Patrick Thomas

BAM!

Here in Washington, Congress is still mostly focused on getting a health care bill passed. But after a narrow victory for climate change legislation in the House this summer, things are starting to move again with the introduction of the Kerry-Boxer bill in the Senate.

Climate change doesn’t feel like a trade issue, but in many ways it is. Trade can play a powerful role in the global fight to mitigate climate change through the exchange of green goods and services. But there is also a concern that climate change could be used instead as an opportunity to build new protectionist barriers to trade.

I am referring to something called a Border Adjustment Mechanism (which has a fantastic acronym). In essence, a BAM is a tariff levied at the border on goods made in countries which do not account for carbon intensity during production. BAMs are seen by some as a way to level the playing field in regards to competitiveness.

Instinctively this may sound reasonable. But BAMs are a blunt instrument to solve what is actually a fairly small problem. They would be very tough to administer and they would have to be structured very carefully to pass muster in the WTO.

From a trade angle, the UK Government worries about the protectionist signal that BAMs could send. We need free and open markets to really tackle climate change, and we don’t want to risk sending the wrong message to our global trading partners. We agree with the statement that President Obama made about BAM provisions in the House legislation that passed in June:

At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there.[…] There are going to be a series of negotiations around this and I am very mindful of wanting to make sure that there's a level playing field internationally. I think there may be other ways of doing it than with a tariff approach.

Nick Bridge has been doing an excellent job covering the wider climate change debate from the Embassy. Businesses and think tanks are engaging too - Jake Colvin of the National Foreign Trade Council and Matt Yglesias have both recently written thoughtful posts on BAMs, which I encourage you to read. This will be an ongoing debate as the Senate considers climate change legislation, and BAMs, in the coming months. I hope to write more about this subject in the future.

Posted at 09:34 19 October 2009 by Patrick Thomas  |  Comments[0]

A new normal

In recent weeks, there have been some signs that the sharp recession which has plagued the global economy is slowly beginning to turn a corner. This is welcome news. A good dose of economic growth is sorely needed at the moment; but looking forward, it’s clear that fundamental challenges remain. Last week, The Economist ran a cover story titled ‘After the Storm’, which cast a sober look at what could be the ‘new normal’ for the global economy:

The prospect of a ‘new normal’ … still spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate of growth, without regaining the ground lost. That, the IMF points out, is what happens after most financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate, with investment, employment and productivity growth all feebler than before.

This is hardly encouraging stuff, and it made me wonder what we can expect from international trade in the future.  Will trade and investment, the great engines of global economic growth, pick back up? Or are we looking at a ‘new normal’ of weaker commerce?

Here in the US, I have heard two very different scenarios. Earlier this week, Nobel Prize-winning trade economist Paul Krugman gave a talk to the World Business Forum. Mr. Krugman is bearish about the future of commerce. Referring to the trade collapse this year, he concluded:

When it comes to international trade, actually it’s not the Great Depression, it’s worse… World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.

Fortunately, I have seen some more optimistic thinking as well. I attended a discussion at the World Bank a couple months ago, where Caroline Freund, Senior Economist in the Development Research Group at the World Bank, argued that the ratio between trade and global GDP has increased over time due to the increasing complexity of global supply chains. By this logic, just as trade has fallen fast, it should snap back quickly as global economic growth returns.

We don’t know which of these scenarios will come to pass, but it seems clear that things will not be the same post-crisis. For me, this is another reason to complete the Doha Round of trade negotiations as soon as possible. In the ‘new normal’, there will likely be fresh challenges for the multilateral trading system. Once we finally finish the Doha Round, which was launched back in 2001, the World Trade Organisation will be much better placed to tackle them.

Posted at 12:33 09 October 2009 by Patrick Thomas  |  Comments[1]

Watching out for protectionism

For a lot of people here in the United States, September means one thing and one thing only: the start of the football season. The NFL’s salary and drafting rules create enormous parity across the 32 teams in the league, so hope springs eternal around the country each autumn. Unless, like me, you’re a Redskins fan – in that case you’re probably already wondering what went wrong.

Like most modern sports, American football is obsessed with statistics. You can easily go online and find minute detail about every team and player in the league. There is an embarrassment of riches.

I think stats can be great: when used properly, they help us make sense of the bigger trends. This carries over to the policy world as well, so I was excited that we had not one, but two reports measuring protectionism in the G20 countries released last week. The first is a joint effort of the WTO, OECD and UNCTAD, and the second comes from the independent Global Trade Alert. I recommend that you have a look at both. Each one has enough graphs, charts and killer stats to make any NFL analyst’s head spin.

The WTO/OECD/UNCTAD report paints a cautiously optimistic picture. While noting that there has been ‘policy slippage’ in most G20 countries, it states that they “have not observed a widespread resort to trade or investment restrictions as a reaction to the global financial and economic crisis.” Most G20 nations have taken measures to increase the openness of the investment climate.

Global Trade Alert’s report is considerably more pessimistic. It alleges that there has been a ‘serial violation’ of the G20 pledge to resist protectionism. Killer stat: since the Washington G20 summit in November 2008, “on average, a G20 member has broken the no-protectionism pledge every three days.” Ouch.

It might seem like a mixed picture, but I think there are two key takeaways here. First, while we have so far avoided a knock-out tariff, countries have introduced a flurry of smaller trade-restricting measures, albeit most of them legal and within WTO rules. Many continue to do so, and as I blogged previously, we need to be concerned about this sort of murky protectionism. Second, protectionism has nonetheless been somewhat restrained through concerted vigilance and monitoring as well as our strong global trade rules. We need to continue to monitor ourselves and our trading partners. This will be one of the focuses of the G20 summit that meets in Pittsburgh later this week.

Posted at 10:46 21 September 2009 by Patrick Thomas  |  Comments[0]

Trade talks in New Delhi

Last weekend was a busy one; we had the global economic equivalent of a double feature. My colleague Tom Barry blogged about the G20 finance ministers’ meeting in London, which set the broad agenda for the G20 Summit in Pittsburgh later this month. But there was also big news on the international trade front. In New Delhi, the Indian Government hosted a major trade ministers’ meeting with the aim of reviving stalled DDA negotiations. More than 30 nations attended, including the European Commission, the US, China, Brazil and other major players.

In the two short days of discussions, trade ministers did not make any breakthroughs on substantive issues, though that wasn’t the point. New Delhi was fundamentally about process and building momentum in the run-up to the G20 Summit in Pittsburgh.

You can read the official Indian Government press release here. Ministers unanimously re-affirmed the need to complete the DDA by the end of 2010, and that development would remain at the heart of it.  As a next step they agreed that Chief Negotiators and Senior Officials would meet at the WTO in Geneva during the week of 14 September to plan the next 2-3 months of engagement. This leaves a chance for political intervention by leaders in Pittsburgh if the negotiators can’t get things moving before then.

As with any international negotiation, there are many factors in play. Much will depend on constructive engagement from the United States. Here in Washington, there has been little movement in the trade policy arena so far this year. Congress has not ratified any of the three free trade agreements signed by the previous administration with Panama, Colombia and South Korea, and some senior positions of President Obama’s trade team have yet to be filled. However, the President has signalled that he will give a speech in the near future which sets out his administration’s trade agenda. Commentators are saying that until then, things are unlikely to move forward.

Nonetheless, EU Trade Commissioner Baroness Ashton said that the 2010 deadline is ‘absolutely achievable’, and WTO Director-General Pascal Lamy expressed hope that this is the ‘beginning of the end game of the Doha Round’. The UK agrees. My earlier blogs spoke of how the DDA can help in the battle against protectionism, as well as lift millions out of poverty.

Posted at 12:21 11 September 2009 by Patrick Thomas  |  Comments[0]

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Posted at 11:35 02 September 2009 by e-Media Global  |  Comments[0]

FTAs vs. multilateralism

I recently attended a panel discussion assessing the Obama administration’s trade policy after the first six months. It was a full house despite being August in DC, and there was plenty of big thinking about the future of trade policy. The top notch panel mostly agreed that the current centrality of free trade agreements (FTAs) to US trade policy would have to change. This got me thinking about a wider policy question: whether FTAs or multilateral WTO deals are the best way to expand trade.

FTAs do offer certain advantages over multilateral trade deals, namely that they allow for deeper integration and are ostensibly  quickerto negotiate.  Indeed, the European Union considers them a complement to wider trade liberalization. But while useful, they present only a limited vision for the future of trade. By including only certain trading partners, they increase the risk of trade diversion. What’s more, the mesh of FTAs which govern an increasingly large portion of global trade often have different rules and standards, leading to administrative complexity that could actually stifle trade.  (Some 421 FTAs were notified to the WTO by December 2008). Jagdish Bhagwati famously calls this the ‘spaghetti bowl’ phenomenon.

Theoretically, you can address some of these concerns by advocating wider regional agreements in place of bilateral ones. This was one recommendation of the panel discussion I attended. But really the best way to avoid these issues is by going the WTO route and completing the DDA. A WTO deal also offers much larger tangible benefits than any FTA: as I mentioned last week [hyperlink to last week’s post], the DDA could boost the global economy by at least $150 billion  a year, with significant benefits going to developing countries.  It also ensures the Most Favoured Nation principle is consistently applied and provides a tried and tested enforcement system, the dispute settlement understanding.  

Let’s be clear: it will take real work and difficult decisions to finally bring the DDA home after almost eight years of negotiations. But it is certainly possible, and doing so will remain a top international priority for the UK. While FTAs can play a role, the best way to expand  global trade in a sustainable way is still in the WTO.

Posted at 10:57 31 August 2009 by Patrick Thomas  |  Comments[0]

Water, water, everywhere

Water, water, everywhere.

The great British poet Samuel Taylor Coleridge surely wasn’t referring to global trade negotiations when he penned this famous line from The Rime of the Ancient Mariner, but he might as well have been. At the moment, there is simply too much water in the international trade system.

A bit of background: in WTO-speak, ‘water’ refers to the difference between ‘bound’ and ‘applied’ tariff rates. Bound rates are the tariff commitments that countries make in WTO agreements. It’s very difficult to raise tariffs beyond the bound level without providing additional concessions to trade partners or provoking retaliation from them.

The applied tariff rate is what you actually pay at the border. Often, the applied tariff is much lower than the bound rate, so there is a considerable amount of water. This can be a good thing. The UK government wants tariffs to be as close to zero as possible. The problem is the lack of certainty with applied tariffs. Countries have scope to raise them all the way up to the bound level overnight without technically violating their trade commitments, even though this would adversely impact trade flows and raise the cost of international business. According to an estimate by the International Food Policy Research Institute, increasing all WTO members’ currently applied tariffs up to bound levels would shrink trade by $728 billion. That is a staggering figure.

You can find any number of criticisms about the Doha Development Agenda (DDA), but one of the simplest and most powerful arguments for completing the Round is that it would bind tariffs much closer to the current applied levels. For this reason, Patrick Messerlin calls the DDA a ‘global insurance policy’, which could also boost the global economy by at least $150 billion. Given the current economic climate and the trend of murky protectionism I discussed last week, the logic for a trade insurance policy is compelling. 

Posted at 09:45 21 August 2009 by Patrick Thomas  |  Comments[0]

Google Trends, Smoot-Hawley and murky protectionism

At a recent speech here in Washington, Larry Summers joked that one positive economic indicator is the fact that the number of Google searches for ‘economic depression’ has returned to pre-crisis levels. He’s right about the search history, which you can see for yourself on Google Trends. And after playing around with the website, I am happy to report that the number of searches for ‘Smoot-Hawley’ has also declined after spiking earlier this year, though it remains at elevated levels.

Smoot-Hawley was, of course, the infamous tariff widely blamed for the spectacular collapse in global trade flows during the Great Depression. In trade policy circles, Smoot-Hawley is shorthand for the dangers of economic isolation and the need to resist protectionism. So if Google searches are a proxy for concerns about a tariff hike on par with the original, we should be grateful that they have declined.

However, while reassuring, this also sort of misses the point. A new Smoot-Hawley tariff was always a remote possibility: our current global trade rules, which didn’t exist in the 1930s, would make such a knock-out tariff much more difficult to implement today. And even though we’ve managed to avoid catastrophe during the current economic downturn, it would be wrong to conclude that we’ve escaped protectionism altogether.

The more realistic and immediate danger continues to be incremental increases in protectionism. Instead of one big, headline-grabbing tariff rise, there has been a flurry of smaller trade-distorting measures that have sometimes been difficult to identify. Richard Baldwin and Simon Evenett have aptly called this murky protectionism. And according to a recent WTO report, countries around the world have introduced 83 such trade-restricting measures in the last three months alone.

We should be concerned about this trend for two reasons. First, history shows us that it’s much easier to build trade barriers than to knock them down, and to lose markets than to create new ones. It will only be more difficult to roll back stealthy barriers that are difficult to identify. Second, trade policies aside, it has already been an extraordinarily difficult year for international commerce. The WTO estimates that global trade flows will decline by 10% in 2009 - the first year-on-year drop in more than a quarter century and the largest since World War II. Murky protectionism just risks making things even worse.

Posted at 08:38 14 August 2009 by Patrick Thomas  |  Comments[0]