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1 Globalization and the Changing Trade Debate

The failure of the Doha round of WTO trade negotiations represents an important event. While there have been numerous public protests against the current global trading system – some more significant than others, Seattle in 1999, Cancun in 2003 – this is the first full blown collapse of a multilateral trade negotiating round since World War II. That failure creates a significant opening for potentially repositioning the global trade debate.

The failure of the Doha round of negotiations does not mean the end of trade multilateralism or a reversion to protectionism; instead, it signifies the end of a sixty-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas and subsidies. Behind this change is the growing recognition that international trade is a critical element of globalization and that globalization is a larger, more complicated policy project, than just facilitating cross-border flows of goods and services.

Trade serves to integrate and unify economies, which as advocates of trade liberalization tout can often bring lower prices for consumers. However, it also dramatically changes the structure and dynamics of economies. For developing countries it changes the avenues and policy possibilities for economic development. For developed countries, it changes the structure of competition in both goods and labour markets, and the changed balance of power between workers and firms has broad economic and political ramifications. As evidenced by the general public’s concerns about globalization, these issues have now risen to the surface, and that has rendered anachronistic Doha’s traditional multilateral trade liberalization agenda.

The new reality creates both opportunity and danger. The opportunity is to construct a new approach to trade that incorporates rules governing the parameters of global competition and rules mediating the integration of economies. Such rules can improve globalization by diminishing its impact on income distribution in developed countries, preventing race to the bottom competition between all countries, and promoting sustainable economic development in developing countries. The danger is that this opportunity will not be taken, in which case it is possible to have a slide toward protectionism, particularly in the event of a deep global recession. In effect, the failure of the Doha Round signals the need for the creation of a new 21st century trade agenda that moves away from the traditional trade liberalization agenda to a new agenda that addresses questions of how to govern globalization. Successfully accomplishing this transition will require the formation of a new intellectual and political consensus.

2 Why did Doha Collapse?

A good starting point for assessing the future challenges and possibilities is to examine why the Doha round collapsed. The first cause is that there appears to be a growing recognition that trade is a complicated phenomenon, and that the simple nostrums of “free trade” and “comparative advantage” do not capture this complexity. This recognition is present in both developing and developed countries. In middle-income countries (such as Brazil and Argentina) and the rising large developing economies (such as India) there is an increasing sense that traditional “Doha-style” trade agreements potentially compromise their development strategies. This is because these agreements rule out development strategies and policies that favor domestically based production.

In parallel, there has been growing anxiety among the electorates of developed countries that traditional trade liberalization is driving an undesirable form of globalization. In particular, globalization has become identified with widening income inequality, wage stagnation at the bottom and middle of the wage distribution, and undesirable forms of competition predicated on exploitation of workers and disregard for the environment. These electorate anxieties provided incentives and space for political leaders – in both the US and Europe - to distance themselves from Doha’s business driven trade liberalization agenda. Moreover, this lack of political support for the Doha round was further reinforced by agricultural interests in both the US and Europe. These interests, in sectors such as sugar and cotton, were unwilling to give up existing subsidies and price supports and contributed their political muscle to stalling Doha.

Lastly, NGOs contributed to derailing the Doha round by unmasking the excessive claims about the economic benefits of further trade liberalization made by the international financial institutions (e.g. the World Bank) and mainstream economists (for example, Polaski 2006). In this regard, the work of the NGOs was especially useful to developing country governments. This is because these governments often lack capacity for their own economic analysis; that gap was filled by NGO and activist research that provided analytical support backing developing country arguments and policy positions.

3 What Now?

In the year prior to the failure of the Doha round of trade liberalization negotiations the mainstream press published a great deal of commentary about the threat failure posed to the multilateral trading system. For example, the Financial Times (April 24, 2006) published an op-ed by the chairmen of Nokia and BP claiming that, “the credibility of the multi-lateral trading system” was at stake and that failure of the round would “leave the trading and investment environment seriously damaged.” The Wall Street Journal (September 6, 2006) published a comment by then British Chancellor of the Exchequer, Gordon Brown, labeling Doha’s failure a “Protectionist Backlash.”

Such commentary misrepresents both the causes and consequences of Doha’s failure. Rather than signaling a threat to international trade and the global economy, Doha’s demise represents an opportunity to reposition the global trade debate. Taking advantage of this opportunity will require a twin track strategy. One track requires developing an affirmative alternative trade agenda that is intellectually coherent and politically compelling. The other track requires continuing to chip away at support for the existing policy paradigm by exposing its faulty economics. Both tracks are necessary if the opportunity provided by Doha’s failure is to be taken advantage of.

A critical element of a new agenda is the need to premise the trade debate on the recognition that trade is a tool and instrument of policy, and not the ultimate goal of policy. The real goals are economic development in the context of a fair, inclusive and politically acceptable globalization. These goals must frame a 21st century trade agenda. That means abandoning the current “trade for trade’s sake” approach to policy - an approach epitomized in the metaphor coined by Fred Bergsten, Director of the Institute for International Economics, that described the global trade regime as a bicycle that would fall over if the Doha round failed and further trade liberalization stalled.

4 Challenging the Current WTO Paradigm

With regard to challenging the intellectual dominance of the current WTO paradigm, it is critical to continue exposing the failings of the neo-liberal model of economic development that underlies that paradigm. That is a difficult task because the neo-liberal model is appealingly simple. First, the model asserts a “one size fits all”-approach to policy whereby its recommendations fit all countries regardless of stage of development. Second, these policy recommendations are supposedly good for all in the sense of always generating win – win outcomes. Thus, the model asserts that if a country follows a simple set of policies, which include WTO-styled trade policies, the country and the global economy will both benefit. This simplicity gives the neo-liberal model great rhetorical appeal that continues to pull policy in undesirable directions.

One approach to challenging the model is empirical. Thus, the economic record shows that the neo-liberal policy mix has not delivered, as evidenced by Latin America that applied the neo-liberal Washington Consensus most radically and yet grew more slowly in the post-1980 Washington consensus era (Ocampo 2002). A second empirical challenge concerns the evidence regarding the relationship between trade and development. For instance, detailed statistical work by Rodrik and Fernandez (2001) challenges the hypothesis that international trade causes development, and instead suggests that countries that develop successfully become successful traders.

Another form of challenge concerns the estimation of the size of the welfare gains from further WTO-styled trade liberalizations. One reason for Doha’s failure was alternative model simulations showing that Doha’s proposed trade liberalizations produced relatively small global economic gains, even when estimated using economic models constructed to produce gains from trade by assumption. Moreover, what gains there were accrued to the developed country bloc, and the gains were approximately zero for developing countries as a whole. Furthermore, there were also many significant net losers at the individual developing country level (Polaski 2006).

A third form of challenge concerns the economic theory that has been used to justify and drive the WTO’s trade liberalization agenda. That trade agenda is justified by appeal to the classical theory of free trade predicated upon the logic of comparative advantage. However, classical comparative advantage theory no longer captures what is happening in the global economy. Trade driven by global outsourcing is not a simple matter of balanced exchange based on comparative advantage. Instead, it rests on the new structures of global production organized by multi-national companies and retailing giants such as Wal-Mart, and these structures have changed both the character and margins of global economic competition (Palley 2006a).

In today’s world in which technology and methods of production are highly mobile, winning at trade involves strategic policy – which includes tariffs, industrial policy, and exchange rate policy. In such an environment classical free trade is not the best way to develop, and this is now being confirmed by new theoretical developments (Gomory/Baumol 2000; Samuelson 2004; Palley 2006b). These new theoretical arguments are supported by economic history, which shows that free trade was not the path chosen by today’s industrialized countries, including the United States, in their early stages of economic development (Chang 2002).

Lastly, it is important not to be deceived by proposals that call for just augmenting the Doha trade agenda with a new “helping hand” domestic policy agenda that includes wage insurance (Kletzer/Rosen 2005). Wage insurance aims to compensate workers who lose their jobs and end up with lower wages because of trade-induced job loss. It is a welcome policy idea as it helps reduce economic risk and improve social well-being. Indeed, such insurance should be expanded to cover wider causes of job loss. However, wage insurance does nothing to address the fundamental failings of current trade policy, which rests on flawed economic logic. For this reason wage insurance is not a solution to the trade problem, and the only solution is a new trade regime.

5 Domestic Demand-led Development and Labour Standards

A post-Doha trade agenda should fit with new thinking about economic development. Over the last two decades economic policy has focused on international trade and growing the supply-side, but policy has neglected the development of domestic demand (Palley 2002; Palley 2006d). This failure to attend to domestic demand considerations has likely slowed growth and made it more unequal.

With attention focused on international competitiveness, there has been a focus on holding down costs, and therefore wages. The focus on international competitiveness has also encouraged retrograde competition, as countries have tried to win competitive advantage by whatever means possible. Furthermore, the focus on international competitiveness has contributed to destabilizing deflationary conditions in the global economy since countries have added to global supply through export-led growth without adding similarly to global demand (Blecker and Razmi 2005; Palley 2003a). These failings suggest that policy must be repositioned so that it also focuses on developing the demand side of developing economies along with the supply-side.

Developing the demand side in turn leads to a more inclusive agenda. Rather than simply being a cost, wage income becomes a critical source of demand. Linking wages to productivity can then promote a virtuous circle of inclusive development. Higher productivity drives higher wages, which in turn increase demand to absorb the increase in productivity. At the same time, robust demand conditions encourage producers to invest, further raising productivity and advancing development.

Labour standards are key for such a demand-led model of development as they help workers bargain for a fair share of productivity (Palley 2004; Palley 2005). This points to the vital need for making labour standards part of the rules of the global trading system. In a global economy, in which countries are pitted against each other through the activities of multi-national corporations and through global sourcing networks, labour standards are critical for establishing a floor for the global economy. Historically, such standards have been represented as a form of “surrogate” protection intended to protect northern workers from competition from southern workers. That misrepresents the reality. Wage differences between north and south are so large that labour standards cannot significantly alter this source of southern competitive advantage. However, they can help prevent unfair wage erosion in the north, thereby actually maintaining wage differentials.

Additionally, labour standards can help southern workers capture a larger share of income, thereby promoting domestic demand growth in the global south that spurs inclusive economic development. Over the last twenty years, innovations such as global sourcing have increasingly pitted southern workers against each other in ever-fiercer competition. This has resulted in more value in the global production value chain being shifted to northern economies, where it is captured at the retail end by companies such as Wal-Mart, Nike and Gap.[1] By putting in place a floor to the global economy, labour standards are a means of mitigating south – south worker competition, thereby enabling the south as a whole to capture more of the value it generates.

Labour standards give workers the right to form unions, and unions are essential to developing a demand-led system of economic growth. The history of today’s developed economies (Western Europe, U.S., Canada, Japan, South Korea, Australia and New Zealand) shows that all embraced trade unions at some stage as part of their transformation to mature developed market status. That history suggests unions are key to development and the global trading system should therefore foster unions instead of facilitating attacks on them. Rather than being a market distortion as claimed by neo-classical economics, trade unions may correct market failure associated with imbalanced bargaining power. Viewed in this light, trade unions are the “market friendly” approach to correcting labour market failure because unions set wages in a decentralized fashion. Though wages are set by collective bargaining, wages can differ across firms with unions in more efficient firms bargaining higher wages than those at less efficient firms. In this fashion, democratic trade unions help establish a sustainable income distribution tied to underlying productivity that can support a consumer society. [2]

6 Tariffs and Industrial Policy

Another challenge for a post-Doha agenda is that it must permit developing countries to use tariffs and industrial policy as part of their economic development policy toolbox. For many developing countries tariffs are a significant and efficient source of government finance. These revenues are needed to fund public investment and public services that are vital for development and vital for ensuring that development serves all. They are an efficient source of finance because tariffs are relatively easy to collect since imported goods are closely tracked and enter through a limited number of ports of entry. At the same time, developing countries often lack the administrative capacity to tax domestic incomes and expenditures in the way that developing countries do.

Tariffs and industrial policy have also historically proven to be a valuable tool for promoting growth. First, they offer a leg-up to domestic producers so that these producers can learn to compete. Second, they provide an incentive for multinational corporations to produce within a country’s borders to avoid the tariff penalty imposed on imported production. These positive impacts are confirmed by the historical record, which shows there was a positive correlation between growth and tariffs in the 19th century (O’Rourke 2000).

Finally, as part of the re-evaluation of the economic policy role of tariffs, it is worth reviving and emphasizing the distinction between tariffs on imported consumption goods versus tariffs on imported capital goods. The latter are an input into production so that capital goods tariffs make a country less competitive and hinder development. This suggests that the policy focus should be on consumption good tariffs. Additionally, to the extent that imported consumption goods are luxury goods, this lends a progressive income redistribution dimension to tariffs.

The great challenge of tariffs and industrial policy is to ensure that they do not become captured by special interests, causing them to become sources of rent rather than a force for development. That speaks to placing tariffs and industrial policy in a broader policy frame of domestic competition that ensures competition is not neglected. It also speaks to the importance and challenge of good governance.

7 Policy Space, Governance and Labour Standards

The need to restore a role for tariffs and industrial policy links with broader concerns about “policy space” and how globalization is reducing such space. As capital becomes more mobile and policy works to lower barriers between economies and to synchronize rules across countries, the space for autonomous national policy seems to have been shrinking. Restoring a role for tariffs and industrial policy can contribute to restoring policy space. However, with restoration of policy space comes the need for good governance, and that links back to need for labour standards.

Not only do labour standards yield significant conventional economic benefits for developing countries and the global economy, they also yield significant political benefits. First, labour standards are strongly positively associated with democracy (Palley 2005). Second, poor governance is increasingly viewed as a significant obstacle to development. By giving workers increased voice, labour standards may improve governance, giving such standards an additional development rationale.

A perennial problem in developing countries is the problem of “who will guard the guardians?” Giving policymakers the space to conduct policy can be dangerous if policymakers cannot be trusted. Free traders often assert that free trade is a two-for-one. That is it improves economic efficiency and raises income, and it also guards the guardians by increasing competition and competing away rents. A parallel argument holds for labour standards, which are also a two-for-one. First, they promote economic development and secondly, they guard the guardians by strengthening worker voice and promoting democracy.

In a sense, labour standards are both a “means” and an “end” of development. They are a means because they contribute to policy efficiency and a structure of income distribution that advances development, and they are an end because they promote respect at work and broader political freedom. Linking trade with labour standards can therefore ensure that trade serves to promote development and globalization that is fair, just, and politically acceptable. This means labour standards must be the bedrock of a 21st century trade agenda aimed at refashioning globalization.

Moving the labour standards agenda will require a multi-faceted approach. At the national level, trade negotiators should make labour standards an official policy priority to be pushed in all multi-lateral and regional forums. Labour standards should also be included in bi-lateral trade arrangements, and multi-lateral progress can be advanced by building up a core of countries that have signed on for labour standards at the bi-lateral level. Allowable trade preferences, in the form of tariff and quota relief, can also be used as a carrot to induce developing countries to sign on to the labour standards agenda. Most importantly, there is need to change the climate of opinion and understandings about labour standards, and build a global echo chamber supporting such standards. That means the IMF and World Bank, with their massive networks of economists and public opinion outreach, must come on board and endorse labour standards with vigor and openness. Finally, NGOs have an important role to play in this process by directly advocating labour standards and pushing governments and the multilateral institutions to make labour standards part of the rules of the global economy.

8 Environmental Standards

In addition to labour standards, it is also clear that there is need for international environmental standards – particularly regarding greenhouse gases and global warming. Best of all would be the adoption of common binding standards across countries. However, in the absence of common standards countries will need to have the right to border-adjust for costs of pollution that have international impacts.[3]

Such border-adjustment is needed to prevent the environment becoming a margin of international economic competition, and it can protect countries that impose high environmental standards on domestic producers from unfair competition from countries that impose low or no standards. The mechanism of protection is simple: imports from countries with low standards would face an environmental tariff that attributes the environmental cost of production to imports from low standard countries, thereby stripping away any competitive advantage achieved through environmental degradation.

9 Exchange Rates and Trade

A last critical element of a post-Doha 21st century trade agenda is exchange rates. Historically, exchange rates have not been considered part of trade policy and they have been excluded from the rules governing international trade. Instead, trade policy has focused on market access issues, tariffs, and subsidies. This focus reflects the fact that exchange rates have been treated as a financial matter that is separate and distinct from the real world of trade. This policy dichotomy is reflected institutionally in the fact that exchange rates are left to central banks and Treasury Departments. It also parallels the thinking of economists who separate exchange rates from trade theory and treat long run trade patterns as independent of exchange rates.

However, there is now growing realization that not only can exchange rates have temporary effects on trade patterns, they can also have permanent long run affects by influencing the location of industries (Gomory/Baumol 2000; Palley 2003b, Palley 2006b). Moreover, these influences have become larger and more significant in the era of globalization because economies are more internationally open and production more mobile. Trade policy has yet to catch up with this and still operates as if trade and exchanges rates were separate. In the U.S. this failure of trade policy is evident in the China trade deficit. China has been pursuing a policy of export-led growth that relies on an undervalued exchange rate to make its manufactured goods internationally competitive and to attract new foreign direct investment in manufacturing. The result has been a tidal wave of imports from China into the U.S., closure of U.S. manufacturing plants that compete with Chinese goods, and the relocation of production and new investment to China. The U.S. has been stymied by this development because the trade agreement giving China access to U.S. markets had no provisions guarding against the use of undervalued exchange rates to gain market share. This situation is unsustainable and could potentially generate a trade war.

Current U.S. – China trade problems therefore speak to the need for future trade arrangements to explicitly incorporate exchange rate provisions. In the era of globalization exchange rates matter more than ever. That means exchange rate issues and disputes are likely to recur. Without provisions against inappropriate use of exchange rates as an instrument of international competition, the global trading system could breakdown. One risk is that it could break down in a flurry of recriminations over unfair trade deficits and resulting job losses. A second risk is that it could be drawn into a round of competitive devaluation among countries, reminiscent of the 1930s, which in turn produces financial turmoil and economic dislocation.

Guarding against these risks requires rules governing exchange rates and trade, and it also suggests the need for some form of global system of exchange rate management. That provides another illustration – this time concerning financial market arrangements - of how trade can no longer be considered in isolation.

10 A “Tropical Products” Trade Round of Trade Liberalization

Reframing the global trade agenda to incorporate the above issues is likely to take time and be contentious. In the meantime, while that process works itself out, there is still some room for small-scale targeted multilateral trade liberalization that advances development in the South while producing benefits in the North. Advocates of a new global trade regime should support such measures as it makes clear that they are not protectionist.

One suggestion for beneficial incremental trade liberalization is a tropical products trade round involving commodities such as sugar, cotton, coffee, cocoa, rice, and orange juice (Palley 2006c). Such a round could focus on those commodities that most benefit developing countries and where Northern subsidies are most damaging. For these commodities, trade predicated upon the theory of comparative advantage still holds, and there are gains from trade to be had by all sides.

The advantages of such a tropical products round are numerous. First, it would refute the charge of corporate globalizers who claim that those who opposed the Doha round are opposed to trade. Second, the tropics contain the world’s poorest countries, and a tropical products round would truly help them. The agricultural liberalization proposed in the Doha round did not help tropical countries because they are significant importers of northern agricultural products (cereals, meat, dairy). Consequently, elimination of northern subsidies as proposed under Doha would have raised world prices of those products to the detriment of the south. Contrastingly, a tropical products round would reduce northern production of tropical products (cotton, sugar, etc) that compete with the south, so that any induced price increases would raise southern incomes.

There are also good economic reasons for northern countries to support such a round. First, there would be large government budget savings to Northern taxpayers from elimination of certain specific agricultural subsidies. Second, consumers would gain as prices would come down from elimination of quotas. Third, northern manufacturing workers would have no interest in opposing a tropical products round as they would benefit as consumers and taxpayers, while manufacturing would essentially be off the table. Fourth, northern production of tropical products is often environmentally damaging, as exemplified by the impact of sugar cane growing on Florida’s everglades. Finally, Northern producers of tropical products are politically poorly positioned, as they tend to be large agro-businesses whose political profile is unappealing. This contrasts with confronting subsidies for dairy and grain farming, which have a different political profile that includes small family farmers.

11 Politics and Ideas

For the last fifty years trade agreements have emphasized market access and tariff, quota and subsidy reductions. Additionally, the last twenty years have seen trade agreements increasingly peppered with intellectual property and investor protections. The failure of the Doha round of trade negotiations suggests that this approach to trade is politically exhausted. In the public’s mind trade is now firmly connected with globalization, and trade and globalization are viewed as significantly responsible for wage stagnation, widening income inequality, and increased job insecurity. Trade may indeed result in increased exotic varieties of beer on supermarket shelves, but that does not compensate for heightened economic insecurity and disconnection of wages from productivity growth.

The new political conditions created by the realization that existing trade policy and the current path of globalization are not serving ordinary people well contributed importantly to the failure of the Doha round. Public disenchantment with globalization and existing trade policy points to the need for a new trade policy paradigm that addresses the economic realities of trade and globalization. Doha’s failure provides an opportunity to begin transitioning to this needed new policy paradigm.

The corporate lobby that has driven the existing paradigm is extremely powerful, and it stands ready to block change with claims that the economic roof will cave in if countries abandon the path of neo-liberal globalization. Countering it will require a two pronged strategy. One prong must expose the overly simplistic economics of the neo-liberal model. The other must advance an affirmative alternative trade paradigm that is politically appealing and discredits charges that those opposed to corporate globalization are just protectionists and Luddites.

That alternative paradigm is now clear to see with its emphasis on labour standards, environmental standards, exchange rates, and domestic demand-led development. Trade policy cannot be developed in isolation. Instead, it must be intimately linked with rules for labour markets, the environment, and financial markets, and with an understanding that trade impacts the character of competition, the socio-economic structure, and policy space. The last quarter of the 20th century witnessed the birth of corporate globalization, of which the Doha round of trade liberalization negotiations was part. Looking back, historians may one day view the failure of the Doha round – the first round of multilateral trade negotiations to fail in sixty years – as an important turning point. That failure can now usher in a pause in trade liberalization, and that pause can then be followed by re-orientation of the global economic system to include labour and environmental standards and a reining in of extreme corporate power.