Crisis hits leaderless WTO

News Analysis: Protectionism haunts free trade as the world's watchdog fails to bite

AN OLD and familiar spectre has begun to haunt the world economy again in recent months - the spectre of protectionism.

In the US, the number of "anti-dumping" measures against foreign imports is strongly on the rise, while in many other parts of the world, reducing imports and maximising exports has become a public policy priority.

Rudderless and leaderless, the international organisation which is meant to act as a standard bearer for free trade, as well as arbitrate in trade disputes, the World Trade Organisation, seems powerless to halt the tide.

Increasingly its rulings are flouted while it seems to lack both the gravitas and the power to impose its authority.

The first visible cracks began to appear last year. Half a century ago a banana was a rare and exotic fruit; during the war and for some while afterwards, it was impossible to get them in Britain at all. Now Britons eat tens of millions of them each year. Thanks to the blossoming of world trade in the post-war era, it has become the nation's favourite fruit.

Bananas have also become the cause of one of the most bitter trade rows between Europe and the US of the post-war period. The US threatened steep tariffs on a range of European imports, including cashmere from Scotland, unless the EU ended its favouritism towards West Indian rather than Latin American bananas.

The Europeans retorted that it was opening up its banana import regime, and the unilateral US action was illegal. The World Trade Organisation found in favour of the US, allowing it to impose sanctions amounting to $191m in the first ever judgment of this kind.

No sooner had this dispute faded from the headlines than a new one has emerged. This time it concerns beef. The European Union has banned imports of US beef from cattle treated with the artificial hormone BST, on health grounds. The US plans $300m in further sanctions as a result, and so far the EU has not blinked.

These two examples are likely to be followed by other, similar battles - for example, over genetically modified foods. After years of uninterrupted progress towards ever-freer trade, tensions appear to be rising alarmingly.

One simple explanation is the economic crisis of the past two years. World trade growth has slowed sharply in value, from 3.5 per cent for both goods and services in 1997 to minus 2 per cent last year. Nor has it picked up in the first few months of 1999.

The US economy has borne much of the burden of this slowdown. Figures last week showed its balance of trade in goods and services in the red by a record $19.7bn in March, suggesting the full year figure will easily outstrip 1998's $169.3bn hole. Meanwhile, Japan has recorded a record trade surplus. And while the EU surplus has fallen slightly, this reflects weaker exports by European companies rather than higher imports of American and other goods.

Members of the US administration insist that, although the trade deficit is larger than they would like, it does not point to mounting protectionism in the US.

Robert Shapiro, Under-Secretary at the US Department of Commerce, says: "I don't believe there is any real national constituency for protectionism. Unemployment is the lowest it has been for 30 years. Protectionism needs an environment of distress, and that's not the American environment."

However, trade experts show more concern. Since 1995 the Administration has had no "fast track" authority to reach trade deals without having to refer them to Congress for specific approval - and that means new negotiations have been virtually impossible as no trading partners want to rely on the vagaries of Congressional politics.

Ironically, President Clinton lost fast-track authority thanks to an attempt to make minimum labour and environmental standards a requirement of new trade deals. Free-traders in Congress voted it down as protectionism in disguise. They were probably right: new research by Kym Anderson and Bernard Hoekman of the Centre for Economic Policy Research shows that developing countries can find markets closing when rich countries apply their own standards on the rest of the world.

There is little chance of reviving fast-track authority, according to experts, despite the current buoyancy of the American economy and jobs market. And, as a recent report from Washington's Brookings Institute observes: "If not now, when?" This casts a shadow over prospects for a new "Millennium Round" of negotiations to liberalise trade in controversial areas such as agriculture. The foundations for the most recent agreements under the WTO - on information technology in 1996, basic telecommunications in early 1997 and financial services in December 1997 - had all been laid under the prior General Agreement on Tariffs and Trade (Gatt).

What's more, the areas of trade tension are becoming increasingly controversial. Alan Winters, Professor of Economics at Sussex University, says what makes trade tensions more severe now is the fact that disputes centre on matters of scientific opinion and consumer preferences. He says: "It is going to be difficult to settle some of these disputes. They start to look very intractable."

Many observers also argue that the creation of the WTO has itself made disputes more legalistic, because the WTO has the power to judge and arbitrate them - in contrast to Gatt, which simply tried to negotiate solutions.

"Gatt was extremely pragmatic, essentially political ... It was about keeping the show on the road," says Professor Winters. To make matters worse, the WTO is leaderless at the moment. A battle to take over at the helm between Mike Moore, a former New Zealand prime minister, and Supachai Panitchpakdi, Thailand's deputy prime minister, is in a state of stalemate.

The US favours Mr Moore, an abrasive, no-nonsense politician who adopted an uncompromisingly free market approach to policy while prime minister of New Zealand. Japan wants Mr Panitchpakdi. His appointment is supported by many developing countries, who believe he might adopt a more sympathetic approach to the plight of the Third World.

The struggle for the leadership might not be settled in time for the annual ministerial meeting of the WTO in Seattle at the end of November if, as some fear, the process has to start all over again. Nor is there any leadership from the EU, whose affairs are in a state of flux after the Commission's dramatic resignation over allegations of negligence.

The trade portfolio held by Sir Leon Brittan will go to a new Commissioner some time after the 10 June European elections. The US is meanwhile pressing ahead, in this vacuum, with its own unilateral actions. As the presidential election campaign starts to grind into gear, trade has become a political football with some aggressive attempts to force open new markets.

Some politicians have come to see barriers to trade as the root cause of the burgeoning United States trade deficit, and there is growing pressure for tit-for-tat retaliation.

Professor Winters concludes: "I think good sense will prevail. But if the politicians are asleep, the trade system could be pushed so hard it cracks."