Thursday, June 20, 2013

Global Trade System at a Crossroad

Eric Chiou

          Today's global trade system is at a crossroad. A decade-long WTO Doha round negotiation not merely reflects a significant divergence between its members, but also reveals unspoken and inherent concerns and anxiety over the consequences of further trade liberalization.

          Despite orthodox liberal economics claiming that trade liberalization facilitates the efficient distribution of production factors and increases general welfare across borders, what it does not guarantee is that no one will be hurt. Since free trade encourages competition by dismantling any form of obstacle hindering trade across borders, it is not only undermining a state's control over its economy, but also reducing the state's protection on its domestic industries. Hence, freer trade is destined to pose negative impacts on some vulnerable industries and sectors which are not so globally competitive.

          While most people probably agree that free trade and competition within a fair and open business environment will generate benefits more than detriments, however, the negative consequences of this relentless global competition have been generally underestimated and ignored. In fact, a severe global competition is likely to destroy many small but valuable local economic activities, such as small-medium enterprises (SMEs) with traditonal features, which importance may not simply be evaluated via the measure of numbers. In addition, over-emphasis of free trade also tends to generate the situation of "a winner-takes-all," suggesting that multinational corporations with the advantages of abundant capital and the economics of scale are likely to defeat other competitors and dominate or even monopolize local markets in more than one country.

          Most importantly, the devastating repercussion brought by free trade at global scale is to challenge or even weaken the legitimacy of a sovereign state, since the state may no longer be able to fulfill its promise of generating economic welfare for most people while achieving the goal of full employment for its nationals. An enlarged gap between the rich and the poor as well as deepened sense of social deprivation among the "losers" are prone to induce more uncertainty and potential unrests in a society.

          Among the people who feel frustrated and even in despair about current economic situations, young generation is likely to occupy the majority of this unsatisfied group, since it becomes more and more difficult for them to obtain job security. Even they are lucky to have jobs, but their jobs are likely to be underpaid. Hence, the gap between the expectation and the reality breeds frustration and even anger and hostility against governments, which is one of crucial reason to explain why in recent years so many students' protests and youth uprisings occur in both advanced countries and developing countries. For instance, a famous student's demonstration in the developing world in 2012 was the "Occupy the Wall Street" movement in the United States. What happened in the Middle East, such as in Egypt, Tunisia, and Libya were also notorious cases of political instability due to an unsustainable economic inequality.

          Of course, not all cases mentioned above can all be attributed to the outcome of free trade. Nevertheless, one indisputable fact is that the latest phenomena of economic globalization have aggrandized people's economic insecurity and enlarged social disparity, so as to destabilize the legitimacy of the state. If these undesirable and poisonous effects of free trade were not addressed effectively, one will not be surprised to see rampant student protests and civil riots happened in more and more countries. Hence, how to maximize the positive impacts of free trade while minimizing the negative clouts becomes a crucial issue to be considered.

          Over the past decade, the failure of the WTO multilateral negotiation shows that some states, which are reluctant or unwilling to open up their domestic markets, may be due to massive political and social costs beyond their affordability. Meanwhile, some countries are likely to foresee the dire consequences of their local industries after further liberalizing trade. Thus, the essence of free trade is the game of the strong and the demise of the weak. In other words, free trade does not provide a satisfactory resolution to the vulnerable, which may be one of its significant and fatal defects to be prevailed globally.

          Thankfully, as the most important and influential economic cooperation forum in the Asia-Pacific, APEC had an insight about the long-term prospect of free trade. Hence, in 2012, APEC leaders proclaimed that APEC's economic growth should be based on five attributes, which are balanced growth, inclusive growth, sustainable growth, innovative growth, and secure growth. Among these, inclusive growth and sustainable growth represent APEC's emphasis on the justice of income distribution as well as the balance between environmental protection and economic development. This is to say that APEC has noticed the detrimental effects of trade liberalization and intended to address these crucial issues through APEC's collective actions.

          Nevertheless, it remains questionable whether APEC has provided a compelling case in terms of resolving the drawbacks of trade liberalization, given that current emerging trade blocs divide into two approaches to deal with this issue. For instance, the US-led Trans-Pacific Partnership (TPP) tends to impose strict and intrusive rules, so as to foster more competition on the one hand, and to protect workers' rights and environment on the other. In contrast, the ASEAN approach, embodied in the Regional Comprehensive Economic Partnership (RCEP), suggests a different approach to mediate this conflict. Specificiall speaking, RCEP intends to provide more flexibility and longer period of adjustment for these states which may be unable to bear the costs of swiftly embracing full trade liberalization.

          It is too early to tell which approach could provide a more useful and promising template for the future WTO negotiations. However, the role of APEC as a forum of ideas should not be underestimated. While the global trade system may be at a crossroad, APEC could always play a critical and constructive role in inspiring new ideas and creative thinking to reduce the side effects of free trade.

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