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The WTO System is About Stability

The WTO defies simplification. Its purpose is often said to be “free trade”, but the phrase appears nowhere in WTO documents - except in relation to “free trade areas” (where the rules are being got around). Others say the purpose is “trade expansion”, but that is also misleading, for subsidies expand trade - and WTO rules are against them (although they are also got around).

Anti-globalization protesters often insist that the WTO is run “by and for the benefit of multinational enterprises”. But a common complaint among supporters of the WTO system is that business does not do anywhere near enough to support the rules-based trade regime.

So what is a more objective statement of the role of the multilateral trading system in the growth and development of the world economy? Spokesmen stress “predictability”.

The underlying purpose is to promote the institutional stability that is conducive, even essential, to international trade and investment, enabling private enterprises to know where they stand vis-à-vis their governments, and the governments of other countries, so that they can make investment, marketing and other business decisions of long-term significance - so that they can plan for expansion or, if need be, for adjustment.

In that way economic growth and development is facilitated in poor and rich countries alike. Economic growth, after all, is a process of continuous adjustment to changes in patterns of demand, advances in technology, shifts in comparative advantage and so on - stimulated by ideas, innovation and investment.

What’s also important within countries as they become more and more a part of the world economy is the rule of law - with impartial courts - in upholding private property rights and laws of contract, both critical to the functioning of market economies.

Protectionism and Asset Values

Nobody in public life admits to being a protectionist. Protectionism nevertheless persists, although in surreptitious ways, with political figures often saying, “I am not a protectionist, but…”.

In the 1970s and 1980s, as “the new protectionism” emerged, the protectionist instrument of choice was the “voluntary” export restraint, but it was eventually prohibited in the Uruguay Round agreement on safeguards. Today the protectionist instrument of choice is the anti-dumping duty, which Alan Greenspan, Chairman of the U.S. Federal Reserve Board, frequently deplores in speeches on the dangers of protectionism in thwarting adjustment to changes in the economic environment:

"…it is this continuous churning, this creative destruction [as Joseph Schumpeter called it], that has become so essential to the effective employment of advanced technologies over recent decades. In this regard, drift toward protectionist trade policies, always so difficult to reverse, is a much greater threat than is generally understood.

"Erecting barriers to the free flow of goods and services across national borders undermines the division of labor and standards of living by impeding adjustment of the capital stock to its most productive uses. Not so well understood, in my judgment, is the impact that fear of growing protectionism could have on profit expectations - and hence on the current value of capital assets.

"Protectionism was a threat to standards of living when capital asset values were low relative to income. It becomes particularly pernicious in an environment, such as today’s, when that is no longer the case."

— ALAN GREENSPAN, before the Committee
on Ways and Means, U.S. House of Representatives, on 20 January 1999

Impact of Uncertainty on Confidence

Life is full of uncertainty, a normal condition in people’s lives, which they try to limit through savings, insurance and so on. Societies similarly act in the collective interest through rules of behavior (law and order) that provide for the foreseeable and the unforeseeable. Internationally they do the same through financial hedging, assistance to poor countries, diplomatic agreements and - following the Great Depression and World War II - the international economic order.

Recently commentators have focused on how uncertainty is affecting confidence in corporate governance, the market economy and capitalism more generally.

“We have gone from a world (it seems) of small and understandable risks to a world of huge and imponderable hazards. Terrorism? Who knows? It may be an immense danger - or merely a periodic tragedy. The accuracy of corporate accounting? Another black hole. The increase of tainted companies (Enron et al.) sows widespread suspicion, even if the scandals touch only a few firms…

“American consumers have remained optimistic, but among economic élites there is a foreboding that something - terrorism, corporate scandals, a dollar crisis, a stock market crash, a Japan shock - is leading us to we know not where.”

of Confidence", The Washington Post, 12 June 2002

Fragility of Multilateral Trade Rules

Maintaining the international economic order, keeping the multilateral trading system abreast of developments in the world economy, is difficult because it takes a while for systemic issues to surface and get enough analytical attention to be resolved through discussion at inter-governmental level. Not only that…

“Regimes like the multilateral trading system, which require constant management by diplomacy, are certain to deteriorate over time. They are bound by precedent, but their precedents, created by negotiations rather than by law, are unprincipled and cumulatively erode the foundations of the regime. To enshrine the objectives of the multilateral trading system more precisely in national law would make private property rights more secure against arbitrary government manipulation and would serve the logic of democratic constitutionalism.”

— JAN TUMLIR, "International Trade Regimes and
Private Property Rights", Contemporary Policy Issues, Los Angeles, April 1987


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  • The WTO System

    Cartoon by R.K. Laxman of The Times of India, Bombay, reproduced with permission from The Best of Laxman: the Common Man in the New Millenium (New Delhi: Penguin, 2000).

    After the Protesters Depart

    "The anti-globalization protesters have packed their puppets and gone home. The Cordell Hull Institute plans to stay.

    "DC’s newest trade think tank, though still in its infancy, boasts an all-star board, chaired by former U.S. secretary of state Lawrence Eagleburger and including Brent Scowcroft, Howard Baker [now U.S. ambassador to Japan], and Robert Strauss, as well as a sampling of prominent academics, economists and lawyers.

    "The players are unified by their support of free trade, open markets and an integrating world economy. They also believe the international community has lost its way when it comes to global economic affairs"

    — “The Ideas Industry” column,
    The Washington Post,
    Washington, DC, April 25, 2000

    On the Confidence Men

    "Economic integration among nation-states is a matter of establishing a civilized economic community, which involves taming the outlaw forces of protectionism and, what becomes more of a problem as integration proceeds, controlling the confidence men who attempt to sell covert protectionism as overt conformity with the principles of economic integration"

    — HARRY G. JOHNSON, Foreword
    to Victoria Curzon Price, The Essentials of Economic Integration (1974)