Perhaps the riots in Seattle marked a turning point for a globalising world. In the past 50 years cross-border trade and investment have boomed, raising living standards across the world and lifting millions out of poverty. But now a backlash against this closer integration has begun. This backlash is surprising. By and large, it comes not from developing countries which were battered when world financial markets seized up in 1997-98, but from rich countries which escaped largely unscathed. It is strongest in the US, the biggest beneficiary of free trade, luxuriating in an economic boom. And its main target is not multinational companies or global banks, but a once obscure regulator with 500 staff and an annual budget of ?48m: the World Trade Organisation (WTO).
The protesters who mobbed its summit in Seattle last December have propelled the WTO to notoriety. Yet it remains widely misunderstood. The popular perception is of a secretive, unaccountable body which tramples on national laws that protect the poor, the environment, and public health, in order to advance big companies' global ambitions. "Many decisions affecting people's daily lives are being shifted away from our local and national governments and instead are being made by a group of unelected trade bureaucrats sitting behind closed doors in Geneva," according to Ralph Nader, a leading American consumer-rights campaigner. The WTO, it is said, threatens countries' sovereignty and democracy itself.
This distorted image of the WTO is peddled by an unlikely alliance of media-savvy pressure groups and old-fashioned protectionists. Greens make common cause with smokestack industries, consumer activists with trade unions, development lobbyists with rich-country farmers. These "globaphobes" have all sorts of gripes, many of them contradictory. Some rage that rich-country markets are being flooded with cheap imports from poor countries, others that they are rigged against them. Many who rail at the WTO's powers want to hijack them for their own ends. But all of them harness people's anxieties about the might of big business, the pace of economic change, and a sense of powerlessness in the face of intangible global forces-and focus these fears on to the WTO. Ostensibly, globaphobes have the WTO in their sights because it is powerful. In fact they target it because it is weak. The WTO cannot easily fight back. It has no votes to deliver, no lobbyists in national parliaments, no campaign contributions to splash around and no vast PR budget. Its total budget amounts to less than a quarter of that of the World Wide Fund for Nature, one of its many critics.
The WTO's critics are abetted by governments for whom it is also a convenient scapegoat. Like the EU, the WTO is blamed for beneficial but unpalatable policies. For example, governments often blame job losses, or rising inequality, on "unfair" competition from foreigners, while insisting that the WTO prevents them from taking protectionist measures. Attacking the WTO also deflects attention from domestic failings. The Clinton administration, whose trade policy is in hock to corporate lobbies, blasts the WTO for ignoring public opinion. EU governments, whose regulatory lapses have led to mad-cow disease and dioxin poisoning, claim that the WTO threatens food safety. And developing countries whose reforms falter argue that the WTO is biased against them.
this portrait of the WTO is a travesty. Although the WTO has its faults, it is generally a force for good. Indeed, by helping to free world trade, the WTO and the General Agreement on Tariffs and Trade (Gatt) which it replaced in 1995, have probably done more to raise living standards and reduce poverty than any other man-made device. Sceptics should compare the long boom in the US and Europe, as trade barriers fell in the 1950s and 1960s, with the protectionist nightmare of the 1930s. Or they should consider how trade has benefited South Korea: in 1970, poorer than Ghana; now, richer than Portugal. Or they should read country studies showing that openness boosts economic growth. Or study the paper by Jeffrey Sachs and Andrew Warner, which finds that developing countries with open economies grew by 4.5 per cent a year in the 1970s and 1980s, while those with closed economies grew by 0.7 per cent a year. (At that rate, open economies double in size every 16 years; closed economies must wait 100 years.)
The benefits of free trade are now taken for granted. In Seattle, Americans who chanted that trade should be "local not global" sported Japanese cameras, chatted on Finnish mobile phones, kept warm with Colombian coffee and doubtless wore clothes made in Asia. So the case for free trade bears restating. Eliminating taxes on foreign goods gives consumers lower prices and more choice. It also encourages domestic firms to specialise in what they do best, rather than making goods which are more efficiently produced elsewhere. Moreover, it boosts economic growth, because other countries' technologies are more readily adopted and foreign competition spurs domestic firms to increase productivity.
But what about the costs of free trade? Governments lose the revenue from import duties. The profits of domestic firms fall. Capital and workers must shift to more efficient uses. In the short term, there are losers. Their pain-like that of anyone who loses their job-can and should be eased with welfare benefits and job retraining. But it is odd for protectionists to argue that the temporary losses of a few should prevent the country reaping the much bigger-and permanent-gains from free trade. After all, the interests of candle makers were not allowed to stop the introduction of electricity. Nor are governments scrambling to stop the internet cutting out middlemen. Freeing trade, like new technology, causes change; that is how it boosts economic growth. Some of us lose at first, but eventually we all gain.
Critics scoff that this model of free trade is na?ve. In the real world, they say, big companies monopolise markets. Breaking down trade barriers merely helps these behemoths crush their smaller competitors. This argument is perverse. For one thing, big companies are not as omnipotent as they seem. Not one of the world's ten biggest firms by market value a decade ago is still in the top ten. The world's biggest firm, the US's Cisco Systems, was founded in 1986. Europe's largest companies, Britain's Vodafone and Finland's Nokia, were minnows a decade ago. Moreover, opening markets to foreign competition curbs big companies' dominance. Closed domestic markets, where national champions can cosy up to government, are much more likely to be monopolised than global ones. And if big firms come to dominate global markets, then their monopoly is better tackled by antitrust watchdogs-or indeed by competition rules at the WTO-than by raising trade barriers.
But the critics are right about one thing: companies do have an unhealthy influence on governments' trade policy. That is precisely why the WTO is such a good thing. In an ideal world, each government would act in its country's best interests and liberalise unilaterally. But this is often politically difficult, because industries that fear foreign competitors tend to lobby governments harder than the disparate millions of consumers who benefit from cheaper imports. So in practice governments tend to be mercantilist. They seek to pry open markets for their exporters, while protecting their domestic industries from import competition as far as possible.
The WTO helps to break this deadlock. Governments offer to open domestic markets in exchange for greater access to foreign ones. This galvanises exporters' support for liberalisation, which helps to overcome the opposition of import-competing industries. The second advantage of WTO agreements is that they tie governments' hands, making it harder for them to backtrack on liberalisation, as well as making their import rules transparent and predictable for business.
One reason, then, why the WTO is so unpopular is that it undermines sectional lobbies. When the US's steel industry protested at a rise in cheap imports in the wake of the world financial crisis in 1998, the Clinton administration responded by imposing anti-dumping duties on imports which it deemed "unfairly" cheap. This did not satisfy the industry. So the administration offered a subsidy package involving $300m in tax breaks, and promised to make it easier in future to get protection from import surges. But even that was not enough. The industry spent $4m on a media blitz and lobbying campaign, urging the US to "stand up for steel." The House of Representatives rose to attention. In March 1999 it passed a bill to impose quotas on foreign steel producers. The administration said it would veto the bill: not because it was bad for Americans who would thus pay more for their cars, nor because it was bad for crisis-hit countries which needed to export to the US to escape depression, but because it would breach WTO law. Thankfully, Bill Clinton's mettle was not tested. The Senate stood up to steel and threw out the bill. But support for the WTO took another knock.
there are two further reasons why the WTO is increasingly controversial. Trade quarrels now touch on sensitive issues such as food safety and the environment, which were once exclusively a matter for domestic policy. These new disputes mobilise a wide range of people previously uninterested in trade. Second, unlike the Gatt's, the WTO's dispute settlement mechanism now has teeth. Countries found to be in breach of world trade rules can no longer veto rulings against them. So governments-and pressure groups-are increasingly turning to the WTO to settle by legal means disputes which might often be best dealt with politically.
The WTO's dispute settlement mechanism is unique in international law. Unlike, for example, UN resolutions, which can be vetoed by the five big powers, WTO rulings are binding-even on the US. To many Americans, who view international institutions, such as the UN or the IMF, as sticks for disciplining foreigners but not themselves, this smacks of world government. Others think the dispute settlement mechanism is a tool for the rich and powerful, notably the US, to impose their writ on the poor.
Neither side is right. The WTO is not a world government in embryo. It is a place where governments negotiate trade deals and try to settle disputes. It cannot force, say, genetically modified (GM) food on Europeans or slap sanctions on the US for banning shrimp imports from countries which kill sea turtles. But it is a forum where global rules on such tricky issues are hammered out, and an umpire which can be called upon when others breach the rules.
All the WTO's rules are agreed by a consensus of its 135 member governments, and then ratified by national parliaments. Yet such accountability does not satisfy many pressure groups, such as Greenpeace. They think the WTO should answer to them. Why? Almost 600m voters elect the Indian parliament, whereas Greenpeace is scarcely accountable to its 2.5m members. And why Greenpeace, rather than the Road Haulage Association or the National Front? Pressure groups, not the WTO, are guilty of trying to bypass democratic institutions.
The WTO is a servant of its member governments, not their master. It arbitrates in disputes only when asked to do so by a member government. Its verdicts, arrived at by an independent panel of trade experts, and open to appeal, are based on rules to which its members have previously signed up. The WTO does not prescribe what countries which breach world trade rules must do to comply with them, nor can it impose trade sanctions if they fail to amend them satisfactorily. Moreover, countries can at any time choose to withdraw a case and settle it politically instead. But if they do not, and a country fails to fall into line with WTO rules, the aggrieved government is entitled to impose sanctions on the offender's exports. Alternatively, it can agree to compensation in the form of lower trade barriers in other areas. Of course countries are free to leave the WTO if they wish. At present Congress is debating whether to take the US out of the WTO-although this is unlikely. Many countries, notably China, are queueing to join.
The WTO is much more open than the IMF, the British government, or most pressure groups. True, trade negotiations are conducted in private. Talks between governments generally are. Privacy makes it easier to reach agreement. Ironically, though, Seattle was such a shambles that trade critics were often in the same room as governments were negotiating-and failing to agree. In any case, WTO agreements and panel verdicts are widely available on the web, at www.wto.org. There is a good case for panel hearings to be public too. This might dispel fears that trade hands are conspiring to take over the world. (Public hearings would probably not attract much attention. By all accounts, they are very dull.)
What, then, of the charge that the WTO is a tool for the strong to oppress the weak? Critics point to the banana battle between the US and EU. They claim that the WTO is helping wicked US multinationals, such as Chiquita, to drive Caribbean banana growers out of business. But the EU's banana regime mostly benefits European companies which market Caribbean bananas-such as Ireland's Fyffes-rather than Caribbean growers themselves. According to a study by Brent Borrell, formerly at the World Bank, the EU's banana regime costs European consumers $2 billion a year in higher fruit prices. Over half that sum ends up as monopoly profits for fruit distributors. Banana growers in the poor countries gain only $150m a year. And the equally poor countries which the EU does not favour, such as Ecuador and hurricane-hit Honduras, lose. In short, the EU's rules are a rich man's racket, not a safety net for the poor.
The truth is that the WTO is more a champion of the weak than a stooge of the strong. Ask Ecuador. Its annual income per person is about ?1,000-less than St Lucia's-but its banana growers are the most efficient in the world. Banana production is in the hands of local people and banana workers enjoy full union rights. Their problem is that the EU makes it difficult for Ecuador to sell its fruit in Europe: the EU imposes strict limits on how many bananas it can export, and makes it pay hefty import duties. This is no small matter for Ecuador. One in ten Ecuadorians depends on bananas for a livelihood; the fruit is the country's largest foreign-currency earner; and Ecuador's economy is in its worst crisis in decades.
Without the WTO, Ecuador would be in dire straits. It could complain to the EU, but Ecuador doesn't have much clout in Brussels. Thankfully, it was able to appeal to the WTO, which ruled that the Europeans were breaching world trade rules. Kicking and screaming, the EU has agreed to change its banana regime-although it has yet to do so satisfactorily. Eventually, Ecuador should be able to sell more of its bananas in Europe. This need not deprive Caribbean banana growers of a living. So long as the EU gives better access to bananas from the rest of the world, it can continue to give preferential access to Caribbean fruit.
This is not the first time that the WTO has helped a small poor country fight its corner against a big rich one. (The US lifted its restrictions on imports of Costa Rican underwear after the WTO ruled that it was in the wrong.) True, the dispute settlement mechanism is not as fair as it could be. The US can marshall a battery of top lawyers to fight its cases; poor countries have to scrimp. But efforts are being made to remedy this, and a legal aid centre for poor countries is being set up. The point, though, is that in an unequal world, the WTO's dispute settlement mechanism is much fairer than the alternative: the law of the jungle.
The WTO's dispute mechanism is a strength, but it can also be a weakness. When governments lack the political will to comply and are too big to be bullied into doing so, it can be counterproductive. A legal ruling which assigns blame to one side can make it more difficult to reach a face-saving political compromise. This not only leaves the offending trade barriers in place, but also entitles the aggrieved country to retaliate with trade sanctions, which harm its own consumers, who have to pay more for imports. Worse: support for the WTO is undermined. Winners blast it for being ineffectual, losers for imposing unwanted foreign products on it.
the wto gets a lot of stick when those "unwanted" imports are as innocuous as steel. But what if they are as controversial as GM food? Quarrels about food safety and the environment have come to the fore because countries' economies are now so closely intertwined that almost any government policy can have a discriminatory impact on foreign companies. They are particularly tricky, not least because governments are reluctant to compromise their ability to pursue other aims for the sake of free trade.
Consider the battle between the US and the EU over beef hormones. In 1985 the EU banned beef from cows treated with growth hormones which, it claims, can cause cancer. Such hormones are widely used in the US, where regulators say they are safe. In 1989, the US retaliated against what it saw as EU protectionism by imposing $100m of sanctions on EU imports. After the WTO was set up in 1995, with its new dispute procedures and new rules covering food safety and trade, the US lifted its sanctions and took its beef dispute to the WTO, which ruled that the EU ban breached world trade rules. But the EU failed to lift its ban by last May's deadline, so in July the US imposed $117m of trade sanctions.
This battle over beef hormones is very different from a traditional trade quarrel such as a row over restrictions on steel imports. Traditional disputes are quite simple. They are usually about explicitly protectionist measures such as import tariffs or quotas, which keep out foreign goods at the border. The costs of such measures (higher prices and less choice for consumers) are reasonably easy to quantify; they typically outweigh the benefits (fatter company profits and tariff revenues for governments). Even mercantilist governments should be able to resolve such narrowly economic disputes. One way is to buy off steel companies and unions. Another is to exchange access to domestic markets for access to foreign ones.
The new trade disputes are more complicated. They are not just about economics but about social and cultural issues, too. They are about domestic regulations which have international effects, rather than about border controls: Europe has banned all hormone-treated beef, not just America's. Such regulations are not wholly protectionist. Although Europe's ban does keep out American imports and is partly motivated by a desire to protect inefficient European farmers, it is also a response to public fears about food safety.
The costs of the ban (higher beef prices, less choice) are quite easy to establish. But the benefits are not: the value of safer food is hard to quantify and reasonable people may put widely different prices on it. Indeed, some of the new actors in such disputes, such as consumer-rights activists and environmental groups, may not be susceptible to economic reasoning. So even liberal governments may have trouble resolving such quarrels. They may be particularly wary of setting precedents which they may later regret: the beef war is widely seen as a forerunner for a larger battle about GM crops. Many may feel that such disputes intrude too far on national sovereignty, and thus refuse to accept that international trade rules should trump domestic political considerations.
The multilateral trading system, founded in 1948 when memories of the 1930s were still fresh, recognises that governments have legitimate aims other than free trade. Governments were keen to liberalise international trade, but were wary of giving up policy tools which might help them prevent another slump. So a delicate compromise was struck. Governments agreed to be bound by multilateral rules in order to trade freely internationally, but retained the right to set their own policies domestically.
In the 1950s and 1960s, the compromise worked well. Countries agreed to lower their most blatant barriers to trade-such as import tariffs or quotas imposed at the border-while intervening at will, with taxes, subsidies and regulations, in their domestic economies. But by the 1970s, problems began to emerge. As border barriers fell, it became clear that domestic regulations were also a serious impediment to trade: a subsidy or a discriminatory rule could shut out imports just as effectively as a tariff. Moreover, governments began to abuse these loopholes for protectionist ends: anti-dumping cases and import-restricting regulations proliferated. So the focus of trade policy turned to limiting such abuses.
Twenty years on, the compromise is in tatters. The problem is how to craft a new one which secures the huge benefits of free trade while respecting countries' different cultural traditions. This is a delicate balancing act. Trample too much on domestic sovereignty and popular support for free trade will evaporate. Tread too lightly and it will be open season for protectionism. Broadly, the solution is for governments to pursue their political aims in ways which harm the rest of the world as little as possible. That is often tough to achieve in practice.
Consider again the battle over beef hormones. It is ridiculous for Europeans to accuse the WTO of trying to foist dangerous food on them. Its ruling, that the EU's ban was illegal because it was not based on sound science, is based on rules to which the EU agreed in 1994. There is no scientific evidence that growth hormones are dangerous when used responsibly. They can, however, be dangerous in high doses. Americans are not dropping dead in the streets, so the hormones are presumably not misused. Many products which are safe when used responsibly, such as cars, can be lethal when misused. All the same, if Europeans genuinely prefer to be safe rather than sorry, and are willing to incur the economic cost of being extra-cautious, then they should not be forced to lift the ban. But then, they should not have agreed to the WTO's food safety rules. And there is a more important point. There is no such thing as national preferences, only individual ones. It is an affront to our freedom for governments to decide what we can or cannot eat. So it would be best if the EU lifted its ban but required that hormone-treated beef be labelled as such. Then those Europeans who are not worried about growth hormones could eat beef treated with them and those who are concerned could avoid it. How can that be a threat to democracy?
The row over beef hormones is a light skirmish compared with the looming war over GM foods. Many Europeans are paranoid about genetic modification, and the economic stakes for the US run to many billions of dollars. A possible European ban on GM foods, which are not commercially produced in Europe, would effectively discriminate against US farmers. If the US challenged such a ban at the WTO and won, support for the WTO would plunge in Europe. Clearly, it would be best if the matter were dealt with politically. In any case, the truth is that there is no stark choice between food safety and free trade. Even free traders prefer safe food to free trade. But tastes-and perceptions of risk-differ between individuals and countries. Rather than ban GM foods, the EU should require proper labelling.
The battle of Seattle has only just begun. The failure of governments to launch a new round of world-trade talks has left a vacuum which critics of the WTO are eager to fill. They are redoubling their efforts to win over public opinion, to lobby governments and elbow their way into the WTO's work. European farmers are pressing for the WTO's food safety rules to be watered down. Trade unionists, notably America's AFL-CIO, are pushing for the WTO to impose trade sanctions on countries which fail to enforce core labour standards. Greens want the WTO to enforce environmental standards, too. Al Gore, the Democrats' candidate for president, says he supports their aspirations. There is a growing danger that the WTO's dispute settlement powers will be used not to keep trade free, but to keep imports out.
It is unfortunate that development lobbyists share platforms with such protectionists. The main losers from such a perversion of the WTO's mission would be poor countries. Understandably, developing countries' immediate priority is to escape from poverty, rather than ending child labour or clearing up air pollution. To ban their imports because they do not have labour and environmental standards as high as rich countries is to deny them any hope of development-and the ability to afford such high standards in future.
The stakes could not be higher. Those who believe that the WTO can make the world a richer, and thus a cleaner and safer, place must do more to fend off attacks from those who want to pull up the ladder to prosperity behind them. The WTO itself has much to do. It needs to pacify its more reasonable critics and win back public opinion at large. That requires reforms to make the WTO more open and less bureaucratic. The WTO should also lose its power-easily open to abuse-to authorise retaliatory trade sanctions against recalcitrant countries, which should instead have to lower their barriers to less controversial imports. Above all, the WTO must convince people that it is genuinely a friend of the little man and a champion of consumer rights.
Yet such a task cannot succeed without governments. Only governments have the power, the money and the legitimacy to make a difference. They created the WTO to nurture, through global rules, the process of globalisation. As the richest and most powerful, the US and the EU have a special responsibility to shore it up. Perhaps they have forgotten that globalisation is reversible. The deep integration of world markets in the 19th century was reversed in the first half of the 20th century, with catastrophic results. Unless governments defend them, the huge gains from free trade could yet be lost again.
