Hamish McRae: Our main task now is to hold the line against the forces of protectionism

The received wisdom about international trade talks is that they are very important – and the practical reaction of most of us that they are very boring. So the general reaction to the collapse of the Doha trade round is a mixture of earnest condemnation of the short-sightedness of politicians, coupled with a certain relief that we won't have to keep pretending to understand what is going on.

In fact, we don't know how important the failure will prove to be. On the one hand this could turn out to be the high point of the long progressive expansion made by the world economy since the Second World War. That was built on the idea that international trade and investment should be progressively liberalised on a multilateral basis. The three institutions founded after the Bretton Woods Conference in 1944, the International Monetary Fund, the World Bank and the World Trade Organisation, shaped this process, the idea being that the world should not slither back into the protectionism that devastated the world economy in the 1930s.

However, the WTO has had a more fraught history than the other two institutions because the countries could not agree on its terms of reference and constitution. So for most of the post-war period, actually until the early 1990s, its work was carried out by its predecessor institution, the General Agreement on Tariffs and Trade. It was used because the countries could not agree on the terms under which what was then called the International Trade Organisation would operate. So the ITO was still-born. The GATT was a treaty rather an organisation, but it had a secretariat and so could function as an ad hoc ITO/WTO, choreographing successive trade rounds with great success.

I give you that bit of history for two reasons. First, the opposition to trade liberalisation has always been strong, so what happened this week is nothing new. Actually, I think it was rather a mistake to set up the WTO because it gave the protectionist lobby, which is well-organised and aggressive, something to shoot at. It would have been much better to have left the GATT to get on quietly dismantling barriers to freer trade rather than draw too much attention to the whole business. And second, it is possible to create conditions for freer trade by using ad hoc procedures and that is what will have to happen now.

The reason why it is better to liberalise in lots of small steps rather than a big bang is simple. Removing any trade barrier brings benefits to consumers. But while it will benefit the more efficient producers it will hurt the higher-cost ones. So the benefits are widely spread but the costs are very visible. Since high-cost producers tend to have political clout they will use it to resist.

Curiously, manufacturers are less able to mobilise political support than farmers, with the result that we have pretty much free global trade in manufactures but not in agriculture.

No one doubts that the great engine of economic growth is trade. International trade has normally risen at about double the rate of growth of the world economy, as you can see in the first graph. But going right back to 1950 (next graph) manufacturing trade has risen faster than trade in fuel and mining, and much faster than trade in agriculture. As a result, Asia, Europe and North America, which export a huge amount of manufactured items (third graph), have done well over the past half century, whereas Latin America, Russia and the other CIS members, and Africa have found it tougher. (The Middle East is uneven, for the oil-rich nations have of course prospered while the rest of the region has struggled.)

The thing I find most impressive from those graphs is the consistency of the manufacturing export success story. It is almost straight-line growth at more than 7 per cent a year, with exports continuing to rise even through the difficult 1970s. Right now we can see that China's boom is built in fair measure on its ability to produce cheap manufactured goods, while India's more recent growth is more dependent on manufacturing than is generally realised. That China and India have been able to achieve take-off is largely the result of their domestic reforms but they could not have succeeded as they have except in the context of progressively more liberal global trading conditions. And that in turn is largely the result of the work of the GATT and the WTO.

So what happens now? At one extreme this could indeed be the moment when things flip. We might in another 10 years' time see 2008 as marking the end of the longest period of economic prosperity that the world has ever known. We might even look back on this period as something like the Edwardian years before the First World War shattered the previous burst of globalisation, though most of us would find that thought unbearable. But it does not need to be like that.

What will matter in the coming years is that the world does by bilateral deals what it has failed to do by multilateral agreement. A good point was made yesterday by Alec van Gelder, of the International Policy Network. He said: "reforms to simplify customs procedures and remove other administrative barriers can be even more beneficial to growth and prosperity ... dropping the tariffs that were being discussed at the WTO is an important way to boost trade but, crucially, countries can move quickly on these important reforms on their own accord without waiting for more complicated negotiations in Geneva."

That must be right. The problem will be that there will be lots of flashpoints, where short-term economic nationalism wins over long-term economic self-interest. You can see that in Russia at the moment, for the country has managed to create one of the most unfriendly regimes for inward investment anywhere in the world. You can see it in the US in the resistance to investment by sovereign wealth funds in any industry that is deemed close to the national interest. And of course there are similar examples of push-back in Europe, China, India and elsewhere. The trick will be to make sure that the flashpoints don't trigger something worse.

The global trading and investment system won't fall to bits just because some politicians and their bureaucrats have failed to reach agreement in Geneva. What troubles me is that the notion of ever-freer movement of goods, services and investment is being challenged by people who should know better. The bad guys and gals will take comfort from the collapse, and the good ones have to lick their wounds and regroup. The next couple of years will be particularly dangerous because the downturn will both increase the pressure for protectionism and make it harder to resist. There will be a new US Administration which may well be more protectionist than the present one and, post-Olympics, there may be more concern in the West about the tactics and behaviour of China. As for Africa, I am afraid the collapse of the talks may turn out to be particularly damaging.

So what we have to hope for is a couple of years of holding the line, then a resumption of the chipping away of trade and investment barriers, but on a bi-lateral basis. Not impossible – but tricky.

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