Transcript Professor Peter Lloyd - singapore economic review conference 2015

Singapore Economic Review Conference 2009
Free Trade and the WTO
by
Peter Lloyd
Theme
I want to address a set of issues which is
fundamental to the future of the world economy,
namely, restrictions on cross-border access to
world markets for goods and services.
The global economic crisis has shifted attention
away from these negotiations but arguably they
will have as much effect on the world economy as
the pace of recovery from the global economic
crisis.
Singapore is a suitable location
Singapore is a good place to review these issues. It has
been a duty free port for almost all of the time since it
was established as the Straits Settlement in 1819.
Today Singapore production is more integrated into
world production chains than that of any other economy.
It has evolved from an entrepot economy to a Southeast
Asian hub with goods passing through as part of a
regional production chain, facilitated by services trade
and organised by multinational corporations (see Hoon
and Ho, 2001).
Free trade is best
The unanimous view of trade economists
today is that free trade is the best policy for
a small price-taking economy. Departures
from free trade reduce national welfare. We
are all familiar with this story.
I want to argue that we still substantially
underestimate the gains from trade
liberalisation. There are two major reasons
for this.
Intra-industry trade
Intra-industry trade has been steadily increasing and
spreading to all parts of the world economy. Brülhart
(2008) calculated that, in 2006, it accounted for 44 per
cent of global goods trade.
Current cge models and other methods of calculating
gains underplay intra-industry effects by using the
Armington Assumption. New trade theory shows a
variety of other effects – increased product variety and
quality, economies of scale and agglomeration. The
New New trade theory of Melitz (2003) introduces
further gains due to the exiting of low productivity firms
and other firm level adjustments.
Trade liberalisation increases
growth rates
New Growth theory shows that trade liberalisation
accelerates the rate of growth of liberalising
economies in several ways: increased savings
rates, lower costs of capital and intermediate
inputs, more productive R& D, etc.
Empirical evidence is remarkably consistent
across countries. Holding other growth-inducing
factors constant, a 1 percentage point increase in
the growth of exports is associated with a 1/5
percentage point increase in real GDP per capita.
Trade is the engine of world growth
Higher growth in single economies lifts the
growth rate of other countries through
increased demand for imports, improved
technologies and other mechanisms.
These growth effects of trade liberalisation
have been the main explanation of the
record rate of growth of aggregate world
GDP over the last 25 years.
Progress towards free trade in the
GATT/WTO era
Cross-border trade in goods and services has become
much freer in the GATT/WTO era, though it is difficult to get
comparable series for many countries.
Figure 1 shows a series of the (unweighted) average tariff
rates of 35 countries over the long period 1870 to 1990s.
Figure 2 shows times series of average tariffs rates in the
US and Australia over the last 100 years.
Figure 3 shows the nominal rate of assistance to farmers in
high-income and Developing economies.
2003 - 2004
1998 - 1999
1993 - 1994
1988 - 1989
1983 - 1984
1978 - 1979
1973 - 1974
1968 - 1969
1963 - 1964
1958 - 1959
1953 - 1954
1948 - 1949
1943 - 1944
1938 - 1939
1933 - 1934
1928 - 1929
1923 - 1924
1918 - 1919
1913 - 1914
1908 - 1909
1903 - 1904
Figure 2. Australian (solid line) and US (broken line) Tariff
Rates
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Figure 3. Nominal rates of
assistance to farmers
Regionalism
Regional free trade agreements (RTAs) offer an alternative
route to trade liberalisation. In the limit, if all pairs of
countries signed RTAs that completely freed trade, there
would be global free trade.
Everyone knows of the rapid spread of regional
agreements since the early 1990. Medvedev (2006)
estimates that on average in 2002 countries have signed
five agreements each. The number must now be six each.
How important is regionalism?
Some economists argue that regionalism is less important
than indicated by the rapid increase in the number of
agreements.
The usual approach is to estimate the share of world trade
which takes place between countries that have signed an
RTA. (Medvedev, 2006) estimates this is 32 per cent. After
allowing for tariff lines which have zero MFN rates, the
share of world trade which is subject to preferences fall to
22 per cent. After allowing for non-satisfaction of strict
Rules of Origin requirements, the share falls further to 1115 per cent.
Preferences are important!
This calculation underestimates the importance of regional
preferences. First, where a preferential rate exists, we
should look at the share of trade which is distorted. This
may be all trade in the item, not merely the trade entering
at the preferential rate. Second, tariff lines with zero MFN
rates are predominantly imports of intermediate inputs.
This trade increases the effective rate of protection of the
goods which are produced and subject to positive
preferences.
Preferences are important!
What, therefore, should we do about regionalism?
The gainers
To answer this question, we need to know who are
the gainers and losers?
Countries that participate in RTAs have gained
from trade discrimination with few if any exceptions.
The costs of trade diversion have been
exaggerated. This is borne out by cge studies. We
need also to add in all of the features of RTAS that
go beyond goods and services trade - freeing
trade in capital and business labour, greater
security of investments and protection of IP, etc.
The losers
The losers are countries outside the agreements. They lose because
of negative terms of trade effects as demand for their exports generally
falls.
Developing countries’ participation in RTAs has, as a generalisation,
pushed import costs towards world prices and has improved their
access to world major markets less than that of Developed countries.
A few such as Mexico and Chile and the East European countries have
benefitted greatly. The Least Developed countries have benefitted
least.
This does not mean that that Developing Countries as a group have
lost from regionalism. For most of them, it means that they have
gained less than richer countries.
Changing WTO rules re RTAs
How can the WTO rules be changed to increase the
gains and reduce the loses from trade discrimination?
There is one key change. The present rules, under
Article XXIV, require for a free trade area that
“…the duties and other regulations of
commerce…shall not be higher or more restrictive
than the corresponding duties and other regulations
existing in the same constituent territories prior to
the formation of the free trade area”.
This needs to be amended to require a reduction in tariff
rates and other trade restrictions applying to MFN trade.
Unfortunately, no one has found a simple operational rule
that would eliminate losses to outside countries.
“Multilateralising regionalism”
Much of the recent discussion has taken place
under the banner of “multilateralising regionalism”.
This catchphrase covers a number of ideas,
including the coalescence of existing RTAs into
bigger RTAs (an Asia-Pacific Community?) and
extending cumulation provisions in Rules of Origin.
But it is a self-contradiction. The only true
multilateralisation of preferences occurs if MFN
rates are lowered to Preferential rates. The only
precedent here is ASEAN after the extension of
preferences in AFTA.
New rules for PTAs
The WTO could, if it wished, change the rules relating to the
establishment of RTAs. But it has shown no desire to do so.
I suggest two simple changes that would increase the net benefits of
RTAs:
A waiver of ROOs in RTAs when partners’ MFN tariff rates are
identical or differ by, say, 2-5 %
A requirement that all preferential rates be zero. This would reduce
trade costs due to multiple tariff rates.
These changes could be done unilaterally by participating countries.
The best step the WTO could take to reduce the costs of trade
discrimination is to succeed in the Multilateral Trade Negotiations.
Advancing the MTNs at the WTO
The current Doha Round negotiations have stalled. This
has led to a lot of soul searching inside and outside the
WTO.
Some economists have suggested the WTO concentrate
on safeguarding its rules and the world rely on unilateral
liberalisation to lower trade barriers. But unilateral
liberalisation has always been selective; the US, EU and
Japan have rarely cut tariffs unilaterally, and it has been
more focused on tariffs than ntms. Moreover, we need
multilateral reductions in trade barriers to reduce the impact
of preferences in RTAs, and to tighten rules in areas such
as subsidies, government purchasing and anti-dumping
action.
Causes of Negotiation Failure
After the July 2008 failure, the Director-General outlined the negotiation
problem in the following terms:
“Three principal constraints today represent a challenge to our
work: the first is the bottom-up approach, under which
members must themselves always take the lead in tabling
negotiating proposals and compromise solutions; the second is
the concept of a “single undertaking”, which implies that in a
round of negotiations with 20 different topics, nothing is agreed
until all is agreed; and the third is the decision-taking by
consensus, which is reasonably close to unanimity.”
The first allows Member governments to pursue their own objectives
which are generally mercantilistic, pushing for improved export access
and resisting all attempts to lower their own import barriers. The last
two give a veto to those members who do not agree with a result in any
area. These three features operating together have made negotiations
very difficult in many areas.
Some suggestions

Abandoning the Single Undertaking in
negotiations
 Reviving the “critical mass” modalities used in
the ITA and services agreements after the
Uruguay Round
 Using the modalities and formulae of the
Uruguay Round
 Confining negotiations to OECD and larger
trading DCs, giving other DCs and all LDCs a
free ride.
A fundamental problem
The WTO lacks a clear objective and, because of this, it lacks a vision
of where it is heading. The Preamble to the Marrakesh Agreement has
two objectives: reciprocal reductions of tariffs and other barriers to
trade and “eliminating” trade discrimination.
The WTO has failed abysmally to pursue the second of these. The first
is vague and has led to directionless incrementalism.
The lack of progress in MTNs means that trade liberalisation in the
world economy at present depends on regional actions, which the WTO
is supposed to eliminate, and unilateral actions, which are outside its
control and diminishing.
A new objective
The WTO desparately needs a new
objective.
It should, in my opinion, adopt the objective
of free trade. This implies the removal of all
border measures that restrict trade. As well,
free trade is non-discriminatory trade.
Developing countries too
This objective should apply to all members, Developing
Countries and Developed Countries alike.
One of the bad features of the Doha Declaration is the
interpretation of Special and Differential Treatment for DCs
as “less than full reciprocity in reduction commitments”, or
LTFR as it known in WTO-speak.
Simulations done by the World Bank, using cge models,
show that proposed WTO scenarios would benefit DCs to a
greater extent than the Developed Countries, and most of
the gains come from cuts in their own border barriers rather
than improved export market access.
Concluding remarks
Adoption of a clear objective of “free trade” is not going to
happen in the foreseeable future. Economists have won
some of the battles in the cause of free trade in many
countries but they have not yet won the war.
Meanwhile trade discrimination is increasing and
multilateralism has stalled.
Agur (2008) explains both trends in terms of the increase in
the US trade deficit from around 1 % in early Nineties to
more than 6 % of GDP.
Thus, the present international trade environment is mixed.
The WTO has succeeded in holding trade restrictions in
the global economic crisis period at almost where they
were (cf the Great Depression) and the DSP has contained
trade disputes. But the failure to maintain multilateral trade
liberalisation is switching off the engine of growth in the
world economy.
The job of trade economists is to persist with analyses of
the obstacles to trade liberalisation and proposals to
accelerate the movement to free trade.