Fears of trade war stalk World Economic Forum

Doha deal failure to hit global system

Open markets and trade are the essence of globalisation that delivered rising prosperity for decades until interrupted by the credit crunch and economic downturn.

An initial unified global response to the crisis staved off the wave of protectionism that many felt was inevitable. But fears persist that stubborn trade disputes — especially between China and rich powers like the US, European Union and Japan — could spill over into an outright trade war, not least because of tensions over exchange rates. Trade ministers will hold two meetings at Davos this week to review progress on the renewed push for a deal on Doha trade round this year. A failure to conclude the round, already more than nine years old, would deal a body blow to the global trading system.

Brazilian Finance Minister Guido Mantega, watching the appreciation of the real, said last September the country was in a currency war, and earlier this month warned that conflict was turning into a trade war.

“The threat of a trade war is real,” Jean-Pierre Lehmann, a professor at IMD Business School in Lausanne told Reuters. “We know that trade wars make everybody pay the consequences, but that doesn’t prevent them from happening.”

Dispute settlement

The failure of 1930s-style protectionism to emerge in the downturn was widely ascribed to multilateral trading system umpired by the World Trade Organization. The WTO dispute system provides respected channel for states to resolve differences by consultation or litigation.

According to former WTO Deputy Director-General Roderick Abbott, the recognition that supply chains nowadays are global militates against protectionism. “Interrupting the chain by shutting out your neighbour can mean shutting down your main industry,” he said. WTO Director-General Pascal Lamy has argued that rules-based trading system has withstood the crisis. But late last year he warned that currency tensions could undermine that resilience.

The desire to hold down currencies has many causes, but defending domestic jobs by keeping exports cheap and imports dear often plays a role.

While many economists and policymakers are upbeat about overall economic prospects, few are bullish about the outlook for employment. Lamy says a deal in the Doha round for new trade agreement would bolster the WTO system as bulwark against protectionism. The converse, of course, is also true.

Weary trade negotiators say it is still not clear, despite ritual calls in G8 and G20 communiques, whether political leaders are ready for compromises needed for a deal.

A preference for bilateral or regional deals over Doha can be seen as another crack in the multilateral trading system. But for some, the importance of Doha goes beyond however many billions of dollars it would inject into the world economy.

The ability to clinch a new trade deal is a touchstone for the world community’s ability to cooperate on other issues, from climate change to financial regulation.