Friday, July 28, 2006


Amidst the continuing noise in the Middle East, economic news has been a lower priority. However, the collapse of the Doha round of negotiations on tariff cuts is a potentially very serious development. The failure to tackle the need for free trade is creating more unstable conditions in the global economy. This is a political issue, but is also a moral issue.

Poverty in Africa could be ameliorated far more rapidly if there was freer trade allowed for African goods. The large tariff barriers of the US and the EU have distorted the global markets for most agricultural goods. Whole markets in cotton, for example are rigged by large subsidy payments in the USA, while Europe insists on subsidies for sugar beet production that undermine the far more efficient cane sugar producers of the West Indies. Since it is uneconomic to invest in production, the West Indian producers have grown more open to other sources of money- like narcotics transportation. Thus, our failure to take free trade seriously poses a threat to our own way of life.

I hope that the collapse of the Doha round may be temporary, but I fear that it may not be. The fact is that global free trade is easier to negotiate during a period of prosperity. As I see the continued increase in commodity and energy prices, and the limits to growth that the inefficient financial system is creating in China, it now seems likely that new instability is emerging in the global economy.

The huge asset price inflation of the past few years now seems set to create a generally more inflationary climate. This makes it quite likely that interest rates will continue to track up, and finally shut down the growth engine of long term cheap credit. The implications of this- a plunge in house prices, for example- could be part of a global economic downturn.

I am pretty gloomy about the current outlook- normal credit ratios have been long since abandoned and I see a significant risk to the financial system as leveraged instruments need to be unwound. The risk in the financial system no longer lies entirely with banks, and a correction may find unexpected holders of complicated financial structures, which they may not even understand.

As I say, the long term boom in the global economy has rested on this greater liquidity and on the fact that China was presumed to have a limitless capacity to manufacture. Neither of these calculations may prove to be correct and while India may be able to take up some of the Chinese slack in the medium term, the short term looks more ominous. Neither do I forget that the Chinese Communist government is an unstable tyranny. Tien-an-men in 1989 may prove in hindsight to have been the precursor to a general revolt against the CPC.

The Middle East is a tinderbox, with the massive miscalculation of the US intervention in Iraq, now threatening the stability of the entire region. Iran continues to seek to provoke Israel into a more dangerous confrontation though its allies in Hezbollah. A wider war in the Middle East is now distinctly on the cards. In any event energy prices seem set to continue to remain close to record levels- reducing the power of the West still further.

I have terrible forebodings- the risks in the system are now increasing on a daily basis.

In retrospect the failure of the Doha round may have a more than totemic significance.


English European said...

The history of globalisation is not a shining example of altruism. Most of the liberalisation has been pushed through to the benefit of rich countries and their resident multinationals and at the expense of the poor. I'm glad Doha has failed - now let's bury it. The world doesn't need more dirty back room deals, it needs Europe and America to give the poor world fair access. This can be done unilaterally and bilaterally and is what we liberals should be campaigning for now.

Cicero said...

I wish that free trade could be done bilaterally, but what tends to happen is that the poorer country ends up with a weaker deal: c.f. various US bilateral initiatives. Although the process of trade rounds is a bit like the old joke about sausages (you don't want to know what goes into them) the fact is that previous rounds have been far more beneficial than not- and not just for multi-nationals. The Doha round was especially important, because it was talking about food- one of the few things that particular Africa has a competative advantage in. The only people who benefit from its failure are the global agri-businesses.

Tristan said...

english european:

The collapse of Doha could be a disaster for the poor all over the world, all countries should open up their markets. Bilateralism, as Cicero says, is also usually worse for small countries, they can be bullied by the big countries they make the deals with (to accept things like the ridiculous intellectual property laws we currently have). At least in multilateral talks they can side with big countries against other big countries to try and get their way.

As liberals we should promote three options:
Unilateral opening of markets- for this we need to get the message across that free trade is not a concession (as the mercantalist ministers seem think, as well as vested interests in industry) and that it benefits us.

Multilateral opening of markets- far from perfect, but they give smaller countries recourse to groups like the WTO to settle disputes.

Bilateral opening of markets with no incentives other than the opening of the market and a most favoured nation clause like that Cobden negotiated with France, that is, if you give another country better terms, then you must extend it to us (as we will to you).

We need to dispel the myth of 'infant industry' protection and that free trade is not a concession to be made for being able to protect other parts of industry.
We need to make the benefits to Europe clear as well as the benefits to the developing world.