The Strategic Importance of Trade Agreements and Development Institutions


Regional trade agreements are en vogue, since global – multilateral – trade agreements within the World Trade Organisation have, more or less, collapsed. The never-ending story of the latest attempt at a global agreement, the Doha Round, in the making for more than ten years, with no end in sight, attests to that.

China has concluded trade agreements with many of ist neighbors, the United States has concluded NAFTA with Canada and Mexico, CAFTA with Central American countries, and has most recently concluded negotiations with ten Pacific states (but not China), acronymed TTP. The European Union has concluded an agreement with Canada (CETA) and is negotiating with the USA the contested TTIP agreement, contested both in Europe (especially Germany and Austria), but also in the US Congress.

Traditional economics, from its formation as a „science“ in the 18th century, has celebrated the benefits of free trade. The benefits would accrue to both partners, mainly because of economies-of-scale effects which enabled more efficient production at home because of larger lots to be sold. In spite oft he fact that trade between two countries might lead to negative exclusion effects for those outside the agreement who would lose trade volume to those within the agreement, free trade became one of he mainstays of liberal economics.. More recently, this dogma has come under attack.

This more recent criticism relates to the fact that free trade does not benefit everybody within countries (income distribution effect), mainly benefiting businesses and skilled labor, and might have negative effects on social standards and on the environment, if the trading partner competed with the help of lower standards. Social standards might come under pressure from imports from countries with lower standards, and thus lower costs. Negative environmental effects come from transport externalities which are not included fully in the costs of imports and exports, but also from competitive pressure of imports from countries with lower environmental standards, hence lower costs. And, of course, an older argument is that trade might equally benefit importing and exporting countries only, if they are at similar levels of development, because more advanced countries with superior technology, economies of scale and established production modes would trump production of less developed, fledgling countries (infant industry argument). These latter arguments have also more recently been made against TTP and TTIP by more traditional economists like G. Sachs and J. Stiglitz, among many others.

An important aspect which rarely enters the public discussion is the strategic intention by the large countries when they push (conclude) trade agreements. Of course, the intention is still to benefit home producers (by enabling more exports and cheapening imports), but large countries, like the US and China – to a lesser extent the European Union – are also making a lot of effort to establish their own rules and regulations as the global standard. Thus, there is standard-setting competition as the driving force of large regional trade agreements.

The best empirical example for this urge to gain or maintain rule-setting capacity is the futile fight of emerging and developing countries about gaining more influence in the governance situation of the Bretton Woods Institutions, the International Monetary Fund and the World Bank. While their economic (and political weight) in the global economy has increased during the last decades, their influence, measured by voting shares, top administrative positions and influence on the direction of these institutions remains grossly under-represented. At the insistence of the G-20, the IMF board already in 2010 decided a „quota reform“ which should have increased the voting power of emerging and developing countries. This reform has not been ratified by the US Congress, but a number of European countries is not unhappy about that, because for the time being it cements their 7-8 board seats (out of 24). The World Bank enacted a tiny voting reform, turning one board seat from European countries over to African countries, and increasing marginally the voting power of some countries. The President of the World Bank is still – as always since 1945 – a U.S. citizen, the combined political power of the US and Europe prevented an African, resp. Latin American candidate to be elected at the last „election“. Significant pressure was exerted on the governors of Latin and Asian countries to vote for the present president. As part of an US-EU „non-gentlemen’s agreement“, a French national is the Managing Director oft he IMF (since its  beginnings, always an European). The „business model“ of both the IMF and the World Bank is still the so-called „Washington Consensus“, an arch-conservative market-fetishising dogma pursued and pushed by the rich countries.

In this way the rich, industrialized, OECD countries have managed to maintain these important institutions of global economic governance „in their own image“, under their own influence and direction. The result is that large emerging countries, Brazil, Russia, India, China and South Africa (BRICS) have this year founded their own New Development Bank and an IMF-competitor. China has additionally established the Asian Infrastructure Development Bank (AIIB) which is under Chinese influence. So far, no country has left the IMF and World Bank, but global governance has certainly been weakened by even more fragmentation and (future) competition on rule-setting.

Whether this competition over rule-setting in global trade, investment and economic development institutions will lead to a new phase of „Cold War“ is still up in the air. But there is no doubt that standard-setting powers which go beyond national borders is a decisive driver of global competition.

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Filed under Crisis Response, European Union, Financial Market Regulation, Fiscal Policy, Global Governance, Socio-Economic Development

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