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Photo: Reuters
Photo: Reuters

The Ponzi scheme in global trade

Why would anybody take sermons on trade liberalization seriously when the proponents have a tendency to pocket gains in areas of their interest?

When the world’s largest trader lays down its priorities, it’s important to pay attention. The European Union (EU), which represents the trading interests of 28 member countries, commands influence because of its dominant status in the global trading system. Over one-third of the international trade in goods and services originates from EU members. Leading industrialized countries—Germany, France, the UK, the Netherlands, Italy, Sweden, Denmark and Finland, among others—as well as economically and fiscally ravaged nations such as Greece, Spain, Portugal and Ireland and former socialist countries of the east are all part of it.

With a referendum on the UK’s membership next month, the economic crisis in Greece, the worsening refugee problem and the growing opposition to globalization, the EU looks vulnerable on several fronts.

Yet, when it comes to trade and unveiling new trade agendas, the EU invariably claims leadership. From the Uruguay Round to the Millennium Round, and now from the Doha Round to new trade issues based on global value chains, successive EU trade policy chiefs have claimed the high moral ground. Consider, for instance, EU trade commissioner Cecilia Malmstrom’s latest trade agenda. In two separate addresses on 26 April and 2 May, Malmstrom set the ground as to what the EU wants the large membership of the World Trade Organization (WTO) to do.

She has subtly conveyed to WTO members that they should not “get bogged down in the question whether Doha (Development Agenda round of trade negotiations) is dead or alive". Clearly, she is aware of the prevailing comatose conditions in which the WTO finds itself now. After the successful Nairobi Ministerial Meeting nearly five months ago, everything has come to a standstill at the WTO’s William Rappard building in Geneva. Members seem to be somewhat staggering around in the Nairobi stupor. Surely, Malmstrom, along with her counterpart Michael Froman in Washington, can claim all the credit for generating the tectonic Nairobi effect.

“And the economic rise of countries like China and India has not only changed the balance of power in the WTO, it has changed the interests of some key developing countries," she has argued, going on to suggest several areas where members can start work at the WTO. They include tackling domestic farm subsidies, digital trade, investment, sectoral market access agreements on goods, export restrictions on energy and raw materials, local content requirements and state-owned enterprises.

At Geneva’s Graduate Institute, Malmstrom further clarified her ideas in a keynote lecture on “Putting Principles into Practice: Multilateralism and Other Values in EU’s Trade Policy". She said, “The fundamental role of EU trade policy must be to create economic opportunity for people, starting with people in Europe." That emphasis on people in Europe should not be surprising given the history—from the Vikings to modern-day Brussels’s trade liberalization apparatchiks.

“But trade," she argued, “must also be about values and principles as much as it’s about economic interest." The EU’s strategy “Trade for All", which was unveiled last year, according to Malmstrom, is based on economic realities in Europe, particularly “global value chains". Over 30 million jobs—“one of every seven jobs in our whole economy"—depend on global value chains that provide imports of “energy, raw materials, or intermediate goods or services", she said.

Effectively, the EU trade commissioner is suggesting that for exporting state-of-the-art technologies and products to the daridra narayans of the world (to use Gandhi’s phrase) the EU companies need guaranteed flow of imports such as raw materials, energy and back-office outsourcing services from the developing countries. This would also imply that the developing countries must continue to produce what they are good at, such as raw materials, intermediate goods and back-office services. The raison d’être of global value chains, or GVCs, is that industrialized countries will continue to produce the state-of-the-art iPhones and technologies while the Make in India types provide the components and parts.

This new GVC-inspired international division of labour, which began with cotton some 400 years ago, continues to manifest in one form or the other. In his book Empire of Cotton, Harvard historian Sven Beckert succinctly described in graphic detail how European merchants “vertically integrated" their businesses and operations connecting growers and manufacturers.

“Asia’s cotton markets were vast, and winning them was the grand prize that British, French, Dutch, Spanish and American imperialism bestowed, not just on Lancashire manufacturers but on some continental European, North American, and Japanese manufacturers as well," Beckert argued. “India in particular became a huge market—already in 1843 it was for British manufacturers their most important customer, and it remained central for about a century thereafter. By 1900, 78% of the total production of British cotton industry was exported, much of it to India," he wrote.

Unfazed by the latest leaks and growing opposition to the Transatlantic Trade and Investment Partnership negotiations with the US, Malmstrom maintained that Brussels wanted to bring about “regulatory cooperation" to ensure that trade policy around the world is consistent with the EU’s values, particularly human rights and labour and environmental standards.

The EU, she said, wants rules “in line with 21st century realities of global trade". They include new rules for “digital trade", which barely existed “when the Doha Round was launched"; investment, which is “now supported by foreign direct investment"; and subsidies in agriculture and fisheries, as well as subsidies to manufactured goods. She also believes that “over the last decade, level playing field issues like the role of state-owned enterprises and local content requirements have increased in prominence and impact".

In short, “If 164 countries are prepared to open their markets on the same terms to each other and follow the same rules, that’s good for everyone," she said.

Why would anybody take these sermons on uninterrupted trade liberalization seriously when the proponents have a tendency to pocket gains in areas of their interest without paying others what they deserved in reciprocity? Increasingly, trade liberalization looks like a Ponzi scheme, with countries asked to pay and pay for promised benefits that, invariably, never materialize.

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