WorldCity, On their own | Miami | Publications | WorldCity Business Magazine | Connecting Local Business Leaders To The Global Economy

On their own

by Jeffrey Sparshott

*On their own *

The free trade landscape is turning into a patchwork of small trade pacts. Countries like Brazil and India may be left out in the cold.

Now that World Trade Organization talks have crumbled, nations are likely to try to clear alternative commercial paths that they hope will lead to prosperity at home. The different initiatives, however, may not all be heading in the same direction.

The WTO, at least for a while, will no longer be the primary forum to liberalize trade. Instead, the United States, the European Union and others will redouble efforts to strike bilateral free-trade deals. Such accords are meant to spur global talks but also to cement narrow commercial interests. The Bush administration has adhered to the strategy almost from Day One.

But there are several problems with bilateral or small regional deals.

“They can detract from multilateral efforts by stretching scarce negotiating resources and political capital. They can distort trade through trade diversion’ to the extent that imports from low cost producers outside the agreement are replaced by higher cost production from partners within it. And, as a counterpart to breaking new ground, [they] can cause friction between systems by generating potentially incompatible rules and standards between different [agreements] and the rules and disciplines of the WTO,” the Organization for Economic Cooperation and Development said way back in 2001, as the current round of WTO talks began.

That won’t stop the United States from pursuing deals with South Korea, Malaysia, Panama, the United Arab Emirates and other countries. The agreements allow the United States to cement political ties with steadfast allies while also boosting commerce, a calculus used by the administration with all its trade deals. Expect the European Union, Japan, China and others to do the same, potentially creating a patchwork of trade agreements among rich and middle-income countries.

Countries that aren’t on the U.S. radar screen or can’t finalize deals because of political difficulties will be left out in the cold. Thailand, South Africa and Egypt fall in this category.

At the same time, as the United States and others try to liberalize trade, forces will be working against more open markets.

Of course, the Free Trade Area of the Americas is on hold until WTO members can reach a grand settlement on farm subsidies, or political circumstances evolve dramatically (as through elections, for example).

In fact, countries like Brazil and Argentina may lose some access to the U.S. market. Senator Charles Grassley, Iowa Republican and chairman of the powerful Finance Committee, has threatened to “graduate” countries like Brazil from the U.S. Generalized System of Preferences. The program, which dates to 1976, provides duty-free entry for more than 4,650 products from 144 developing countries and territories, according to the U.S. Trade Representative’s Office. India also is in Grassley’s sights.

“Brazil and India derive great benefits under our Generalized System of Preferences program, or GSP. And they’re also two of the countries most responsible for holding up the [WTO] negotiations. Maybe they and other GSP beneficiaries feel they don’t need a [new WTO] agreement since the status quo serves their interests. This leaves me frustrated,” Grassley said.

“As a result, I’ll likely oppose the extension of the GSP program, which is due to expire at the end of this year. If GSP is extended, I’ll work to see that the eligibility requirements are tightened, so some countries can expect to be removed from the program,” he added.

Also, we can expect a proliferation of cases at the WTO. The Geneva-based organization will remain a robust forum for trade dispute settlement. And the multiple issues that could not be settled through negotiation such as farm subsidy levels will instead be brought to litigation. The victor in such cases earns the right to impose trade sanctions. That’s a remedy that punishes the loser’s exporters but also the winner’s consumers.

The United States is likely to be a target of several high-profile cases. If it loses, that would undermine support for free trade in a Congress where lawmakers already are inclined to throw up barriers to heavy-hitting competitors like China.

The breakdown of WTO talks already reflects a hearty skepticism of globalization among citizens of rich and poor countries. If the round remains moribund, that would only underscore a failure of public confidence in open markets and free-trade policies. World trade won’t come to a wrenching halt, the WTO will still serve a vital function, countries will continue to buy and sell across borders and global companies are likely to push for growing integration of economies.

But public sentiment to raise walls, rather than tear them down, may grow, further hampering even the smallest efforts to boost trade.