The G8 talks trade, but the big deals are done elsewhere

The main trade deals are not struck through the G8. Gareth Fuller/PA

Trade is one of the big buzzwords at this G8 summit. Along with tax and transparency, it makes up the “three T” priorities for the UK’s presidency of the group.

But it is not at all clear whether multilateral summits like the G8 represent the best way to make progress on trade. With the focus increasingly shifting towards deals between a selective group of countries, the G8 risks becoming nothing more than a talking shop.

We’ll no doubt hear a lot this week about fighting protectionism, and the economic benefits of including developing countries in the world trade system. The issue will probably have a few lines in the post-summit communique. But the significant trade deals will not be struck through the G8.

A trade revival

However it happens, it is clear that world trade needs reviving. The financial crisis of 2008 saw falls in trade comparable to the 1930s Great Depression. Between October 2008 and March 2009, trade fell by about 50% in many countries.

After a small recovery, trade has remained pretty static and the last half of 2012 showed falls across the major industrial countries. Asian trade continues to grow but the collapse of economic activity in the European Union (EU) is a major concern for the whole world.

Many commentators have worried about the scale of the Chinese trade surplus but few have noted that in 2012 the German trade surplus was the same size and shrinking very slowly. The Eurozone is gambling on its weaker members getting out of the crisis by improving competitiveness and increasing exports, something the rest of the world has not indicated a willingness to help with.

Fortunately the world’s leading economic powers did not respond after 2008 by creating massive protectionist barriers, as they did after the crash of 1929, and they largely stuck to the rules of the World Trade Organisation (WTO).

But these rules still allow extensive scope for new trade barriers. Industrial countries have subsidised some of their most sensitive industries, and developing countries such as India have used anti-dumping measures. Countries have also raised tariffs that were previously below the WTO’s permitted maximum levels. The Global Trade Alert project periodically reviews these measures and has argued that the leading economies of the G-20 are the worst offenders and have increasingly resorted to non-transparent “murky” measures.

The 2001 WTO meeting in Doha called for a reduction in trade barriers. Twelve years on, these new barriers and “murky” practices demonstrate the international community’s inability to make any progress with the agenda.

This is partly because the benefits of committing to further reduce trade barriers are seen as modest when spread over the whole world, while the potential losers are clearly identifiable and highly vocal. But it is also because the WTO requires a consensus of all members on all issues before anything can be signed.

Paradoxically, trade liberalisation by the EU is sometimes opposed by poor developing countries who currently receive preferential treatment. Their present status would be worth little if the EU opened up to places like Brazil. While some commentators suggest that the WTO is no longer fit for purpose, no states are willing to call for its dissolution – they value its symbolic role and the ability to use its dispute settlement mechanism to enforce existing rules.

China, for example, is relatively satisfied with the status quo. It is willing, more or less, to respect its existing obligations but not to open further. The EU, the US, India and China all have export lobbies but also domestic constituencies who oppose further foreign competition, especially as the world economy slows.

Momentum transfer

The impasse at the multilateral level has not led to a total loss of interest in trade negotiations. However momentum has transferred toward bilateral and regional deals.

The EU, for instance, has a trade agreement of some sort with all but eight of the 159 WTO members. However these eight include the US, Japan and China, who account for 30-40% of EU trade. The EU is working to rectify this situation, formally opening negotiations with the US and announcing its aim to negotiate with Japan, though not China. This comes on the back of a trade deal with South Korea and a nearly completed one with India.

The US has promoted the TransPacific Partnership with all major regional parties except China.

This new generation of trade agreements is designed to lock in the voluntary reduction of tariffs that have taken place since the last round of WTO negotiations. It is partly driven by business interests, who increasingly feel the need to ensure the free flow of imported parts and components to ensure the market for their exports.

The new agreements also explicitly aim to cover regulatory obstructions to trade such as differences in mandatory standards. These issues are easier to agree among a smaller group of partners. However bilateral deals are also haunted by two factors that hold back the WTO talks.

First the actual progress on regulatory issues is quite limited. Domestic interests, including both consumers and producers, are reluctant to agree to trade negotiators dealing with regulations on such issues as food safety. France has threatened to block an EU-US deal if it affects cultural goods and services, even if a deal would consolidate market access for wine and cheese into the US. And although China has some bilateral deals with neighbours, there is a very clear sense that countries feel safer if China is excluded from future deals.

Bilateral deals are also slow and sensitive to negotiate. The EU-Korea deal set an optimistic precedent. There is evidence that it had positive effects: trade with South Korea grew faster after the deal, unlike trade with other partners.

Despite these worries, there is no doubt that bilateral trade deals are easier to complete than the WTO talks. As the world still waits for progress on the Doha agenda, the fact that bilateral deals have been signed at all demonstrates this. Though the G8 will talk a lot about trade agreements that will benefit all members, countries are increasingly going their own way.