The 21st Century’s (So Far) Chaotic Trade Regime

I happened to be in Brussels on 20 October (2016) when it was announced that due to the veto of the Wallonian government in Belgium – population 3.5 million, share of EU trade with Canada 0.045% – the proposed CETA (Canada-EU Comprehensive Economic Trade Agreement), which had taken seven years of hard negotiations, had been blocked. I wrote an article that I entitled “The Mouse that Roared”, drawing on the marvellous 1959 film of that name with Peter Sellers and Jean Seberg in which the tiny duchy of Grand Fenwick declares war on the mighty US …. and wins! The crisis was averted, with some apparent concessions to Wallonia, but the incident demonstrates the fragility of the trading system in today’s political and economic climate.

What an amazing roller coaster the 21st century has been so far: fascinating and frightening, but, and perhaps especially, unpredictable. This has been emphatically the case with trade. The prelude to the 21st century trade saga occurred in 1999 with the chaos that reigned at the WTO ministerial meeting in Seattle. It was dubbed the first major anti-globalisation demonstration. Though there seemed to be a brief (illusory) respite with the ministerial in 2001 in Qatar that witnessed the launch of the Doha Development Round, two years later the Cancún WTO ministerial in 2003 experienced a cacophonic collapse.

The “trends” of violent anti-WTO demonstrations were not sustained, however, not because the WTO became legitimised and popular, but because it became irrelevant. Whereas in the early years of this century demonstrations in front of the WTO building in Geneva were a daily routine, you go to the WTO today and cavernous is the word that comes to mind to define the atmosphere that prevails. Then WTO Director General Mike Moore declared after the Seattle fiasco that his main fear was that the WTO would become the “League of Nations” of the 21st century world economy: impotent and irrelevant. The League of Nations failed to prevent World War Two; there has been no major trade war so far, but to say that it is improbable would be the height of complacency.

There have been lots of positive developments, in particular great reductions in global poverty, but a term much used in literature and media these days that applies to sundry dimensions of the global economy is “disruption”. Of course, disruption is nothing new; as Eve is alleged to have said to Adam as they were being chased out of the Garden of Eden: “there is going to be a lot of disruption ahead”.

* Emeritus Professor, IMD; Visiting Professor, Hong Kong University; Founder, The Evian Group.

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21st Century Simultaneous Disruptive Discontinuities

What characterises the 21st century is not that there should be disruption, but rather the speed with which simultaneous disruptive discontinuities have occurred. To be clear: disruptions need not be negative, they can be positive, or perhaps more illustrative of the 21st century they can be positive but with seemingly negative unintended consequences.

Take China, the “emergence” of which on the global market has been arguably the most “disruptive” discontinuous force, albeit by no means the only one. For centuries, China was the world’s biggest economy, looked upon with awe by western pundits such as Marco Polo and Immanuel Kant. In 1820, just a couple of decades before the first Opium War, China accounted for 33% of world GDP. By 1950, it had dwindled to 4% while still accounting for some 20% of the world’s population.

In 20th century parlance, the words “poor” and “Chinese” were synonymous. Following the market reforms undertaken by Beijing in the 1980s, China witnessed the most massive and prodigious reduction of poverty ever experienced by humanity. This was accompanied by a huge burgeoning of an emerging urban middle class. In 1995, the number of overseas Chinese tourists was close to zero, twenty years later, 2015, it was close to 150 million! Chinese represent France’s biggest revenue in tourism, while China is the world’s biggest market for Bordeaux wines. On the negative consequence side, there have been many losers – millions of job losses arising from Chinese competition especially in manufacturing industry. The Chinese “disruption” is all the more acute in that it was hardly anticipated at the time China acceded to the WTO in 2001 (16 years after it applied to join the GATT), and one of the major problems has been the inability of many economies and corporations to adjust to the new disruptive realities.

Another major disruptive discontinuity has been the “global market revolution”. For the half-century following World War Two, the global economy was divided into three “worlds”: the first world, the rich countries, members of the OECD, which accounted for the overwhelming share of every economic indicator – GDP, trade, investment, etc.; the second world, primarily the economies of the countries on the other side of the Iron Curtain that pursued policies of autarchy; and the third world, the economies of the “under-developed” continents of Africa, Asia and Latin America, which, following the prescriptions of the highly influential Argentine economist, Raúl Prebisch, sought to keep out both foreign investment and foreign trade. There was very little exchange between these three worlds.

Then in the course of the 1990s, a tectonic transformation occurred as the second world imploded and many third world countries actively sought to join the global market and attract foreign direct investment. As the late Renato Ruggiero, WTO Director General from 1995 to 1999, prophetically commented at a forum, “we have gone from a divided world to an integrated world; and an integrated world is much more difficult to manage.”

Throughout the “GATT years” (the General Agreement for Tariffs and Trade, precursor to the WTO), the world regime was effectively run by the four dominant powers of the first world, collectively known as the “Quad” – Canada, the EU, Japan and the United States. In all the GATT rounds, whenever consensus was reached among the Quad, others fell in line. While the Quad initially welcomed the emergence of “emerging markets”, this was on the assumption that they would be passive and obedient on the policy front, while providing market opportunities for first world multinationals.

The assumption was completely wrong, as was vividly illustrated at the Cancún 2003 Ministerial. While the Quad sought to impose its authority and expected the developing countries to abide by its instructions, in fact they objected strongly and created an alliance initially termed the G22. The heads of delegations of the Quad – respectively the American Robert Zoellick, the Canadian Edward Fast, the EU Pascal Lamy and the Japanese Yukio Edano – looked aghast as these “upstarts” sought to usurp their authority. In Cancún the WTO, like Humpty-Dumpy, fell off the wall and has never been properly put together again.

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A third quite dramatic disruptive discontinuity has been the digital revolution, encompassing information, communication, transportation and production technologies. This phenomenon has been largely responsible for the emergence and proliferation of global value chains. The nature of trade has been considerably revolutionised, in that exchange of intermediate goods between or indeed within companies in different geographical locations has become a significantly greater dynamic than the more classical exchange of finished goods between states. Again, it is not simply the nature of the change itself, but the hallucinating speed at which it is occurring. Developments such as 3-D Printing and Robotisation will clearly have an impact, the extent of which at the moment is unfathomable. While the digital revolution has clearly had a major impact on production technology, this has also been quite dramatically the case in terms of consumption patterns. Digital trade has, among other things, seen the emergence of major new players such as Amazon, Google, and indeed in China, Alibaba.

While digital trade greatly facilitates the life of the consumer, it greatly complicates the life of the trade negotiator and policy maker. This is true within and between borders. EU officials are busily trying to define a single European digital market. It also raises critical questions about taxation.

The multiple ways in which the digital revolution will develop remain to be seen as they continue to proliferate. Certainly, while, as noted, the digital revolution has opened vast new vistas for consumers in the global market, they have also provided totally new and hitherto unimaginable real time means of communication among global citizens. The digital revolution engendered the social media revolution. For its part, and as paradoxical as it may seem, the social media revolution has served as a major means for fostering and spreading anti-trade protests. These have become increasingly virulent and contagious. The discontinuities have resulted in strong backlashes.

Exponential Versus Linear Change – Social Confusion Arising!

In his 2002 book entitled High Noon: 20 Global Problems, 20 Twenty Years to Solve Them (the clock is ticking away!), author Jean-François Rischard argues that a major “governance gap” has occurred owing to the chasm between exponential change arising from the technological and global market revolutions and the linear plodding of institutions and mentalities.

These cumulative discontinuous revolutions have created chasms in society. Of course, this is always the case with revolutions – otherwise they would not be revolutions! The difference in the 21st century is the availability of information (or misinformation) globally and the rapid and often widespread reactions they lead to. So there is a strong sense among the many – the 90% – that the world is unjust. So, what else is new? It always has been since time immemorial. However, whereas in the past there were of course occasional social upheavals, they were almost invariably quashed and those at the lower end of the social pyramid reminded that they must know their place. The French Revolution resulted in greater liberty, equality and fraternity among the new (or in many cases renovated old) elites, but hardly touched the downtrodden masses whether in agricultural fields or emerging industrial factories. This was true not only of the downtrodden masses in France, but also of the downtrodden masses everywhere. Information and communication spread, especially in “advanced” countries with the advent of printed media, the telegraph, radio and television, though developments tended to be incremental and, by and large, excluded vast swathes of the “developing” world.

The information revolution, however, has seen revolutionary change in the technology but also in social perceptions and expectations. The often-cited factoid that more people have mobile phones than have toilets illustrates the phenomenon. With the exception of some remote parts of the planet – e.g., Amerindian tribes in the Amazon jungle in Brazil – the global information revolution has been truly global. In her excellent book on India’s rising millennial social media-savvy generations, The End of Karma, Hope and Fury Among India’s Young, Somini Sengupta shows how they have no truck with this “karma stuff”, which anthropologists for centuries have defined as a key characteristic of Indian society. India still has a very young population; with more than a million[Page15:]youth entering the labour market per month, this will represent potentially a hugely powerful social force this century.

Twenty-First Century globalisation has produced, as even its most ardent supporters will acknowledge, a huge and highly visible chasm between winners – the well-educated and well connected tech-savvy – and losers – almost everyone else. In the search for scapegoats, globalisation generally and trade in particular provide convenient and readily identifiable targets. Hence the virulence of the backlash against trade. Social, economic, environmental and political forces drive the backlash. Hence the constant creation of protest coalitions; and hence the political ramifications and manifestations most graphically (but not exclusively) illustrated by the phenomenon and personage of Donald Trump. There are comparable backlashes in Europe, which, among other things, go a long way to explain “Brexit”. These reactionary forces in Europe and America are both fed and exacerbated by the perceived surging rise of immigrants, thereby adding to the more general sense of confusion and insecurity.

To this unnerving social condition, one must add that political leaders, policy makers and business leaders have tended to make a fragile and volatile situation far worse by an amazing degree of insensitivity and irresponsibility.

With the failure of the WTO Cancún Ministerial meeting and the unwillingness of the rich countries – which have greatly benefited from the post-war global trade regime – to meet their moral obligations and the legitimate expectations of the developing countries – against which the playing field has been tilted for decades – in line with the letter and spirit of the Doha Development Agenda, ultimately the multilateral system was abandoned as the Quad marched off with their marbles to play in their own newly established and discriminatorily exclusive sand-pits.

The failure of Cancún will go down in history as the event that ultimately marked the collapse of the global rules-based multilateral trade regime. This is reflected, inter alia, in the emergence of the so-called “mega-regionals” which in essence are exclusive clubs of the rich economies. CETA, as noted above, brings together Canada and the European Union, while the TTIP (Transatlantic Trade and Investment Partnership) is composed of the US and EU, and among the 12 signatories of TPP (Trans-Pacific Partnership) – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the United States – all are either middle or upper income countries with the sole exception of Vietnam which is still a low income country. In none of these mega-regionals are LDCs (least developed countries) included. Thus were TPP to materialise, an LDC such as Bangladesh (US$900 per capita GDP) would be at a serious disadvantage in accessing the rich markets of Japan, Australia, New Zealand, Canada and the United States, compared to TPP member Vietnam (which has a bit more than twice Bangladesh’s per capita GDP).

As a matter of fact, however, while these mega-regionals discriminate against developing and least-developed countries, the most virulent opposition has been in the rich countries, notably the United States, the EU and, to a lesser extent, Japan. The opposition has been so strong and has mustered such political support that, at the time of writing (April 2017) the United States had withdrawn from TPP, and it was not clear whether the other 11 Signatories would ratify it without the United States, and the prospects of the European Union completing TTIP did not look good. The anger and consequent backlash arise from a multiplicity of factors.

Negotiations are held in top secret behind closed doors feeding the perception that they have something to hide that is to the significant detriment of society and the environment. They are also visible scapegoats in the overall backlash against globalisation – even though it could be argued that actually the mega-regionals are anti-globalisation in that they fragment, rather than unite the world economy. They are seen, not without justification, as further privileging the winners at the expense of the losers.

And, in the category of “winners,” business interests overriding social and environmental circumstances are seen as especially toxically present. This in turn is exacerbated by the increasingly low esteem and high degree of suspicion in which much of the population holds[Page16:]business. Irresponsible financial skulduggery by banks that caused the great financial crisis of 2007/8 from which the world economy has yet to recover, and the unethical environmentally offensive cheating of manufacturing corporations are in great part to blame for this situation. Business leadership, with some notable exceptions, has been short-sighted and hence more of a problem than a solution to the conundrums facing the global trade regime.

Going Forward – the Roads to 21st Century Salutary Global Trade Regimes

In 2009, on the occasion marking the 90th anniversary of the establishment of the International Chamber of Commerce (ICC), my son (Fabrice) and I edited a book entitled Peace and Prosperity Through World Trade. The ICC was established in 1919, immediately following World War I, by visionary business leaders (they existed then) who described themselves as “merchants of peace” and whose motto was “world peace through world trade”. Though the dream failed to materialise, as the world was plunged into war again two decades later, it did not totally evaporate.

In the Atlantic Charter drawn up in August 1941 by Franklin Roosevelt and Winston Churchill, out of eight articles, two address the issue of trade, namely that after the end of hostilities and the victory of the allies (still four abysmal years to go) all nations:

4. Will endeavour with due respect for their existing obligations, to further enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.

5. As they desire to bring about the fullest collaboration between all nations in the economic field, with the object of securing for all improved labour standards, economic advancement, and social security.

These were the two articles that ultimately led to the establishment of the GATT and the development of the post-World War II trade regime that at least until recently proved so successful in generating peace and prosperity.

Along with the promulgation of the Atlantic Charter – a remarkable document that merits constant reading and re-reading – free traders often cite the words, in quasi-biblical terms, of the man who was the leading spirit behind the erection of the post-war trade edifice, Cordell Hull: “I have never faltered, and I will never falter, in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade.”1

There clearly is a correlation between trade and peace and prosperity. But trade per se is insufficient: Cordell Hull’s injunction must be carefully read as he stipulates that the freedom to international trade must be indissolubly connected to friendliness, fairness and equality! No friendliness, no fairness and no equality: no peace and prosperity.

These qualities are especially important in a context where for many of the recently emerging nations in the global market, trade is associated with warfare and exploitation rather than peace and prosperity. The opium trade and consequent war with Britain shattered China’s peace and prosperity, resulting in over a century of impoverishment and humiliation. Britain’s cotton trade caused profound ravages and widespread impoverishment in India’s erstwhile cottage industry. For sub-Saharan Africans the word most closely associated with “trade” is “slave”.

For global trade to be beneficial and indeed legitimate, several steps are sine qua non.

First, as noted in the reference to Jean-François Rischard, not only is institutional reform necessary, but perhaps above all a change in mentalities. It is incumbent to adjust to the new realities arising from the disruptive simultaneous discontinuities. New emerging actors need to be engaged with rather than contained. This is, arguably, especially true of China if only because of the increasingly gigantic proportions it has taken in both trade and investment. The erstwhile Quad should avoid making moral blandishments to Beijing while remembering where we have come from. [Page17:]

Second, the only hope that the global trade regime will be fostered by friendliness, fairness and equality is that all WTO Members return to their multilateral venue in Geneva, and eschew the unfriendly, unfair and unequal mega-regionals. Of course, it will be difficult. But it is the only way.

Third, there has to be a clear connection between trade, environment and society. In his book, Rischard argued that global governance – as a means of closing the “governance gap” – should be built on three pillars: our common humanity, our common planet, and our common rules book.

When I founded the Evian Group in 1995 – a think tank/forum on globalisation focusing on trade – we stated that the objective was to create an international coalition of corporate, government, civil society and opinion leaders, committed to fostering an open, inclusive, equitable and sustainable global market economy in a rules-based multilateral framework. The challenge still lies ahead. Ultimately as in 1919, the role of business leadership will be crucial.

Needed: A Business Leadership Revolution

It is my hope that this book plays a small part in spurring a revolution in business leadership. The authors have worked hard to simplify the complex and technical subjects of trade and investment to make them more accessible to business leaders. They have provided a sound introduction to the most important trade concepts. They have reduced technical subjects to readily understandable language, and most importantly, they have provided business guidance in the form of Shaded Tip Boxes, as well as legal details in Text Boxes. Civil society and other opinion leaders will all benefit from this work which goes a long way towards demystifying international trade and investment agreements.

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1
Cordell Hull, Economic Barriers to Peace, p.14 (1937)