After Doha: what is the future of world trade?

The failure of the Doha Round of trade liberalisation doesn't mean the end of globalisation, says Morgan Stanley economist Stephen Roach. Global trade volumes are increasing at a great rate. What it does demonstrate is the increasing politicisation of world trade.

Too much has been made of the apparent failure of the Doha Round of trade liberalization. It does not spell the end of globalization. Nor does it signal an imminent threat to the expansion of cross-border trade. Instead, the lessons of Doha bear more on the trust factor - the unwillingness of the world's body politic to buy into the win-win boosterism of globalization. In the rough and tumble arena of global competition, that may be par for the course - but hardly the disaster that the breakdown of trade talks was widely made out to be.

The Doha Round was probably doomed from the start. Conceived in the highly emotional aftermath of 9/11 as a politically motivated endorsement of globalization, there was great hope for a major new breakthrough on the world trade front. However, it turns out that the macro climate made concessions exceedingly difficult for rich and poor countries, alike. The seemingly intractable battle over agricultural subsidies - always a contentious issue under the best of circumstances - was a foil for much deeper-rooted misgivings. A powerful global labor arbitrage put employment and real wages under intense pressures in the developed world - causing great resistance to a further lowering of trade barriers in the industrial world. And rapidly growing export-led developing countries resented being cast in the role of scapegoats - giving them little incentive to offer concessions of their own. For about a year, the handwriting has been on the wall that this round of trade liberalization was going nowhere. By the time the talks finally collapsed, expectations were so low that not all that much was really lost.

World trade: growth in trade volumes

In the end, the global trade dynamic matters much more than a high-profile media event staged around a breakthrough in multilateral negotiations. Despite repeatedly stiff resistance to the Doha agenda for nearly five years, there can be no mistaking the powerful gains in world trade that have occurred over that same period. Global trade volumes - calculated as the average of export and import growth - rose by 6.6% per annum over the 2002-05 period; that pace was about 50% faster than the 4.3% average world GDP growth over the same time frame. As a result, the ratio of exports to world GDP rose by 4.0 percentage points from 24.1% in 2001 to 28.1% in 2005 - the strongest four-year increase since the early 1970s.

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Putting it another way, the growth in global exports accounted for fully 40% of the cumulative increase in world GDP over the past four years. In the end, that's what matters most. Despite the psychological headwinds of a doomed Doha Round, the strength in global trade went well beyond any vigor that can be attributed to the global business cycle.

World trade: the impact of the internet and offshoring

What that means is that global trade barriers may already be low enough to have established a breakthrough threshold for accelerating globalization. I can't help but think that the hyper-speed of IT-enabled connectivity is an important new catalyst in this equation -- providing multinational corporations with new options to cope with increasingly intense competitive pressures. Not only has the Internet revolutionized the cross-border logistics of price discovery and supply-chain management in manufacturing businesses, but it has also transformed the knowledge-based output of once non-tradable services into tradable activities. A Doha breakthrough - especially the watered-down agreement that negotiators were aiming for in the end - would have paled in comparison to these powerful organic developments that are now driving cross-border trade in an IT-enabled global economy.

All this is not to say there aren't serious problems on the global trade front. Suffering from the twin pressures of job and real wage insecurity, rich countries feel increasingly threatened by globalization and are pushing back on free and open trade. The rapid growth of white-collar offshoring is a particularly big deal in the current climate. Even though the absolute number of lost jobs has been small so far, the fear of where this trend is going - and what it implies for real wage convergence - are sources of considerable anxiety amongst long-sheltered knowledge workers in the developed world. "No jobs are safe any more," is the refrain I hear constantly in he developed world.

The US and China are lightning rods in this debate. America, with its massive trade deficit, feels more exposed than ever. With a $200 billion bilateral imbalance with China having accounted for 25% of a record $800 billion multilateral US trade deficit in 2005, Washington has fallen into the blame game. Over 20 pieces of China-bashing trade legislation have been introduced in the US Congress in recent years. A multilateral breakthrough in the Doha Round would have done little, in my view, to dissuade Washington from taking dead aim on China.

World trade: the politicisation of globalisation

In a narrow sense - namely, from the point of view of hard-pressed workers - the politicization of globalization is understandable. Yet in a broader context, protectionism is entirely misplaced and may well be an inappropriate response to unusual macro characteristics of both the US and Chinese economies. For example, as long as the United States runs a "zero" net national saving rate, it is forever doomed also to run large current-account and trade deficits. Like it or not, this is an inherent bias of America's wealth-dependent, saving-short economy.

By going after China, Washington politicians are unwittingly taking aim on the mix of the US trade deficit, while doing absolutely nothing to reduce the magnitude of the overall external imbalance. Similarly, nearly two-thirds of China's export growth over the past dozen years is attributable to "foreign-invested enterprises" - Chinese subsidiaries of foreign multinational corporations and joint-venture partners. The very existence of these subsidiaries is an outgrowth of conscious decisions made by Western businesses - an outgrowth of efficiency solutions implemented in the name of competitive survival. This is a very different development than unfair competition by indigenous Chinese companies. Politicians continue to ignore these macro sources of trade tensions. I guess it's always easier to find a scapegoat than to look in the mirror. Nor would a Doha breakthrough have cracked this denial either.

World trade: chances of a US-China trade conflict

There is a potentially tragic irony to the juxtaposition between the surging global trade and the political backlash against globalization. There are inherent biases to the macro performance of both the United States and China that are setting up these two nations for trade conflicts. If left unattended, these conflicts pose much greater risks to globalization than the failure of trade talks. A successful completion of the Doha Round would have done next to nothing to diffuse these pressures.

From the start, Doha was a sideshow to the main event in the global economy. Nearly five years of disappointing progress in multilateral negotiations didn't make a dent in an increasingly powerful world trade dynamic. Nor would a breakthrough - watered down or not - have done much of anything to temper the mounting bilateral sources of protectionism. A successful completion of the Doha Round of trade liberalization would have been nice. But the benefits would have been fleeting, at best. There are much bigger fish to fry in an increasingly contentious era of globalization.

By Stephen Roach, global economist at Morgan Stanley, as first published on Morgan Stanley's Global Economic Forum