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Obama and trade policy: ‘speak softly and carry a big…vision’

Written by Chris Stevens

If Barack Obama’s trade policy is to avoid following Theodore Roosevelt’s advice to the letter, which of his multiple personas would best serve – tough Chicago politician or president of the Harvard Law Review? A no-brainer, you might think. Everyone knows that the Great Depression was exacerbated by competitive protectionism championed by populist politicians. Those who urged the conclusion of  the Doha Round  before the end of 2008 added a contemporary twist. Without tighter rules, they warned, countries would use their existing World Trade Organization (WTO) flexibilities to raise tariffs. Low and middle-income countries could be the most adversely affected.

But as Sheila Page has pointed out, things are not so simple. The potential scale of WTO-legal tariff increases, whilst not negligible, will produce effects no greater than countries routinely experience as a result of exchange rate fluctuations. On the Richter scale of the current global crisis, traditional trade policy barely registers.

The trade policy challenge

Does this mean we need not fear the recession will be made worse by ill-conceived trade policies? No. Unhappily, these are always close to the surface at times of crisis. They appear to allow the imposing country to shift the pain on to others and their boomerang effect is easily obscured. The danger is that new, unforeseen ways of obstructing trade will be created – just the sort of thing that a clever ex-Harvard lawyer would be well placed to oversee.

The problem is not that Doha’s failure has left open bolt holes for the traditional trade distorting policies such as tariffs and subsidies. It is that, because commercial practice changes rapidly, either the WTO rule book will become increasingly outdated or it will be updated in ways that test the resolve of the big trading states to accept multilateral disciplines.

Doha was touted as a ‘Development Round’. What this meant in practice was never very clear, but the fact that for the past two years completion has become an objective in its own right – on almost any terms - illustrates how far the grand vision has been ditched. A Round that simply plugged some of the known bolt holes and further eroded the traditional protectionist instruments of tariffs and subsidies would, by definition, fail to get to grips with the new methods through which trade flows are distorted, often involving private sector regulation

In the absence of new, negotiated provisions the WTO rulebook does not remain static – but it changes in a way that is always perceived as being zero-sum. And this is where the danger lies at a time of unprecedented global economic stress. Neither Chicago politician nor Harvard lawyer are adequate role models for a new President who will need to tread delicately around the pitfalls and booby traps.

There can only be agreement on a new Round if all WTO members agree, or at least acquiesce, to the terms. The danger that some countries may simply acquiesce in changes that are not in their interests is a continuing development concern as it is the poorer states that will tend to be less well informed about the implications of complex new rules – and most vulnerable to arm twisting. But this worry is mitigated by the fact that most sub-groups of developing countries in the WTO include some negotiation savvy states well able to uphold their own interests and, in so doing, protect those of their peers as well.

There is no such safety net for the other route through which new trade rules are created and bolt holes plugged: dispute settlement. When adjudicating on disputes brought by one WTO member against another the Appellate Body often clarifies vague phraseology and sometimes interprets provisions in unexpected ways. As with common law, this can provide a valuable way of making old rules relevant to new commercial realities. But it involves a danger that is now particularly acute; there is always a winner and a loser in dispute settlement. This is a gift to the populist politician and, if the loser happens to be rich and powerful, one that could have global consequences.

How to respond

This is not the time for any major new initiatives on trade policy. Trade policy is still nonessential to the crisis. Disruptions to commerce appear to be the consequence of the global financial crisis, rather than the knock-on impact of trade policy measures. The danger of any initiative being hijacked by protectionists is very high. If scope to do good is limited, the immediate emphasis must be to avoid doing harm. ‘Speak softly’…defuse pressure for new trade restrictions, react calmly to the foot dragging or worse by trade partners or adverse judgements, emphasise the immediate harm caused in an integrated global economy not only to consumers but to producers using imported inputs, and the generalised harm caused to all as trade partners respond.

But the policy environment will change, which is where the vision comes in. For all the lack of clarity and self-serving interpretations, labelling Doha as a Development Round emphasised the fact that ‘the market’ itself has moved rapidly (through globalisation), while the institutional framework through which the market operates has hardly moved.  Few can now doubt this given the speed at which the US financial crisis became global and the myth of middle income states being somehow ‘delinked’ was punctured.

Radical change to trade policy is too important to be left to trade ministries, which inevitably aim for incremental change and are targets for protectionist lobbies. Vision, the mental agility to see new potential trade-offs and alliances, and implementing power is what is needed.  That’s the task for the new President – ours is to prepare alternative route maps so that they are ready when the time is right.