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Perhaps the riots in Seattle marked a turning point for
a globalising world. In the past 50 years cross-border trade and
investment have boomed, raising living standards across the world and
lifting millions out of poverty. But now a backlash against this closer
integration has begun. This backlash is surprising. By and large, it
comes not from developing countries which were battered when world
financial markets seized up in 1997-98, but from rich countries which
escaped largely unscathed. It is strongest in the US, the biggest
beneficiary of free trade, luxuriating in an economic boom. And its
main target is not multinational companies or global banks, but a once
obscure regulator with 500 staff and an annual budget of £48m: the
World Trade Organisation (WTO).

The protesters who
mobbed its summit in Seattle last December have propelled the WTO to
notoriety. Yet it remains widely misunderstood. The popular perception
is of a secretive, unaccountable body which tramples on national laws
that protect the poor, the environment, and public health, in order to
advance big companies’ global ambitions. "Many decisions affecting
people’s daily lives are being shifted away from our local and national
governments and instead are being made by a group of unelected trade
bureaucrats sitting behind closed doors in Geneva," according to Ralph
Nader, a leading American consumer-rights campaigner. The WTO, it is
said, threatens countries’ sovereignty and democracy itself.

This
distorted image of the WTO is peddled by an unlikely alliance of
media-savvy pressure groups and old-fashioned protectionists. Greens
make common cause with smokestack industries, consumer activists with
trade unions, development lobbyists with rich-country farmers. These
"globaphobes" have all sorts of gripes, many of them contradictory.
Some rage that rich-country markets are being flooded with cheap
imports from poor countries, others that they are rigged against them.
Many who rail at the WTO’s powers want to hijack them for their own
ends. But all of them harness people’s anxieties about the might of big
business, the pace of economic change, and a sense of powerlessness in
the face of intangible global forces-and focus these fears on to the
WTO. Ostensibly, globaphobes have the WTO in their sights because it is
powerful. In fact they target it because it is weak. The WTO cannot
easily fight back. It has no votes to deliver, no lobbyists in national
parliaments, no campaign contributions to splash around and no vast PR
budget. Its total budget amounts to less than a quarter of that of the
World Wide Fund for Nature, one of its many critics.

The
WTO’s critics are abetted by governments for whom it is also a
convenient scapegoat. Like the EU, the WTO is blamed for beneficial but
unpalatable policies. For example, governments often blame job losses,
or rising inequality, on "unfair" competition from foreigners, while
insisting that the WTO prevents them from taking protectionist
measures. Attacking the WTO also deflects attention from domestic
failings. The Clinton administration, whose trade policy is in hock to
corporate lobbies, blasts the WTO for ignoring public opinion. EU
governments, whose regulatory lapses have led to mad-cow disease and
dioxin poisoning, claim that the WTO threatens food safety. And
developing countries whose reforms falter argue that the WTO is biased
against them.

This portrait of the WTO is a
travesty. Although the WTO has its faults, it is generally a force for
good. Indeed, by helping to free world trade, the WTO and the General
Agreement on Tariffs and Trade (Gatt) which it replaced in 1995, have
probably done more to raise living standards and reduce poverty than
any other man-made device. Sceptics should compare the long boom in the
US and Europe, as trade barriers fell in the 1950s and 1960s, with the
protectionist nightmare of the 1930s. Or they should consider how trade
has benefited South Korea: in 1970, poorer than Ghana; now, richer than
Portugal. Or they should read country studies showing that openness
boosts economic growth. Or study the paper by Jeffrey Sachs and Andrew
Warner, which finds that developing countries with open economies grew
by 4.5 per cent a year in the 1970s and 1980s, while those with closed
economies grew by 0.7 per cent a year. (At that rate, open economies
double in size every 16 years; closed economies must wait 100 years.)

The
benefits of free trade are now taken for granted. In Seattle, Americans
who chanted that trade should be "local not global" sported Japanese
cameras, chatted on Finnish mobile phones, kept warm with Colombian
coffee and doubtless wore clothes made in Asia. So the case for free
trade bears restating. Eliminating taxes on foreign goods gives
consumers lower prices and more choice. It also encourages domestic
firms to specialise in what they do best, rather than making goods
which are more efficiently produced elsewhere. Moreover, it boosts
economic growth, because other countries’ technologies are more readily
adopted and foreign competition spurs domestic firms to increase
productivity.

But what about the costs of free
trade? Governments lose the revenue from import duties. The profits of
domestic firms fall. Capital and workers must shift to more efficient
uses. In the short term, there are losers. Their pain-like that of
anyone who loses their job-can and should be eased with welfare
benefits and job retraining. But it is odd for protectionists to argue
that the temporary losses of a few should prevent the country reaping
the much bigger-and permanent-gains from free trade. After all, the
interests of candle makers were not allowed to stop the introduction of
electricity. Nor are governments scrambling to stop the Internet
cutting out middlemen. Freeing trade, like new technology, causes
change; that is how it boosts economic growth. Some of us lose at
first, but eventually we all gain.

Critics scoff
that this model of free trade is naïve. In the real world, they say,
big companies monopolise markets. Breaking down trade barriers merely
helps these behemoths crush their smaller competitors. This argument is
perverse. For one thing, big companies are not as omnipotent as they
seem. Not one of the world’s ten biggest firms by market value a decade
ago is still in the top ten. The world’s biggest firm, the US’s Cisco
Systems, was founded in 1986. Europe’s largest companies, Britain’s
Vodafone and Finland’s Nokia, were minnows a decade ago. Moreover,
opening markets to foreign competition curbs big companies’ dominance.
Closed domestic markets, where national champions can cosy up to
government, are much more likely to be monopolised than global ones.
And if big firms come to dominate global markets, then their monopoly
is better tackled by antitrust watchdogs-or indeed by competition rules
at the WTO-than by raising trade barriers.

But the
critics are right about one thing: companies do have an unhealthy
influence on governments’ trade policy. That is precisely why the WTO
is such a good thing. In an ideal world, each government would act in
its country’s best interests and liberalise unilaterally. But this is
often politically difficult, because industries that fear foreign
competitors tend to lobby governments harder than the disparate
millions of consumers who benefit from cheaper imports. So in practice
governments tend to be mercantilist. They seek to pry open markets for
their exporters, while protecting their domestic industries from import
competition as far as possible.

The WTO helps to
break this deadlock. Governments offer to open domestic markets in
exchange for greater access to foreign ones. This galvanises exporters’
support for liberalisation, which helps to overcome the opposition of
import-competing industries. The second advantage of WTO agreements is
that they tie governments’ hands, making it harder for them to
backtrack on liberalisation, as well as making their import rules
transparent and predictable for business.

One
reason, then, why the WTO is so unpopular is that it undermines
sectional lobbies. When the US’s steel industry protested at a rise in
cheap imports in the wake of the world financial crisis in 1998, the
Clinton administration responded by imposing anti-dumping duties on
imports which it deemed "unfairly" cheap. This did not satisfy the
industry. So the administration offered a subsidy package involving
$300m in tax breaks, and promised to make it easier in future to get
protection from import surges. But even that was not enough. The
industry spent $4m on a media blitz and lobbying campaign, urging the
US to "stand up for steel." The House of Representatives rose to
attention. In March 1999 it passed a bill to impose quotas on foreign
steel producers. The administration said it would veto the bill: not
because it was bad for Americans who would thus pay more for their
cars, nor because it was bad for crisis-hit countries which needed to
export to the US to escape depression, but because it would breach WTO
law. Thankfully, Bill Clinton’s mettle was not tested. The Senate stood
up to steel and threw out the bill. But support for the WTO took
another knock.

There are two further reasons why the
WTO is increasingly controversial. Trade quarrels now touch on
sensitive issues such as food safety and the environment, which were
once exclusively a matter for domestic policy. These new disputes
mobilise a wide range of people previously uninterested in trade.
Second, unlike the Gatt’s, the WTO’s dispute settlement mechanism now
has teeth. Countries found to be in breach of world trade rules can no
longer veto rulings against them. So governments-and pressure
groups-are increasingly turning to the WTO to settle by legal means
disputes which might often be best dealt with politically.

The
WTO’s dispute settlement mechanism is unique in international law.
Unlike, for example, UN resolutions, which can be vetoed by the five
big powers, WTO rulings are binding-even on the US. To many Americans,
who view international institutions, such as the UN or the IMF, as
sticks for disciplining foreigners but not themselves, this smacks of
world government. Others think the dispute settlement mechanism is a
tool for the rich and powerful, notably the US, to impose their writ on
the poor.

Neither side is right. The WTO is not a
world government in embryo. It is a place where governments negotiate
trade deals and try to settle disputes. It cannot force, say,
genetically modified (GM) food on Europeans or slap sanctions on the US
for banning shrimp imports from countries which kill sea turtles. But
it is a forum where global rules on such tricky issues are hammered
out, and an umpire which can be called upon when others breach the
rules.

All the WTO’s rules are agreed by a
consensus of its 135 member governments, and then ratified by national
parliaments. Yet such accountability does not satisfy many pressure
groups, such as Greenpeace. They think the WTO should answer to them.
Why? Almost 600m voters elect the Indian parliament, whereas Greenpeace
is scarcely accountable to its 2.5m members. And why Greenpeace, rather
than the Road Haulage Association or the National Front? Pressure
groups, not the WTO, are guilty of trying to bypass democratic
institutions.

The WTO is a servant of its member
governments, not their master. It arbitrates in disputes only when
asked to do so by a member government. Its verdicts, arrived at by an
independent panel of trade experts, and open to appeal, are based on
rules to which its members have previously signed up. The WTO does not
prescribe what countries which breach world trade rules must do to
comply with them, nor can it impose trade sanctions if they fail to
amend them satisfactorily. Moreover, countries can at any time choose
to withdraw a case and settle it politically instead. But if they do
not, and a country fails to fall into line with WTO rules, the
aggrieved government is entitled to impose sanctions on the offender’s
exports. Alternatively, it can agree to compensation in the form of
lower trade barriers in other areas. Of course countries are free to
leave the WTO if they wish. At present Congress is debating whether to
take the US out of the WTO-although this is unlikely. Many countries,
notably China, are queuing to join.

The WTO is
much more open than the IMF, the British government, or most pressure
groups. True, trade negotiations are conducted in private. Talks
between governments generally are. Privacy makes it easier to reach
agreement. Ironically, though, Seattle was such a shambles that trade
critics were often in the same room as governments were negotiating-and
failing to agree. In any case, WTO agreements and panel verdicts are
widely available on the web, at www.wto.org. There is a good case for
panel hearings to be public too. This might dispel fears that trade
hands are conspiring to take over the world. (Public hearings would
probably not attract much attention. By all accounts, they are very
dull.)

What, then, of the charge that the WTO is a
tool for the strong to oppress the weak? Critics point to the banana
battle between the US and EU. They claim that the WTO is helping wicked
US multinationals, such as Chiquita, to drive Caribbean banana growers
out of business. But the EU’s banana regime mostly benefits European
companies which market Caribbean bananas-such as Ireland’s
Fyffes-rather than Caribbean growers themselves. According to a study
by Brent Borrell, formerly at the World Bank, the EU’s banana regime
costs European consumers $2 billion a year in higher fruit prices. Over
half that sum ends up as monopoly profits for fruit distributors.
Banana growers in the poor countries gain only $150m a year. And the
equally poor countries which the EU does not favour, such as Ecuador
and hurricane-hit Honduras, lose. In short, the EU’s rules are a rich
man’s racket, not a safety net for the poor.

The
truth is that the WTO is more a champion of the weak than a stooge of
the strong. Ask Ecuador. Its annual income per person is about
£1,000-less than St Lucia’s-but its banana growers are the most
efficient in the world. Banana production is in the hands of local
people and banana workers enjoy full union rights. Their problem is
that the EU makes it difficult for Ecuador to sell its fruit in Europe:
the EU imposes strict limits on how many bananas it can export, and
makes it pay hefty import duties. This is no small matter for Ecuador.
One in ten Ecuadorians depends on bananas for a livelihood; the fruit
is the country’s largest foreign-currency earner; and Ecuador’s economy
is in its worst crisis in decades.

Without the WTO,
Ecuador would be in dire straits. It could complain to the EU, but
Ecuador doesn’t have much clout in Brussels. Thankfully, it was able to
appeal to the WTO, which ruled that the Europeans were breaching world
trade rules. Kicking and screaming, the EU has agreed to change its
banana regime-although it has yet to do so satisfactorily. Eventually,
Ecuador should be able to sell more of its bananas in Europe. This need
not deprive Caribbean banana growers of a living. So long as the EU
gives better access to bananas from the rest of the world, it can
continue to give preferential access to Caribbean fruit.

This
is not the first time that the WTO has helped a small poor country
fight its corner against a big rich one. (The US lifted its
restrictions on imports of Costa Rican underwear after the WTO ruled
that it was in the wrong.) True, the dispute settlement mechanism is
not as fair as it could be. The US can marshall a battery of top
lawyers to fight its cases; poor countries have to scrimp. But efforts
are being made to remedy this, and a legal aid centre for poor
countries is being set up. The point, though, is that in an unequal
world, the WTO’s dispute settlement mechanism is much fairer than the
alternative: the law of the jungle.

The WTO’s
dispute mechanism is a strength, but it can also be a weakness. When
governments lack the political will to comply and are too big to be
bullied into doing so, it can be counterproductive. A legal ruling
which assigns blame to one side can make it more difficult to reach a
face-saving political compromise. This not only leaves the offending
trade barriers in place, but also entitles the aggrieved country to
retaliate with trade sanctions, which harm its own consumers, who have
to pay more for imports. Worse: support for the WTO is undermined.
Winners blast it for being ineffectual, losers for imposing unwanted
foreign products on it.

The WTO gets a lot of
stick when those "unwanted" imports are as innocuous as steel. But what
if they are as controversial as GM food? Quarrels about food safety and
the environment have come to the fore because countries’ economies are
now so closely intertwined that almost any government policy can have a
discriminatory impact on foreign companies. They are particularly
tricky, not least because governments are reluctant to compromise their
ability to pursue other aims for the sake of free trade.

Consider
the battle between the US and the EU over beef hormones. In 1985 the EU
banned beef from cows treated with growth hormones which, it claims,
can cause cancer. Such hormones are widely used in the US, where
regulators say they are safe. In 1989, the US retaliated against what
it saw as EU protectionism by imposing $100m of sanctions on EU
imports. After the WTO was set up in 1995, with its new dispute
procedures and new rules covering food safety and trade, the US lifted
its sanctions and took its beef dispute to the WTO, which ruled that
the EU ban breached world trade rules. But the EU failed to lift its
ban by last May’s deadline, so in July the US imposed $117m of trade
sanctions.

This battle over beef hormones is very
different from a traditional trade quarrel such as a row over
restrictions on steel imports. Traditional disputes are quite simple.
They are usually about explicitly protectionist measures such as import
tariffs or quotas, which keep out foreign goods at the border. The
costs of such measures (higher prices and less choice for consumers)
are reasonably easy to quantify; they typically outweigh the benefits
(fatter company profits and tariff revenues for governments). Even
mercantilist governments should be able to resolve such narrowly
economic disputes. One way is to buy off steel companies and unions.
Another is to exchange access to domestic markets for access to foreign
ones.

The new trade disputes are more complicated.
They are not just about economics but about social and cultural issues,
too. They are about domestic regulations which have international
effects, rather than about border controls: Europe has banned all
hormone-treated beef, not just America’s. Such regulations are not
wholly protectionist. Although Europe’s ban does keep out American
imports and is partly motivated by a desire to protect inefficient
European farmers, it is also a response to public fears about food
safety.

The costs of the ban (higher beef prices,
less choice) are quite easy to establish. But the benefits are not: the
value of safer food is hard to quantify and reasonable people may put
widely different prices on it. Indeed, some of the new actors in such
disputes, such as consumer-rights activists and environmental groups,
may not be susceptible to economic reasoning. So even liberal
governments may have trouble resolving such quarrels. They may be
particularly wary of setting precedents which they may later regret:
the beef war is widely seen as a forerunner for a larger battle about
GM crops. Many may feel that such disputes intrude too far on national
sovereignty, and thus refuse to accept that international trade rules
should trump domestic political considerations.

The
multilateral trading system, founded in 1948 when memories of the 1930s
were still fresh, recognises that governments have legitimate aims
other than free trade. Governments were keen to liberalise
international trade, but were wary of giving up policy tools which
might help them prevent another slump. So a delicate compromise was
struck. Governments agreed to be bound by multilateral rules in order
to trade freely internationally, but retained the right to set their
own policies domestically.

In the 1950s and 1960s,
the compromise worked well. Countries agreed to lower their most
blatant barriers to trade-such as import tariffs or quotas imposed at
the border-while intervening at will, with taxes, subsidies and
regulations, in their domestic economies. But by the 1970s, problems
began to emerge. As border barriers fell, it became clear that domestic
regulations were also a serious impediment to trade: a subsidy or a
discriminatory rule could shut out imports just as effectively as a
tariff. Moreover, governments began to abuse these loopholes for
protectionist ends: anti-dumping cases and import-restricting
regulations proliferated. So the focus of trade policy turned to
limiting such abuses.

Twenty years on, the
compromise is in tatters. The problem is how to craft a new one which
secures the huge benefits of free trade while respecting countries’
different cultural traditions. This is a delicate balancing act.
Trample too much on domestic sovereignty and popular support for free
trade will evaporate. Tread too lightly and it will be open season for
protectionism. Broadly, the solution is for governments to pursue their
political aims in ways which harm the rest of the world as little as
possible. That is often tough to achieve in practice.

Consider
again the battle over beef hormones. It is ridiculous for Europeans to
accuse the WTO of trying to foist dangerous food on them. Its ruling,
that the EU’s ban was illegal because it was not based on sound
science, is based on rules to which the EU agreed in 1994. There is no
scientific evidence that growth hormones are dangerous when used
responsibly. They can, however, be dangerous in high doses. Americans
are not dropping dead in the streets, so the hormones are presumably
not misused. Many products which are safe when used responsibly, such
as cars, can be lethal when misused. All the same, if

Europeans
genuinely prefer to be safe rather than sorry, and are willing to incur
the economic cost of being extra-cautious, then they should not be
forced to lift the ban. But then, they should not have agreed to the
WTO’s food safety rules. And there is a more important point. There is
no such thing as national preferences, only individual ones. It is an
affront to our freedom for governments to decide what we can or cannot
eat. So it would be best if the EU lifted its ban but required that
hormone-treated beef be labelled as such. Then those Europeans who are
not worried about growth hormones could eat beef treated with them and
those who are concerned could avoid it. How can that be a threat to
democracy?

The row over beef hormones is a light
skirmish compared with the looming war over GM foods. Many Europeans
are paranoid about genetic modification, and the economic stakes for
the US run to many billions of dollars. A possible European ban on GM
foods, which are not commercially produced in Europe, would effectively
discriminate against US farmers. If the US challenged such a ban at the
WTO and won, support for the WTO would plunge in Europe. Clearly, it
would be best if the matter were dealt with politically. In any case,
the truth is that there is no stark choice between food safety and free
trade. Even free traders prefer safe food to free trade. But tastes-and
perceptions of risk-differ between individuals and countries. Rather
than ban GM foods, the EU should require proper labelling.

The
battle of Seattle has only just begun. The failure of governments to
launch a new round of world-trade talks has left a vacuum which critics
of the WTO are eager to fill. They are redoubling their efforts to win
over public opinion, to lobby governments and elbow their way into the
WTO’s work. European farmers are pressing for the WTO’s food safety
rules to be watered down. Trade unionists, notably America’s AFL-CIO,
are pushing for the WTO to impose trade sanctions on countries which
fail to enforce core labour standards. Greens want the WTO to enforce
environmental standards, too. Al Gore, the Democrats’ candidate for
president, says he supports their aspirations. There is a growing
danger that the WTO’s dispute settlement powers will be used not to
keep trade free, but to keep imports out.

It is
unfortunate that development lobbyists share platforms with such
protectionists. The main losers from such a perversion of the WTO’s
mission would be poor countries. Understandably, developing countries’
immediate priority is to escape from poverty, rather than ending child
labour or clearing up air pollution. To ban their imports because they
do not have labour and environmental standards as high as rich
countries is to deny them any hope of development-and the ability to
afford such high standards in future.

The stakes
could not be higher. Those who believe that the WTO can make the world
a richer, and thus a cleaner and safer, place must do more to fend off
attacks from those who want to pull up the ladder to prosperity behind
them. The WTO itself has much to do. It needs to pacify its more
reasonable critics and win back public opinion at large. That requires
reforms to make the WTO more open and less bureaucratic. The WTO should
also lose its power-easily open to abuse-to authorise retaliatory trade
sanctions against recalcitrant countries, which should instead have to
lower their barriers to less controversial imports. Above all, the WTO
must convince people that it is genuinely a friend of the little man
and a champion of consumer rights.

Yet such a task
cannot succeed without governments. Only governments have the power,
the money and the legitimacy to make a difference. They created the WTO
to nurture, through global rules, the process of globalisation. As the
richest and most powerful, the US and the EU have a special
responsibility to shore it up. Perhaps they have forgotten that
globalisation is reversible. The deep integration of world markets in
the 19th century was reversed in the first half of the 20th century,
with catastrophic results. Unless governments defend them, the huge
gains from free trade could yet be lost again.

Posted 01 May 2000 in Prospect, Published articles, Trade

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