A Brazilian WTO chief could prove painful for the West

Late last Tuesday, after months of intense lobbying, and campaigning visits to 47 countries, Roberto Azevedo was confirmed as the next director general of the World Trade Organisation. Amidst the Queen’s Speech and the resignation of a certain football manager, Azevedo’s appointment barely flickered on the UK news radar. Yet it was an event of some significance that could have major implications for the future shape of the global economy.

While less well-known than the International Monetary Fund, the WTO is the most important economic multilateral on earth. With 159 member states, this Geneva-based organisation can be likened to a vast and highly specialised international court, designed to arbitrate on complex trade disputes between governments that come into conflict, so as to keep protectionism in check.

If a nation feels another is unfairly blocking its exports, it complains to the WTO. Ranks of in-house lawyers then interpret international trade rules and issue an independent judgment. If countries found guilty don’t comply, then all members are meant to stop trading with them and close ranks — although it very rarely comes to that.

The idea is to ensure that nations have more to lose from random sector-specific protectionism than from keeping trade relatively “free”. That’s meant to stop short-sighted politicians becoming beholden to vested interests and imposing confidence-sapping trade barriers, so keeping the wheels of commerce spinning.

The WTO’s dispute-resolution mechanism, while a long way from perfect, works relatively well. Having started as the General Agreement on Tariffs and Trade in the late-1940s, the “multilateral” system has contributed mightily to post-war prosperity. In 1950, international trade accounted for just 8pc of global GDP. This figure has since more than tripled — with the value of trade flows increasing almost 26-fold in real terms — in large part due to the relatively liberal global trading environment created by GATT and then the WTO.

All this is in stark contrast to the rash of “beggar thy neighbour” tariffs and quotas that spread in the aftermath of the 1929 Wall Street crash. It was the escalation of such trade barriers, imposed tit-for-tat and spiralling disastrously upward, that put the “Great” in the “Great Depression”. While economically disastrous, such measures also provoked the mutual loathing and extremism that sparked the Second World War.

Yet the multilateral trade regime that has served us so well is now under serious threat. The system only works if, from time to time, WTO members come together and agree a new “trade round” — a series of highly complex, mutually dependent deals, which lower trade barriers across various sectors.

Achieving a new round is extremely tough. It involves thousands of cross-sector trade-offs and WTO rules require unanimous agreement among all member states. But what a country loses in one form of commerce, it may gain in another — so allowing the global trade “pie” to keep growing.

A new trade round, as the WTO’s out-going director general Pascal Lamy has so rightly observed, is “a global insurance policy against protectionism”. Unless such rounds are agreed relatively frequently, then numerous individual negotiations get stuck in a bureaucratic war of attrition, rules become outdated and the WTO grinds to a halt, so stymying world trade.

That’s where we are now. In 2001, in the aftermath of the 1999 Seattle trade riots, and then the 9/11 attacks, WTO members met in the capital of Qatar to start negotiating the Doha round. Admitting that other parts of the world were gaining in economic power, and rattled by terrorism, Western leaders pledged Doha would be the “development round” — acknowledging they could no longer dominate bodies like the WTO and ride roughshod over the rest of the world.

Since then, two asset bubbles have burst and the world has twice plunged into recession. In 2009, following the “sub-prime” collapse, global trade flows plunged 12.5pc, the sharpest drop since the 1930s. Since then, we’ve seen only a lukewarm recovery, with trade growing by 5pc in 2011 but just 2.5pc last year — a major reason why the global economy remains so sluggish.

The world now badly needs a new trade round. Yet 12 years on from Doha, the talks remain gridlocked. Were the 159 member states to sign a deal, thousands of reciprocal trade liberalisation agreements would kick in. The benefits, in terms of commerce and poverty reduction, would be felt by billions. As the world economy falters, we remain locked in the first failed multilateral trade negotiation since before the Second World War.

Enter Roberto Azevedo. We’ve had a WTO boss from a “developing country” before, in the shape of Thailand’s Supachai Panitchpakdi, appointed in 2002. He didn’t complete his four-year term, though, and was anyway a creature of the West. So too was Herminio Blanco, a Mexican educated at Chicago University, who was Azevedo’s main rival.

The Brazilian, of course, is his own man. That’s because Brazil has lately transformed itself from a commercial backwater into a Latin American colossus. Having overtaken the UK, it is now the world’s sixth largest economy. Brazil has benefited not only from high prices for its vast commodity wealth — including world-ranking supplies of iron ore and sugar — but also from voracious regional demand for its cars, auto parts and other relatively high-tech goods.

Brazil is also the B in the BRIC grouping, of course, the increasingly powerful alliance including Russia, India and China. Between them, these countries now account for 30pc of the global economy, more than the US and UK combined. Controlling over half the world’s currency reserves, they’re also all net creditors, not least to large “advanced” nations desperate to sell sovereign debts.

Sick of being pushed around by the West in crucial rule-making organisations like the WTO, these large emerging markets, with many smaller countries following them, have exerted more and more pressure to have their say. And now they’ve come together to appoint a WTO supremo who the Western world really didn’t want.

Ever since the Cancun summit in 2003, the start of this WTO diplomatic rebellion, Western trade diplomats have painted Brazil as a “trouble-maker”. The country has certainly insisted on highlighting the injustice of American and European agricultural subsidies and been more willing to speak its mind than, say, the Chinese.

More recently, Brazil has also railed against the Western world for weakening the dollar, pound and euro through massive “money-printing”, a move which harms Brazilian exports by pushing up the real. In response to such “currency wars”, Brazil hasn’t messed about, hiking duties on dozens of imported products — including cars and iron-based products.

Having bought into the WTO’s multilateral system, many increasingly powerful emerging markets are furious at what they see — rightly, in many cases — as continued Western intransigence. There are now alarming signs such nations are going their own way, cutting bilateral trade deals between themselves that specifically exclude the West.

The bottom line is that, as Westerners, “we” have more to lose than “they” do. That’s because “they” are fast-growing, “they” have fiscal strength, “they” will soon account for the lion’s share of the global economy. Over the coming decade, such realities will become increasingly apparent.

Brazil is in an extremely strong position. Trade accounts for just 25pc of its economy, and it has practically the entire “non-Western” world in its corner. Western leaders should now bite the bullet and make whatever sector-specific sacrifices are needed to complete the Doha round. The reality is that, from our perspective, the terms can only get worse.


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