Storm, The (18 page)

In the event, the negotiations have collapsed. There were several contributory factors. The European Union was seeking to
limit farm liberalization as far as possible and, to the end, President Sarkozy was publicly demanding a curb on further offers
by the EU trade negotiator, Peter Mandelson. The USA, which had traditionally led the demands for subsidy cuts, had insisted
that its own commitment to farm spending should not be reduced (even though much of it had not been used hitherto). There
was also resistance from developing countries such as India to reducing their own, high, tariffs and trade restrictions. Moreover,
the final stages of negotiation coincided with a flurry of panic new trade restrictions in the face of rising food prices
– including export controls in Argentina, potentially one of the biggest beneficiaries of a liberalization agreement. All
of this underlined the crucial importance of an agreement, but also the political problems involved in achieving one: simultaneously
resisting populist measures at a time when people were hungry and angry, and confronting powerful producer vested interests
in pursuit of an international agreement the benefits of which would not always be obvious in the short run.

Finally, it was not agriculture that led to the ultimate breakdown in negotiations. Successive rounds of negotiation have
progressively reduced tariffs on manufactured goods to low levels and removed most quotas. The new round was to take this
process further: cutting EU tariffs from 10 per cent to 4.5 per cent, but also including trade barrier cuts from developing
countries, albeit less substantial and over longer periods and with more exceptions. China’s car tariff would go down from
25 to 18 per cent, for example. One complexity was that the negotiations were not about actual tariffs but about ‘bound’ tariffs
(that is, cuts that cannot be reversed). What was being asked of governments was often not to expose industries to more competition
but to restrict their freedom of manoeuvre in the future. In the event, there was a
disagreement between the USA on one hand and India and China on the other as to how much the latter should liberalize in order
to make the package as a whole work.

The fact that India and China were the catalysts of a breakdown was important, even though a breakdown might well have occurred
anyway. While the long-standing arguments about agriculture between the USA and the EU are damaging and costly to their own
citizens and many developing-country food producers, they do not involve any fundamental disagreement about the merits of
trade. But in the reaction to India and China there are hints of a more profound discomfort with these countries’ emergence
as big players in international trade, and also a lack of commitment by these countries themselves, both of which have emerged
from a long period of near autarky, to trade liberalization.

The discomfort in developed countries towards the big new Asian competitors stems from an underlying fear of the introduction
of very large numbers of poor workers into a world economy already characterized by intense competition. Fear of ‘cheap labour’
has been a recurrent theme in the politics of trade. Populist demagogues have long exploited the fears of the white working
class against this perceived threat to their livelihood, be it from India in the seventeenth century, Japan in the early twentieth
century, or, more recently, Mexico, China and, now, India again. Not only are the politics primitive, so are the economics.
Martin Wolf and others, including the author, have expended rivers of ink seeking to demolish the fallacies, of varying sophistication,
that have engendered a protectionist approach towards trade with poor countries.

What has caused a more sceptical approach to the benefits of freer trade to re-emerge is concern over the distributional impact.
It is one of the most basic propositions of trade theory, as already argued above, that specialization will increase returns
to the relatively scarce factor of production. In other words, in a developed country trading with a poorer country with abundant
labour, there would tend to be increased returns to capital and
pressure on wages. The standard response has long been that these effects are in practice small and are swamped by the impact
of technology, that those adversely affected can adjust into areas of employment not facing overseas competition, and that
the overall benefits outweigh any costs. There has, however, been evidence that returns to capital are growing and that real
wages are being squeezed. Though how far this is due to China’s (let alone India’s) entry into the world economy is debatable.

Until recently, Western leaders have been persuaded that it is desirable, and mutually advantageous overall, to welcome China
and other emerging economies into a liberal global trade system. However, the increasingly widespread belief that import competition
across a wide range of goods is depressing wages and employment has sapped the willingness and ability of governments to force
through liberalizing legislation. There is now a major problem in the USA, with a hostile Democrat-controlled and union-influenced
Congress. Even before President-elect Obama took centre stage, we saw the absurd spectacle of a right-wing Republican president,
with impeccable anti-union credentials, berating the Chinese (and other countries) for not upholding labour rights, and empathizing
with American blue-collar workers over the unfairness of low-wage competition. President Obama is in the uncomfortable position
now of having to deliver protectionist trade measures which he promised to the labour unions.

Should the trade talks have definitively failed, there are several likely damaging consequences, even if the world does not
descend into outright trade warfare. The potential gains would, of course, be forfeited. There is a likelihood of increasing
use of regional and bilateral agreements that incorporate discriminatory treatment of non-members. This is essentially what
happened in the 1930s, when the major powers turned inwards to their protected imperial markets. There is also a likelihood
that, with the authority of the WTO diminished, there would be increasing, unilateral use of anti-dumping duties and other
measures directed at China
and other emerging economies, with the dispute settlement processes of the WTO becoming less and less effective. The tensions
unleashed by the current crisis would therefore weaken further the already fragile structures that provide some sort of governance
for the world economy.

The conflict latent in the tensions over exchange rates, and deeper imbalances in savings and investment, and the inability
of the established economic powers to come to an agreement with the newcomers over trade, do not bode well for the future.
The concerns over ‘security’ unleashed by the oil and food price shocks have also created a new source of potential disputes.

The near-collapse of the Western banking system and the onset of recession have, however, in the short term at least, led
to a more cooperative approach. The Chinese have been bewildered by the unravelling of the capitalist world’s sophisticated
financial architecture and alarmed by the spread of recession to their economy, but appear to recognize that it is in their
interests to achieve global stability.

As the crisis gathered momentum in the early months of 2009, China and India (and other major new players such as Brazil)
responded positively to overtures to participate in the new G20 grouping, which has effectively replaced the G8. This group
agreed in the spring to a common economic stimulus. China in particular, though no doubt for its own domestic reasons, embarked
on large-scale infrastructure investment to forestall recession. It also relaxed monetary policy to allow more lending. At
the autumn meeting the more uncomfortable issue arose of the imbalance in the world economy, and its link to exchange rate
policies. The Chinese, for their part, are promoting interest in the idea of a global currency – the IMF’s ‘Special Drawing
Rights’ – as an alternative to overdependence on the US dollar. There are strains beneath the camaraderie, although so far
there is a sense that the major countries need to hang together or else they will hang
separately. That, at least, is an advance on the inter-war period when nationalism and protectionism took over, in response
to growing unemployment.

At the end of 2008 it appeared – briefly – that both China and India were staring in the face a global recession which was
affecting their exports and the confidence of foreign investors. There was even speculation that China, in particular, would
face political upheaval resulting from serious unemployment. The greater likelihood was that, since both countries rely primarily
on internal demand and have a capacity to sustain high levels of investment and output growth for years to come, there would
only be a temporary, limited slowdown. This appeared to be happening in the latter part of 2009, with China anticipating 8
per cent growth over the year, and India 6 per cent. Indeed, these two countries were leading global recovery.

The upshot of this crisis may therefore have been an acceleration of the shift in the centre of gravity of the world economy
towards the East, as the newcomers continue to grow while the developed world flounders in recession and a broken model of
financial intermediation. It remains to be seen whether the cooperative mood can be sustained.

Economic and financial crises cause pain. People get hurt; they lose their jobs, their businesses and their homes. Pain leads
to anger. And anger produces a quest for scapegoats; victims need someone to blame. Out of today’s series of interconnected
crises, there will be some creative solutions, but, also, some bad ideas and ugly prejudices.

One of the earliest recognizably modern financial crises with major economic and political consequences was the collapse of
the South Sea Bubble in 1720. It was a crisis not unlike that of today, albeit on a scale that reflected the more modest development
of financial markets three centuries ago. That bubble, like today’s, was, in effect, a vast pyramid-selling scheme which enriched
the promoters greatly but left those who bought into the scheme exposed to the risk of collapse. Like today’s property markets,
the South Seas seemed to offer the prospect of infinite expansion. The cleverest minds of the day – indeed, of all time, like
Isaac Newton – were persuaded by the compelling logic of exponentially growing wealth to part with (and lose) all their savings.
When the bubble burst, the consequences spread far beyond Great Britain and a severe recession came in its wake. Angry rioters
among London’s unemployed weavers smashed windows and terrorized the capital’s upper class. Some relief from the pain was
achieved by a parliamentary enquiry which dreamt up im aginative punishments for the promoters, including sewing
them into a sack with poisonous snakes and throwing them into the Thames. But the venomous political climate also led to legislation
strengthening protectionist trade restrictions against Indian calico – wearing it became a crime – thus transmitting the crisis
from Europe to villages in Bihar and Bengal.

When the much bigger crash of the early 1930s devastated stock markets and broke banks across America and Europe, leading
to deep economic slump, conditions were created in which political extremism could flourish. Mussolini was already in power,
but Hitler was undoubtedly helped by the enveloping economic chaos. Indeed, Italian Fascism and National Socialism, and minor
variants like Oswald Mosley’s British Union of Fascists, derived ideological legitimacy from the manifest failures of global
capitalism. The USA also succumbed to economic nationalism, which culminated in the Smoot–Hawley tariffs of 1930 during the
disastrous Hoover presidency. The European powers, including Britain and also the British Empire, particularly Canada, retaliated
in kind. Mussolini embarked on countermeasures, such as restrictions on American car imports, with particular relish. There
is continuing debate as to how much trade warfare contributed to the economic depression of the early to mid-1930s, but it
certainly didn’t help. In other parts of the world, the climate of economic nationalism reinforced the conviction of imperialists
in Japan that the future lay with territorial expansion to secure markets and raw materials, which led to war.