Reminder of sheer complexity of trade between diverse political economies

BOOK REVIEW: Misadventures of the Most Favored Nations: Clashing Egos, Inflated Ambitions, and the Great Shambles of the World Trade System By Paul Blustein Public Affairs; £16.99 (€19)

DESPITE THE convoluted title, this is an interesting and hard-hitting book about global trade and its rule-making body, the World Trade Organisation (WTO), based in Geneva with a permanent staff of about 700.

The rules are made following years of agonising discussions and tough bargaining with about 150 different countries.

The author delves into the history of the WTO and the various trade “rounds” it engaged in. The Uruguay round took eight years and it is likely that the present Doha round may take as long and yet be less useful.

Irish readers will be aware of the negotiations which take place, especially between the EU and the US on aids to agricultural production and tariffs on food imports. The quality and traceability of foodstuffs imported into Ireland is now an issue that falls for discussion, and as the Doha round proceeds, it is to be hoped the playing field can be made level.

The author adheres strictly to the orthodox view that free trade, unhindered by tariffs or export subsidies, is still the best hope for the world economy. His main concern is the logistical, nationalistic and other difficulties associated with WTO trade rounds may drive some countries back into their protectionist shells.

This would exacerbate the global economic and financial crisis. He doesn’t really address the fact that the conceptual framework that caused the recession, ie unfettered markets, is the same one which underlies the theory of free trade.

Suppose, for example,that influential economists begin to have doubts about the efficiency of free markets (or the theory of comparative advantage), this could undermine the theoretical underpinnings of the benefits of free trade.

Whatever about a theoretical volte face, there are likely to be several practical impediments. The US is giving substantial aid to its automotive industry and other countries are following. In the middle of this year, the US reintroduced subsidies on dairy products in retaliation for the EU’s supports to milk producers. The trouble is that if the playing field is made level by a series of national retaliations, world trade will shrink.

Of equal concern is the proliferation of bilateral trade agreements. This trend was apparently begun by president George Bush, who signed several bilateral pacts, almost as a form of diplomatic goodwill. This cuts across the spirit of multilateralism and undermines the WTO’s work.

The author reminds us that there was a time when a few rich countries agreed on trade pacts among themselves. Such cosy arrangements became less important when gigantic countries (and markets) like China, India and Brazil began to emerge.

Including these and many other countries in trade rounds becomes a logistical nightmare. The WTO also has an Appellate Body which adjudicates on reported breaches of trade rules – this judicial function has also become problematic, given different legal systems and cultures around the globe.

Trade itself has become far more complex and it is difficult to write a rule book acceptable to, and implemented by, all countries. A few questions illustrate the point. Is it fair China keeps the value of its currency so low? What if one country imposes very high standards of hygiene on food imports? What if a country taxes carbon-heavy imports in the interest of environmental sustainability? What kind of intellectual property rights will stop counterfeiting? If a rich country sells food to a very poor country at a low price is that dumping or an act of altruism?

World trade has become such a morass that some commentators doubt if the Doha round can be successfully completed. They also doubt there will be another round.

Before the Doha round, the WTO decided to rebrand itself by linking free trade with the development of the Third World. There is, of course, a connection between trade and development, but it is not entirely clear which way the causality operates.

There was an interesting academic debate about this. One side argued that since many “successful” Third World countries engaged in external trade, this proved the benefits of trade. But the other side took the view these countries engaged in external trade because they were successful to start with. In any case, this rebranding attempt by the WTO was regarded as a cynical exercise. It also raised the expectations of developing countries beyond the feasible.

While the author is strongly in favour of true multilateralism, he says little about the other large trading blocs that exist – the EU, North American Free Trade Agreement, and the Association of Southeast Asian Nations. In one sense, they make it easier to negotiate full WTO rounds –they have done a lot of the work themselves – but they are also big beasts who may not readily fall into line.

In fact, it is not entirely clear how multilateralism can be imposed on this tripolar world. It must be like trying to spread a sheet on a patch of ground which contains three huge boulders.

This book raises important questions about the world trading system and it contains serious warnings. Given the openness of the Irish economy, any retreat into protectionism abroad could have major repercussions here.

Michael Casey is a former chief economist at the Central Bank and board member of the International Monetary Fund