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THE GLOBAL TRADING SYSTEM AND THE DYNAMICS OF BUSINESS

By Professors Carlos A. Primo Braga and Jean-Pierre Lehmann - February 2013

We live in exhilarating times. Recent crises notwithstanding, the economic, technological, social and political progress achieved since the beginning of this century is mind-boggling. While sharing in the enthusiasm, our instinct might be compared to that of Letizia Bonaparte, mother of Napoleon I, who remarked after her son's initial spectacular victories: "Pourvu que ça dure!" (hope it may last!)

The term "sustainability" was hardly part of the vocabulary not so long ago. Now it punctuates virtually every paragraph. While the concern over sustainability applies to many areas, our specific concern here is about the global trading system.

In a nutshell: for much of the first half of the last century, especially during the 1930s, the world economy and business were convulsed by predatory trade wars. The architects of the post-war edifice of global economic governance were committed to repairing the system and ensuring that it should be robust, fair, and sustainable. Trade especially was recognised as a critical foundation for peace and prosperity – if, and it is a very important "if", conducted fairly on a non-discriminatory basis. Rules are necessary; otherwise trade can also be exploitative and discriminatory. An attempt to complement the Bretton Woods institutions (the IMF and the World Bank) with the creation of the International Trade Organization (ITO) failed because the US Congress refused to ratify the agreement. The General Agreement on Tariffs and Trade (GATT) became a second-best solution for this institutional vacuum, reflecting the negotiations for tariff reductions that had been conducted in 1947, before the conclusion of the ITO talks. The GATT entered into force in 1948 as an inter-governmental treaty – expected to be an interim agreement on the road to the ITO. Its spirit and letter provided a multilateral framework that saw trade and economic growth among its members flourish in the ensuing 50+ years. The victory of the West in the cold war owes a lot to it.

Indeed, the GATT was so successful that by the time the cold war was over major trading nations finally agreed to establish an international organisation to administer multilateral trade agreements (including the GATT): the World Trade Organisation (WTO), 1995. Since then virtually every nation, with a very small handful of exceptions, came knocking at its door to seek membership. Membership of the WTO, it should be stressed, requires credible market-oriented economic policy credentials – it's tough to get in and accession by new members invariably requires significant reforms. Yet, at the moment of writing, the membership stands at 158 with a number of countries still in the accession negotiating process. The accession of China to the WTO in 2001 will remain as one of the landmark trade developments of the 21st century. China, after two centuries of turmoil, exploitation and marginalisation, in its economic reform program in the eighties had formally embraced globalisation and to that end joined the global trade membership-only club.

So far, so very good. But now we come to the "pourvu que ça dure" bit. In fact the year China acceded to the WTO is the same year the Doha Development Agenda (the first round of multilateral trade negotiations in the WTO era, after the 8 rounds conducted under the GATT rules) was launched. Twelve years later it seems irretrievably stuck in the mud. There are many reasons, but two deserve to be highlighted.

First, completing a multilateral trade round was difficult enough when the membership and decision making was restricted to a compact number of like-minded countries at comparable levels of economic development. With the explosion of membership and hence the immense diversity of economies, from Albania to Zimbabwe, getting the consensus necessary to move the agenda forward is arguably more than "just" a Sisyphean task.

Second is that throughout the GATT decades the private sector and trade public policy officials worked in a syncretic relationship. In fact, as many businesses internationalised, the private sector was the driving force pushing the trade policy agenda forward. Of course many protectionist-oriented businesses sought to impose trade obstacles, but on balance the liberal side of the private sector prevailed. Trade barriers were reduced, trade boomed, business flourished, and societies and consumers gained considerable benefits.

In the last decade, however, the private sector and the world of trade negotiations have become increasingly divorced. They have always operated at different velocities. In the 21st century, however, the discrepancy has increased, with the private sector increasing its velocity -- reflecting the impact of information and communication technologies, the transport/logistics revolution, and unilateral trade liberalization by countries -- while the WTO negotiations move at the pace of an aging snail. Consequently, and not surprisingly, the private sector has come to regard the WTO with impatience, frustration and indeed as increasingly irrelevant. In the interim business leaders have tended to put their eggs in the bilateral or regional trade baskets, to which policy makers have responded: it is the regional and bilateral preferential agreements where the action is, while the multilateral stagnates.

While this is understandable, it is regrettable none the less. It is also very myopic. Even when the GATT was a "cosy club" dominated by the like-minded, there were some dangerous tensions – e.g. in the acute trade frictions between Japan and the US in the 1980s. With the greatly expanded membership and especially the emergence of a number of "new kids" on the global trade block (in particular China), things are infinitely more complicated and more conducive to friction.    

It is true that contrary to fears in 2008/2009, the great financial crisis did not result in trade wars. But the global trade edifice is fragile and its foundations are being eroded by the proliferation of preferential trade agreements. There is no reason to panic, for sure, but it is important to recognise that apathy and complacency toward the WTO are becoming the standard modus operandi for many governments and companies. Business leaders need to be reminded that this is the only multilateral rules-based show in the global village market.

As the WTO is undergoing a major leadership change, with Pascal Lamy completing his second and final mandate in August this year, now is the time when the private sector should rekindle its interest in and commitment to the WTO.[1] This is the time for institutional creative innovation. This is a time for thinking not just of the immediate, but of the long term. This is a time to build a genuine, open, equitable, inclusive and sustainable global market. The private sector is the indispensable partner to bringing this about. Only then can we be more optimistic that the progress will last. After all -- as an Ernest Hemingway character once noted when asked "How did you go bankrupt?" Answer: "Two ways. Gradually, then suddenly." -- one should not take for granted the sustainability of the multilateral trade regime in spite of its historical contributions to global prosperity.  

[1] For details about the WTO DG selection see http://www.imd.org/news/The-WTO-Leadership-Conundrum.cfm

Carlos A. Primo Braga is Professor of International Political Economy and Director of The Evian Group @ IMD. Jean-Pierre Lehmann is Emeritus Professor and Founder of The Evian Group @ IMD. On 30 January the Evian Group convened a public meeting featuring a number of the candidates to succeeding Pascal Lamy as WTO DG on the theme of How to Rekindle the Interest of the Private Sector in the WTO?   

Both Professors teach on the Orchestrating Winning Performance Program (OWP), which provides individuals and teams with the latest management thinking in a customized program schedule, as well as networking with 400 plus international executives.



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