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Jorge Heine: World trade, from bad to worse?

Tuesday,May 26, 2020


By Jorge Heine, a senior research fellow at the Center for China and Globalization (CCG) in Beijing, and a former ambassador of Chile to China.

The recent resignation of World Trade Organization (WTO) Director-General Roberto Azevedo, effective in September, one year before the end of his second term in office, has thrown a monkey wrench into the world trading system. With the WTO already in serious trouble, this resignation could not have come at a worse moment.

World trade fell in 2019 for the first time since 2008, pulled down by both the US-China trade war and Brexit. According to the WTO, world trade might fall by as much as one-third in 2020, as a result of the COVID-19 pandemic. This is a perfect storm.

The former president of the World Bank, Jim Yong Kim, stepped down from his post on February 1, 2019, three and a half years before the expiry of his term in 2022. Azevedo says he has nothing lined up, but quits to facilitate the process of electing his successor, whatever that may mean.

Both Kim and Azevedo jumped ship at critical moments when a steady hand at the wheel was most needed.

Member states wage yearlong campaigns to elect their candidates to head key international institutions, to occupy prestigious and handsomely paid positions. Once elected, why do such leaders quit ahead of time, leaving others to deal with the current mess in crucial areas in world affairs?

This is just another symptom of something else: the falling apart of the current liberal international order (LIO) set up after World War II with pillars such as the United Nations (UN), the International Monetary Fund and the World Bank. It was also inspired by the principles of free trade, first championed by the General Agreement on Tariffs and Trade and later the WTO.

Designed to avoid World War III, with lessons of the failed approach followed by the allied powers in Versailles in 1919, the LIO largely achieved this. On the premise that a rules-based international order is better than a free-for-all and utter Hobbesian system, in the past 70 years, the LIO has brought considerable prosperity to the world. It also avoided a global conflagration between the extant superpowers, such as the US and the Soviet Union — albeit at the cost of outsourcing direct conflicts to numerous proxy wars in Asia, Africa and Latin America.

The current phase of globalization, started circa 1980, in turn, and contrary to what was then the conventional wisdom, ended up giving a big boost to emerging economies in the Global South. The so-called Asian Tigers first, followed by China and then by India, grew in leaps and bounds, attracting much worldwide manufacturing activity. Trade was very much at the heart of this, as global trade grew at twice the rate of the world economy from the mid-1990s till 2007.

The ensuing rise of Asia and of the BRICS countries created a major imbalance in the power distribution and voting arrangements in international organizations (IOs) and international financial institutions (IFIs). Not too long ago, Belgium had more voting shares than China in the World Bank.

To this day, shrinking middle powers like the United Kingdom are among the permanent members of the UN Security Council, whereas emerging giants like Brazil and India are not.

Anachronistic structures that cease to perform their function need updating. But not only have these IOs and IFIs become outdated and unrepresentative.

The WTO has two functions: To liberalize trade and to resolve trade disputes. On the first, the Doha Round, dedicated to foster a global reduction in tariffs, is stuck in neutral since 2008. On the second, its Appellate Body, tasked with resolving trade differences among members, has been rendered inoperative since December 1, 2019, when it was left with just one judge, lacking a quorum to take up new cases. This was the result of a long-standing blocking of such appointments by the US, going back as far as the Obama administration. Although the US has won a majority of the cases it has brought to the Appellate Body, it has also lost quite a number of trade disputes that others have brought against the US, which Washington deems unacceptable.

A dozen-plus WTO member states have set up their own mechanism to resolve trade disputes. Several other states, mostly from the Asia-Pacific region, have come up with a statement in favor of free trade and in support of fostering, rather than hampering, the flow of goods and services across borders. Admirable as these initiatives may be, they don't measure up to the occasion, being the equivalent of rearranging the chairs on the deck of the Titanic. The international trading system is facing the abyss and the double whammy of a supply and a demand shock the likes the world has not seen since the Great Depression.

Some years ago, the argument was posited that the key distinction was no longer between capitalist and socialist states, but rather between open and closed ones. It was said that only open economies and open societies could make the most of what is offered by the Fourth Industrial Revolution and the opportunities it offers on AI, robotics, cloud computing and the Internet of Things.

Today, the irony is that the very countries that once championed free trade and the international arrangements that make free trade possible are closing up borders and raising obstacles to the free flow of goods and services. The last best champions of free trade can now be found in the Global South, rather than in an increasingly protectionist, isolationist and inward-looking North.

From Global Times,2020-05-26
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