free Trade was established. In early November of last year the U.S., EU, Japan, South Korea and Taiwan agreed to reduce tariffs to zero for multi-chip integrated circuits that are used in cell phones, digital cameras and PDAs. Production of these circuits began in 1999, three years after the WTO Information Technology Agreement of 1996 eliminated duties on most semiconductors. As markets become more integrated across countries, such industry agreements may become a key way to capture the economic benefits of increased trade.
A country or two could become even more adventuresome and declare free trade for one or more industries or for the entire economy. Trade negotiations, be they bilateral, regional or multi-lateral, are a political solution to offset the power of special interest groups that believe they will lose under a more open trading system. Where there are no protected interest groups there is nothing to prevent consumers from getting the benefits of higher quality and lower prices that come with a more open trading system. The developing countries as a group have average bound tariffs of over 30 percent on manufactured goods and over 40 percent on all goods. There should be plenty of opportunities to help consumers by unilaterally reducing or eliminating tariffs for some of those items.
All of these approaches to more open trade between countries will have benefits for producers and consumers around the world. The increased specialization that comes from more trade produces higher incomes for producers and lower prices for consumer. Workers with more income use that purchasing power to improve their human condition. That purchasing power ripples out to every potential supplier of goods and services in the world. The increased opportunities for trade cause workers, businesses and consumers in other countries to pressure governments for trade policy reforms.
All of this speculation does not mean that political leaders should give up working on a new WTO agreement. A sound WTO agreement that lowers trade barriers among all WTO countries will increase the ripple affect of increased trade. U.S. Trade Representative Rob Portman has rightly referred to these negotiations as a “once in a generation opportunity” to open up market opportunities around the world. It would be wrong to give up on this opportunity until all avenues for consensus have been pursued.
If finding consensus among 149 countries across all industries is not achievable, then sober reassessment is needed. Would a “small” WTO agreement achieve market access that could be easier achieved by other means? If so, then other trade opening approaches that can bridge the gaps need to be considered. The goal is a more open world trading system that improves incomes for people in all participating countries. That goal provides the proper gauge to measure if the current WTO negotiations are up to the task.