David R. Francis

The other recovery to watch: world trade

World trade suffered its worst slump since the Great Depression in 2008 and 2009.

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    At the EU Commission headquarters in Brussels Nov. 9, European Trade Commissioner Karel De Gucht announces that Russia could be ready to join the World Trade Organization (WTO) by the end of 2011 at the earliest.
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The Great Recession has had many victims, including the stock market, housing, and the jobs market. There's also a lesser-known casualty, yet one important to American economic revival: world trade.

In 2008 and 2009, world trade suffered its worst slump since the Great Depression. The World Trade Organization (WTO) in Geneva predicts 10 percent trade growth this year, measured in price terms. But the volume of trade has not rebounded fully yet, veteran trade consultant Harald Malmgren says.

That insufficient recovery was a problem for the Group of 20 finance ministers when they met in South Korea last month and tried to discourage a round of currency devaluations.

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In the past, world trade has usually grown twice as fast as world gross domestic product. So more than 100 nations, especially places like China and Vietnam, oriented their economic strategies toward pushing exports. They hoped to bring prosperity faster than if they relied chiefly on domestic markets for growth.

If trade doesn't pick up substantially soon, some nations may be tempted to battle for business and growth with a series of beggar-thy-neighbor currency devaluations. Such actions could damage the world's trading rules, inaugurated under the 1947 General Agreement on Tariffs and Trade and strengthened under its successor, the WTO. The GATT and WTO have done much to liberalize and globalize the world economy. Critics say that system needs to be changed.

The global economic system today is "breaking down ... [is] not sustainable," says Clyde Prestowitz, president of the Economic Strategy Institute, a Washington think tank.

The WTO is "totally out of whack with the realities of the global crisis," says another critic, Lori Wallach, director of Public Citizen's Global Trade Watch, a Washington economic justice group. She disapproves of WTO requirements for financial deregulation, which she maintains led to the financial crisis, and of the "monopoly" patent system, which pushes up drug prices.

Even sympathetic WTO observers see trouble ahead. The slump arising from the Great Recession has produced a period of economic nationalism, regionalism, and fragmentation, says Mr. Malmgren, who helped the United States negotiate the Kennedy Round of world trade negotiations (1964-67) and the Tokyo Round (1973-79).

Countries are looking after their own interests. Competitive devaluation of currencies already has started to take off. Some Asian nations, under the leadership of China, may form regional free trade clubs. Malmgren sees little prospect of any agreement at the current nine-year-old Doha Round of multilateral WTO negotiations.

The WTO itself is getting more difficult to govern, he notes. Twenty or 30 years ago, the several dominant industrial nations could work out a deal by consensus. Now, with so many new world trade actors – China, Brazil, India, etc. – reaching consensus is harder when so many varied domestic economic interests are at stake.

In the next 12 months, Russia should become the 154th member of the WTO, according to Lawrence Summers, director of President Obama's National Economic Council. If so, Russia will be an important addition to an international organization dedicated to reducing tariffs, quotas, and other impediments to world trade.

Mr. Prestowitz says WTO membership will limit Russia's freedom to pursue its interests. The goal of the WTO, though, is to show that taming protective trade policies is in nations' self-interest.

David R. Francis writes a weekly column.

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