Wednesday, January 26, 2011

Fears of trade war stalk Davos meeting



Of the raft of global risks confronting business and political bigwigs at Davos, the threat of a trade war is one of the scariest.

Open markets and trade are the essence of the globalization that delivered rising prosperity for decades until interrupted by the credit crunch and economic downturn.

An initial unified global response to the crisis staved off the wave of protectionism that many felt was inevitable. But fears persist that stubborn trade disputes -- especially between China and rich powers like the United States, European Union and Japan -- could spill over into an outright trade war, not least because of tensions over exchange rates.

Trade ministers will hold two meetings at Davos this week to review progress on the renewed push for a deal on the Doha trade round this year.

A failure to conclude the round, already more than nine years old, would deal a body blow to the global trading system.

Brazilian Finance Minister Guido Mantega, watching the appreciation of the real, said last September the country was in a currency war, and earlier this month warned that conflict was turning into a trade war.

"The threat of a trade war is real," Jean-Pierre Lehmann, a professor at the IMD business school in Lausanne and founder of The Evian Group trade and economy think-tank, told Reuters.

"We know that trade wars make everybody pay the consequences, but that doesn't prevent them from happening."

DISPUTE SETTLEMENT

The failure of 1930s-style protectionism to emerge in the downturn was widely ascribed to the multilateral trading system umpired by the World Trade Organization (a system set up in response to the economic tensions of the interwar period).

The WTO dispute system provides a respected channel for states to resolve differences by consultation or litigation.

Just recently the United States has proposed changes to a controversial method of setting anti-dumping duties, known as zeroing, to comply with WTO rulings.

China, a frequent target of WTO litigation, also makes active use of the system as a complainant.

According to former WTO Deputy Director-General Roderick Abbott, the recognition that supply chains nowadays are global militates against protectionism.

"Interrupting the chain by shutting out your neighbor can mean shutting down your main industry," he wrote recently.

In his regular reports to WTO members and the G20, WTO Director-General Pascal Lamy has argued that the rules-based trading system has withstood the crisis. But late last year he warned that currency tensions could undermine that resilience.

The desire to hold down currencies has many causes, but defending domestic jobs by keeping exports cheap and imports dear often plays a role.

While many economists and policymakers are upbeat about overall economic prospects, few are bullish about the outlook for employment. The International Labour Organization forecasts another year of stubborn global unemployment over 200 million acting as a brake on recovery.

Lamy says a deal in the Doha round for a new trade agreement would bolster the WTO system as a bulwark against protectionism.

The converse, of course, is also true.

Weary trade negotiators say it is still not clear, despite ritual calls in G8 and G20 communiques, whether political leaders are ready for the compromises needed for a deal.

In his State of the Union address on Tuesday, President Barack Obama called for quick approval of a free-trade deal with South Korea, but referred in passing to "global trade talks" only in the same breath as other pacts with Colombia and Panama and talks on a regional Asia-Pacific deal.

A preference for bilateral or regional deals over Doha can be seen as another crack in the multilateral trading system.

But for some, the importance of Doha goes beyond however many billions of dollars it would inject into the world economy.

The ability to clinch a new trade deal is a touchstone for the world community's ability to cooperate on other issues, from climate change and poverty to financial regulation.

The World Economic Forum identifies weak global governance as one of the main threats to the world today.
The unified approach of the G20 in the early stages of the crisis -- reminiscent of short-lived global unity after the 9/11 attacks -- has since fragmented.

"The world is probably less together than it was a year ago, when there was still a halo effect of everyone plunging in to deal with the immediate effects of the downturn," Mark Foster, global head of management consulting at Accenture, told Reuters.

By Jonathan Lynn, Reuters
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