Can Davos stop the spiral of protectionism?

Can Davos stop the spiral of protectionism?

Authors: Andreas Freytag, Matthias Bauer und Philipp Lamprecht

Last week, the annual meeting of the World Economic Forum (WEF) took place in Davos under the theme: “Creating a shared future in a fractured world”. Several thousand decision-makers gathered to discuss the future issues of humanity. No decisions were made. But, as always, the forum provided impetus for the global political agenda.

This year’s event has seen a lot of talk about free trade and protectionism at Davos, partly triggered by the latest US protectionist measures against solar panels, coming primarily from China, as well as washing machines. Indeed, the market for solar panels is heavily distorted by subsidies from the Chinese government, which has caused a lot of trouble for German solar manufacturers. For washing machines, however, this applies only to a lesser extent – if at all. The issue here seems to be rather a lack of quality of American products. Overall, these measures by the US negatively impact on both the economic freedom and the purchasing power of American citizens.

Of course, protectionism may indeed come with positive effects for some domestic manufacturers. In this context, President Trump is quoted saying that the US is now making its own products again. And, for the short term, there may actually be a few new jobs in the US if more solar panels and washing machines are produced there.

The flip side of this coin is the loss of the American consumer’s purchasing power as washing machines and solar panels become more expensive. This will result in less demand for other US products and services, which, in turn, leads to job losses in other US industries, let alone retaliation measures imposed by other governments, which are common in the domain of international economic ‘diplomacy’. The problem is that one cannot predict the total job losses, nor the specific sectors affected. Neither is it possible to allocate the losses directly to certain protectionist measures. Unfortunately, as soon as US jobs in other industries come under pressure the President is likely to invent new scapegoats. It is thus the American consumers and, in turn, workers who will pay for Trump’s policies – one way or another.

US Secretary of Commerce Ross goes even further than Trump in choosing a harsher rhetoric than the President. In Davos, he spoke openly of American troops to be sent into a trade war. This conveys his personal, and fundamental, misconceptions about the essential meaning of free trade, i.e. that free trade is a peace project, increasing the individual liberties, especially of the poorest parts of the population. It goes without saying, that both are rather unimportant to the current American government.

As one could have expected, Germany’s acting Chancellor Merkel saw things very differently. In Davos, she asked explicitly whether “we” had learned from history. She left open who this comment was meant for but continued to campaign for openness and rules-based conflict resolution. At the opening of the forum, Indian Prime Minister Modi also warned of the end of globalization and repeatedly – albeit indirectly – pointed to its importance for peace.

The Canadian Prime Minister Justin Trudeau, whose country is now joining the Trans-Pacific Partnership (TPP) in addition to the European-Canadian Regional Trade Agreement (CETA), has been acting in a similar way. It was Trudeau who advocated an even broader Trans-Pacific Partnership (now CPTPP). Both projects will take place without the US, and both are likely to be welfare enhancing and a crucial part of future economic diplomacy. Prime Minister Trudeau has also made it clear that the door will never be “completely closed” for the US.

The US President had the last word at this year’s World Economic Forum – despite having mocked the entire event the year before. His speech, however, left the impression that the President failed to address the opportunities of cooperation in defining the future rules of globalization. Rather than proposing an encompassing and inspirational analysis, or strategy focusing on the current challenges of globalization, Trump’s intervention was of promotional character merely aimed at pitching the US as a “great” destination for investment and doing business. Similarly, it’s been awkward listening to how much the world has to gain from trading with the US at Davos, only to see Trump lash out against “very, very unfair” practices of the EU shortly after.

Meanwhile, business is learning to live with Trump. Having met with fifteen European business leaders who joined him over dinner, Trump announced that he made “new friends” at Davos. Indeed, industry bosses were fast to laud Trump for his policies of tax cut and deregulation, which, after all, have primarily been a project of his fellows in the Republican party. However, it remains to be seen how deep this newly found friendship actually goes. Trump’s anti-EU remarks on the weekend might lead up to a first test.

Overall, it is not of particular importance what the American President said at Davos, as speeches made at Davos generally have a short life span.Last year, Chinese President Xi Jinping launched a free-trade appeal to the world and praised China as the future’s role model concerning commerce, economic openness and the free exchange of goods and services. One year later, China’s free trade spirits have lost steam. The speech of the US President in Davos is likely to chip away too.

The actual trade policies and, importantly, the countermeasures invented by the governments concerned (China or the EU), are of much greater importance. If there really were to be a trade war without the involvement of the World Trade Organization (WTO) as a mediator, the damage for its participants, but also the entire world economy, would be significantly higher than the benefits in the long term.

However, the tumult that Trump causes also has an upside: the advocates of a peaceful and open world move closer together. Even the opponents of globalization, who protested in Davos in recent years, have become quieter. Either they think they are adequately represented by President Trump, or they are reconsidering their position against the background of the unpleasant noise and the side effects of a protectionist program.

In this respect, the World Economic Forum may indeed bring a number of benefits. It can help rational actors – and these are, with few prominent exceptions, probably most participants of the forum – to not only publicly promote open markets, but also open (or maintain) the communication channels to reasonable politicians and officials in the US and elsewhere. In that sense, the forum can actually contribute to stopping the spiral of protectionism.

Photo credit: World Economic Forum on VisualHunt / CC BY-NC-SA

What is the future of the WTO?

What is the future of the WTO?

Giraffe in city street [News]That the World Trade Organization (WTO) has been in the grip of a systemic crisis since 2008 is well known. Notwithstanding relatively minor successes at the Bali Ministerial in December 2013, the WTO’s negotiating function remains effectively stalled. The Nairobi Ministerial, set to take place in December 2015, is not likely to yield systemic solutions, notably to break the Doha Round impasse. The longer this negotiating stalemate endures, the more the WTO’s foundations will crumble, particularly the much-prized jewel in its crown: the Dispute Settlement System. Why? Because an institution that is not able to modernize and continuously update its rules will be, and is being, bypassed. In its 20th year, the WTO faces an intensifying existential crisis.

Competing visions

There are many reasons for this. But at the heart of the problem lies a competing vision for the WTO. One vision is content with “WTO 1.0”; an organization that gives priority to the bulk of its developing country membership with focus on restraining negotiating ambition for fear of the consequences of over-stretching the policy and institutional capacities of those members. A different vision offers “WTO 2.0”, in which the rules are continuously updated and expanded to reflect the realities of modern trade and investment, particularly the global value chains (GVCs) that drive them.

Two broad constituencies, inter alia, advocate “WTO 1.0”: least developed countries (LDCs) and other poor or small country groupings such as small island developing states (SIDS) and small, vulnerable economies (SVEs); and large emerging markets such as India, Brazil, and South Africa, plus a range of middle-power developing economies. These countries, for the most part, share a view that the WTO should not impose undue obligations on its members, and that differential obligations, or special and differential treatment (SDT), should permeate the system. Many are also sceptical that GVCs will confer the benefits proffered by WTO 2.0 advocates, arguing instead that the gains from GVCs are unevenly spread, with the benefits concentrated in developed world multinational corporations while the costs are concentrated on their developing country hosts.

Again, two broad constituencies advocate “WTO 2.0”: developed countries represented, inter alia, by the OECD; and developing countries wishing to integrate better into GVCs, such as those comprising the Pacific Alliance. These countries share the view that the WTO rules need to be extended and updated, and reciprocal market access too. Hence they advocate for incorporation of new issues such as competition and investment into the WTO rules architecture.

As usual, this polar spectrum view conceals important realities. Advocates of WTO 2.0 seem unable to deal with the power of agricultural lobbies in some countries. Agricultural lobbies are quintessentially products of the WTO 1.0 world. This chronic failure fuels the sceptics in that WTO 1.0 paradigm who argue, justifiably, that double standards undermine trust and the legitimacy of the WTO. For this reason the agriculture problem has to be fixed, but almost certainly won’t be. Similarly, there are growing lobbies in certain WTO 1.0 countries that want their governments to sign up to WTO 2.0 rules or market access commitments, but their concerns are routinely sacrificed to the dominant WTO 1.0 paradigm. South African services exporters targeting African markets come to mind.

Shift in balance of power

These “low politics” of trade are now merging with the “high politics” of global affairs. The ongoing rise of emerging markets in world trade and investment, particularly represented by China, is slowly but surely tilting the balance of global power away from the North and West, towards the East and South. This poses serious challenges to the western architects of the WTO, and the broader global trade and investment order in which it resides. These tensions are reflected particularly in the US and play out in various internecine political battles, tying the Executive’s hands in its attempts to exercise leadership of the trading system, particularly in the WTO.

Consequently the US is looking elsewhere, to the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These “mega-regional” trade negotiations represent, at once, an attempt to pioneer new rules among like-minded countries consonant with the WTO 2.0 vision, and an attempt to restore US primacy over the global trading system. The overt intention is to extend US, and US-EU, regulatory preferences to the WTO down the line, through a process of competitive liberalization.

This high stakes poker game has unpredictable consequences. Of most importance is that no one can predict whether mega-regionals will ultimately succeed. While the TPP’s conclusion does appear to be in sight, its final adoption is hostage to a complex political cycle incorporating, not least, the 2016 US elections. The TTIP’s future is less certain, since negotiating power is much more diffuse between the parties, and EU regulatory preferences diverge in significant respects from those in the US.

So how might this all end? In the concluding chapter of our World Economic Forum report on the high and low politics of trade, Robert Lawrence and I set out three scenarios:

  • Building blocks: The TPP and TTIP conclude smoothly, taking account of “outsider” concerns, and a virtuous cycle of trade and investment liberalization ensues. The regulatory agenda is incorporated into the WTO through inclusive plurilateral arrangements, modelled along the lines of the Trade Facilitation Agreement’s “ladder” of SDT provisions. WTO 2.0 is built incrementally, by providing consensual pathways between it and WTO 1.0. Almost certainly this scenario would require a lasting fix of the agriculture problem.
  • Stumbling blocks: In this, more likely, scenario the hurly-burly of trade negotiations gives rise to many compromises in the TPP and TTIP, including on regulations. So US and EU primacy in the global trading system is not decisively restored, leaving behind leadership ambiguity. But enough is done to convince key developing countries, notably China, to converge with mega-regional outcomes, so that the critical mass shifts towards WTO 2.0. But in the absence of decisive leadership, and competing visions for WTO 2.0, progress towards that vision is by no means assured. In short, the outcome is one of continued ambiguity in which Chinese and Indian preferences, with their own domestic reform imperatives in mind, loom ever larger.
  • Crumbling blocks: There remains a substantial possibility that the TTIP, especially, could rumble on for years without reaching a decisive conclusion. Therefore, US and EU primacy in the trading system would be hamstrung, hastening the advance of potential Chinese and emerging market leadership. However, since those countries will not be in a position to exercise decisive leadership for years to come, the outcome is likely to be stasis, and continued exercise of influence through regional formations – such as RCEP in the Chinese case. Thus the centrifugal forces unleashed by continued stasis in the WTO would acquire full force and with unpredictable consequences.

Clearly it is not possible to say where the WTO system will end up until we are clear how mega-regionals, especially the TPP and TTIP, shape up. Nonetheless, a world of stumbling blocks seems most likely, with the WTO poised nervously in-between while the great trading powers position themselves for leadership and influence. This scenario may turn out well, especially if China’s regulatory preferences converge towards US and EU norms, but that outcome is far from certain.

The World Economic Forum report, The High and Low Politics of Trade, is available here.

The 2015 Davos Summit: a Tour d’horizon, with implications for South Africa

The 2015 Davos Summit: a Tour d’horizon, with implications for South Africa

Giraffe and cloudsBefore its annual Davos Summit, the World Economic Forum produces its annual ‘Outlook on the Global Agenda’, based on a detailed survey conducted primarily amongst the individuals comprising the 80-plus global agenda councils that serve as the WEF’s ‘brains trust’. The report guides Davos’ top-level deliberations.

This year 10 core global trends are identified. My focus is on the fourth most important: ‘Rising geo-strategic competition’, and what this means for South Africa.

Three regions receive particular focus: Asia, Eurasia, and the Middle East. In Asia tensions are centered on China’s growing regional and global power, in relation to Japanese and US interests in maintaining the status quo. This has multiple manifestations, from island disputes in the east and south China seas, to Chinese suspicions of western ‘meddling’ in the ‘umbrella’ youth-led protests in Hong Kong. Since these tensions involve the three largest economies in the world they bear close watching.

Of secondary importance is how Narendra Modi is repositioning India in relation to these great power dynamics, and within this whether India will grasp the nettle of market reforms in order to lay the foundation for sustained, rapid economic growth and thereby build its pillars of geopolitical power.

In Europe the key question remains how the Ukrainian situation will be resolved. That hinges on US-Russia relations with Europeans, partially excepting Germany, relegated to secondary actor status. Europeans will have their hands full with managing their own internal crises, particularly the aftermath of Greece’s imminent elections and associated potential resurgence of sovereign debt politics, and how this will relate to the political economy of imminent quantitative easing by the European Central Bank. Switzerland’s shock announcement last week that it has abandoned its cap on the Swiss franc, and the ensuing market pandemonium, is an omen of things to come.

The UK’s elections are of secondary, hardly minor, importance, and will offer important clues as to whether ‘Brexit’ is in the cards. If so, that would feed the broader trends towards European political disintegration, characterised by the rise of political extremes across the European sovereign political space. Taken together, nothing less than the future of the European integration project is at stake.

The Middle East will continue to provide a flurry of tragic mass media material. The geopolitical rebalancing taking place in the region will continue to be centered on two key trends: US retrenchment from the region and derivative re-ordering of key relationships, and the associated Saudi Arabia – Iran competition to fill the power vacuum. These will continue to manifest in the US-Iranian rapprochement and complex negotiations over Iran’s nuclear programme, with the Saudis watching closely. Part of the Saudi response toolkit includes wrestling Iran to the mat on oil prices, in order to inflict further economic pain on their regional rival. Related benefits include punishing Russia for its continued support of Iran’s ally, the Bashir regime in Syria; and taking out marginal shale oil producers in the US thus ensuring that in the medium term oil prices will rise, and Saudi Arabia’s fiscal position can be rebuilt.

Of secondary importance is the continued rise of Jihadism, centered on the Islamic of Iraq and the Levant. Its competition with Al Qaeda has already spilled over, with tragic consequences, into France this year. The scale of cyber-attacks from Islamist groups on French media outlets in recent days indicates that this conflict is set to grow and morph in unpredictable directions. It also highlights the sharp, perhaps irreconcilable, clash in values between the ‘liberal’ West and ‘intolerant’ radical Islam.

This conflict over values also manifested late last year in the events centered on Sony Entertainment’s release of ‘The Interview’, a comedy concerning an attempt to assassinate the ‘Dear’ North Korean Leader. And that connects to a central clash of values between the US and China, over the freedoms to be accorded to individuals in relation to state direction of society and the economy. This clash will intensify as China’s power grows, and a good deal of it will center on internet governance and cyber security.

These key trends raise sharp questions concerning the future of global governance. The current western liberal order rests on one core foundation: US power. In the world we are heading into the US is recalibrating its global role, an inevitable process that the Obama administration is not given sufficient credit for leading, mostly responsibly. But the US body politic has been characterised by trench warfare for years; a situation likely to be compounded on the domestic terrain by Republican dominance of Congress for the next two years. On the foreign policy terrain President Obama will have a freer hand, as he has demonstrated recently through his executive action to unfreeze relations with Cuba.

This is likely to manifest particularly in trade relations; ironically despite the Democratic Party, and with the support of Republicans. The two centerpieces are the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership negotiations, centering on Asia and Europe, respectively. Through these processes the US is attempting a fundamental reordering of worldwide trade and investment relations centered on its regulatory preferences and economic interests. While trade negotiations are hardly new on the international stage, these two are of fundamental geostrategic significance. It is hardly an accident that China, for example, is not included in the TPP.

Relative to the weighty global trends outlined above, and some more that space constraints prohibit being addressed here, regional developments play second fiddle. Yet they are of consequence to us. Zimbabwe’s political evolution in the end game of the succession to President Mugabe will have continental, never mind bilateral, ramifications. How will it impact on our domestic politics? How involved might we need to become? How would that affect regional dynamics? In particular, how will our emerging regional strategic competitor, Angola, respond?

Further afield, Nigeria holds pivotal elections at the end of next month. Will the outcome lend itself to a renewed Nigeria-South Africa strategic ‘concert’ on the African stage? How will budding Kenya-Nigeria ties factor into this? And, ultimately, how will Africa’s numerous conflicts, from potential genocide in the Central African Republic, to Jihadist incursions in north and central Mali, and stabilising Eastern Democratic Republic of the Congo, pan out? Or will the ‘Africa rising’ narrative outweigh these weightier concerns?

So we confront a complex world, from our perch at the Southern tip of Africa. What could be on our delegation’s interlocutors’ minds in Davos?

First, our structurally entrenched, low, economic growth, and a paucity of leadership to address it, is well-known. Africa is rising, but South Africa is stagnating.

Mitigating this is the substantial opportunities associated with government’s large procurement programme. But they are increasingly difficult to access, being enmeshed in local content, government procurement, and BBBEE legislative requirements. Revisions to investor protection legislation, and the associated expropriation axe hanging over foreign private security companies are additional concerns.

Second, the growing instability in some of our key state institutions will receive corridor attention. Whether labeled ‘white anting’ or state capture by the ‘nomenklatura’, it is clear that purges are being conducted. Good governance has given way to compromised governance, in conditions of structurally low growth, high unemployment, and high income inequality. Not surprisingly political risk is perceived to be rising in South Africa.

In an increasingly polarised and unstable world, South Africa has an opportunity to stand out within a broader positive outlook for the sub-continent. Unfortunately it is unlikely our delegation will be able to sell this message, much as I wish them luck.