The last thing we need: neutering the free-trade referee

With the coronavirus putting the world economy into its worst dive in almost a century, it would help if the surviving trade in goods and services between countries was continuing in an orderly way. But, as if we didn’t have enough problems, the future of the international body responsible for ensuring free and fair trade, the World Trade Organisation, is in grave doubt.

The eternal temptation in international trade is protectionism: please buy all our exports, but we’ll be importing as few as possible of your exports. It’s tempting because, to the voters in every country, it seems just common sense to favour your own industries over their rivals in other countries.

Only when you’ve learnt a bit of economics – about the gains from specialisation and exchange, in particular – do your realise that first, it’s the consumers of the protected products and all the local industries you don’t protect who pick up the tab, and second, when you try to steal a march on other countries, they usually retaliate, which ends up meaning you’re both screwed.

That’s why the WTO was set up: to help its 164 member countries reduce their import duties (“tariffs” as economists call them) and other restrictions on imports, and then keep them down, so all the members are better off.

As explained in a report from the Lowy Institute, prepared by Dmitry Grozoubinski, a former trade negotiator with our Department of Foreign Affairs and Trade, the WTO has three main roles.

First, the negotiation of successive “rounds” of mutual reductions in tariffs and import bans or quotas by all the members. After the establishment of the Geneva-based General Agreement on Tariffs and Trade (GATT) after the end of World War II, eight multilateral rounds of reductions were negotiated.

In the early rounds, the members were mainly the developed countries and they concentrated on reducing the tariffs on manufactures that had built up in the 1930s as countries tried to use protection to end the Great Depression, but succeeded only in making it worse.

The result of the rounds was hugely increased trade between the rich countries, which many economists believe contributed greatly to the post-war period of rapid economic growth, rising living standards and full employment, but which ended with the coming of “stagflation” – high inflation and unemployment – in the mid-1970s.

By the “Uruguay round”, completed in 1994, the negotiations had broadened to cover textiles, agricultural subsidies, services and intellectual property. Many developing countries had joined the agreement and benefited from the liberalisation of trade in clothing and textiles, and rural products.

But the round’s most spectacular achievement was turning the GATT into the World Trade Organisation, still based in Geneva. Many more developing countries joined, as did China in 2001.

The WTO’s second role is to monitor member countries’ compliance with the rules agreed on during the rounds. One rule is that once a tariff reduction has been agreed on, it’s then “bound” and mustn’t be increased.

But the most important rule is “most favoured nation”: no other country should be given a special deal. So the lowest tariff you impose on some nation must be the one you impose on every other member. Another key rule is “national treatment”: imported and locally produced goods must be treated equally.

The point of these rules is to keep world trade both free and fair; to discourage countries from backsliding and help governments resist local pressure to revert to protection. In particular, to stop small countries being pushed around by big countries.

And so you see why a middle-size country like ours has much to gain from living in a world where every country sticks to the rules – and much to lose when the big boys on the block decide to start throwing their weight around.

The WTO’s third role is to formally adjudicate trade disputes between its member countries, thereby enforcing its rules. Serious disputes go to a court-like “dispute settlement body” and, if necessary, to an “appellate body”.

So, what’s the problem? Why is the WTO in deep trouble? Because, in Grozoubinski’s words, “all three pillars are wobbly, and had been long before the Trump administration started taking a sledgehammer to them. Unquestionably, however, the picture in 2020 is grim.”

The first role – negotiating further rounds of reduced barriers to trade – is, he says, “hopelessly stalled”. The “Doha round” was launched in 2001, but was unable to reach agreement, partly because it’s much harder for so many developed and developing countries to find common ground. The last attempt to make progress was in 2013.

Meanwhile, countries have shifted from seeking multilateral agreements to doing any number of bilateral (misnamed) “free-trade agreements,” which breach the spirit if not the letter of WTO rules such as “most favoured nation”.

The second role – monitoring members’ compliance with the rules – “relies on international peer pressure for the bulk of its enforcement,” but the world is in the grip of a trade war between the United States and China, meaning the US has gone from decades of getting everyone else to agree on sensible rules and stick by them to ignoring any rules it finds inconvenient in its quest to “make America great again”.

As for the third role – a binding dispute settlement mechanism – in December the US used a procedural blockade to render the WTO’s appellate body “impotent and unable to convene the required quorum of three panellists,” thus rendering the formerly legally binding system of arbitration optional.

If that wasn’t enough, the US is refusing to approve the organisation’s budget, and Congress has bills that would withdraw the US from the WTO (but which are unlikely to be passed). The outfit’s director-general has resigned, and any member could sabotage his replacement. The next conference of trade ministers has been delayed until at least 2021.

And all this is happening at a time of pandemic and escalating protectionism. Well done, chaps.

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The G20 is a talkfest we need to keep talking

If it’s 10 years since the global financial crisis, it must be 10 years since the elevation of the Group of 20 to the status of a “leaders’ summit” – the next of which will be in Buenos Aires in two weeks’ time.

You could say the decision to supplant the G7 with the G20 as the premier forum for global economic co-operation is the one good thing to come out of the financial crisis.

The G7, like the various international bodies set up after World War II, is too Western and Eurocentric, being limited to rich North America, Europe and Japan.

The G20, by contrast, adds in the developing countries and all parts of the globe, encompassing the G7, all five permanent members of the UN Security Council and all five emerging-economy BRICS – Brazil, Russia, India, China and South Africa.

And did I mention it gives Australia a seat at the top table for the first time?

While the G7 accounts for only about 30 per cent of the world economy (measured according to purchasing-power parity), which is projected to have fallen below a quarter by 2040, the G20 accounts for almost 85 per cent of the world economy, which should still be about that in 2040.

The G20 also accounts for 84 per cent of global investment and 63 per cent of the world’s population.

The rich and poor worlds could have spent years arguing over the formation and composition of such a group, but in the heat of the financial crisis, no one doubted that a representative but not unwieldy whole-world body was needed to quickly achieve a co-ordinated response to the threat of a global depression.

The avoidance of such a calamity is all the proof anyone should need that the G20 has justified its existence.

At the time of the crisis, the G20 achieved co-ordinated discretionary fiscal (budgetary) stimulus averaging more than 2 per cent of world GDP in both 2009 and 2010.

It tripled the International Monetary Fund’s lending capacity and facilitated an increase in lending from multilateral development banks of $US 235 billion, at a time when private sector sources of finance were scarce.

Later, it established the Financial Stability Board to tighten up regulation of the world's financial institutions, including banks judged too big to fail.

It’s also working with the OECD to reduce tax avoidance by multinationals, through its BEPS project – base erosion and profit shifting – and having more success than many imagined it could.

But if you want to argue that, in the years since then, the G20 has done a lot of meeting, talking and passing of resolutions without achieving all that much, you wouldn’t be wrong.

You would, however, have missed the point. Do you imagine this was the last economic crisis the world’s leaders will have to cope with? Or that the next crisis is sure to be decades away?

As Scott Morrison’s G20 “sherpa” (every leader ascending summits needs the assistance of a personal sherpa), Dr David Gruen, said in a recent speech, the G20 is best thought of as an institution that comes into its own when it’s most needed - “more a ‘rough weather’ friend than a ‘fair weather' friend".

It is, he says, like a global fire department. It may sit around for days not doing much, but as soon as the need arises it rushes off to put out the conflagration.

What gives the G20 its fire power is its status as a “leaders’ summit” – all G20 leaders attend summit meetings, almost without exception. And when they attend, they talk to each other, just as Donald Trump and Xi Jinping are scheduled to have a meeting on the sidelines at the summit in Argentina, no doubt to chat about their little trade war.

Let me ask you, which would you prefer – world leaders who knew each other and talked regularly, or leaders who didn’t?

The more meeting and chatting they do, the safer the rest of us are.

Gruen reminds us it was the legendary American economist Thomas Schelling who realised international conflicts can arise simply because one side can't understand what’s eating the other side. That messages sent in public may differ from messages sent in private.

A book Schelling wrote led to the installation of the hotline between the White House and the Kremlin. The annual G20 summits are a big step up from that. Nor does it hurt to have the countries’ finance ministers and central bankers meeting regularly.

With Trump’s America behaving so crazily, picking fights with its allies and major trading partners and threatening the rules-based international order the Americans laboured so long to build, we need the G20 to hang together and keep our leaders talking to each other more than ever.

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Why the success of the G20 matters

It's easy to be cynical about the G20. Will the meeting of finance ministers and central bank governors in Sydney this weekend, and the leaders' summit in Brisbane in November, amount to anything more than talkfests?

People say the Brisbane summit will be the largest and most important economic meeting ever held in Australia. That's true, but it just means it will be bigger than the Sydney APEC leaders' summit in 2007 - which is remembered mainly for The Chaser boys' Bin Laden stunt.

But though it's easy to be cynical, it's a mistake. It's possible the two meetings this year will prove no more than talkshops, but that would be a great pity. And, since Australia is this year's chair of the group, it's up to Joe Hockey and Tony Abbott to make sure they're worth more than that.

The G20 began in 1999 as a group for finance ministers and central bankers, in the aftermath of the Asian financial crisis, which revealed the need for greater co-operation and co-ordination between governments in responding to crises in the global financial system and, better, making changes to the global financial "architecture" (rules and institutions) that reduced the frequency and severity of financial crises.

The formation of the G20 was a recognition that the G7 (compromising only Europe, North America and Japan) wasn't truly global, particularly because it excluded the emerging BRICS economies - Brazil, Russia, India, China and South Africa.

For a decade or two most of the growth in the global economy has come from the BRICS, and the developing economies now account for more than half gross world product. For a better global spread, the G20 also adds Argentina, Indonesia, Mexico, Saudi Arabia, South Korea, Turkey, the European Union and, of course, Oz. With just these 20, it accounts for 85 per cent of gross world product.

In 2009, in the aftermath of the global financial crisis, the G20 was upgraded from just finance ministers to include summits of presidents and prime ministers, an acknowledgment of the way economic power had spread beyond the North Atlantic. But why do we need these get-togethers?

Because, as Christine Lagarde, boss of the International Monetary Fund, said recently: "The breakneck pattern of integration and interconnectedness defines our times."

It has become unfashionable for the media to talk about globalisation, but it's continuing apace. As Mike Callaghan of the Lowy Institute said last week: "If there is one lesson from the [global financial] crisis, it is the interconnectedness between financial markets. Events in US financial markets had worldwide consequences. We need co-operation to deal with globally operating financial institutions."

These days, global integration is being driven less by deregulation and more by advances in technology, particularly the information and communications revolution. One part of this is the way the internet has globalised the media.

News of an economic calamity in one country is now conveyed to the rest of the world almost instantly. Financial traders in New York or other centres can start moving money out of the affected country in no time. They can then take a set against neighbouring countries they merely fear may have a similar problem, giving rise to a big problem called "contagion", where trouble spreads like a communicable disease.

And TV news that a few banks are tottering in Europe can scare the pants off consumers and business people in countries around the world, prompting them to stop spending until their confidence returns.

But it's not just crises. As Callaghan reminds us, more and more businesses now operate globally. Goods are more likely to be "made in the world", with inputs from many countries rather than just one. So the trade policies agreed by the international community have to adapt to the new reality that such "value chains" are increasingly driving world trade.

Then there's tax. The more businesses that operate globally, the more businesses that are able to exploit loopholes between different countries' tax laws, shifting their profits to countries with low tax rates. This is eroding the tax base of many countries - including ours - so their taxes aren't raising as much revenue as they should be.

In other words, technology-driven globalisation - the ever-reducing barriers separating particular economies - is throwing up problems that can't be solved by individual countries acting individually.

So we need greater communication, co-operation and co-ordination between countries, first, to discourage countries from pursuing "beggar-thy-neighbour" policies - I attempt to fix my problems at your expense, which usually provokes retaliation, so we all suffer - and, second, to find group solutions to the various problems.

The first couple of G20 leaders' summits in 2009 were quite effective in ensuring the Great Recession wasn't as bad as it could have been. But the truth is the G20 has been running out of momentum, resorting to high-sounding rhetoric while getting bogged down in excessive detail.

Considering how crisis-prone the global economy has become, it's important merely for world leaders, treasurers and central bankers to know each other, have face-to-face meetings and phone each other.

But we also need more joint action, and if the G20 doesn't lift its game the big boys will stop coming to meetings and eventually shift their interest to a smaller, more cohesive group which includes China and a few others, but excludes Australia.

Clearly, it wouldn't be in our interests to lose our seat at the top table. That's why it's so important we use our position as this year's chair to get the G20 back on the rails. Many pre-meeting phone calls need to be made by Hockey and Abbott to their counterparts, to gather support on the directions to be taken.

Then they need to chair the meetings effectively, discouraging set-piece speeches and encouraging interchange that improves mutual understanding and makes progress on a limited range of key issues.

We have a lot to gain or lose.

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Europe has serious troubles, but we don’t

The economic news from Europe in recent days hasn’t been good. And it could get worse as the year progresses. Those guys have big problems. But let’s not spook ourselves by imagining it to be any worse than it is.

Unfortunately, there’s been a tendency in parts of the media to convey an exaggerated impression of how bad things are and of the extent to which Europe’s problems translate into problems for us.

Take last week’s downwardly revised forecast for the world economy in 2012 from the International Monetary Fund. We heard a lot about the fund’s dire warnings of what could happen if the Europeans didn’t get their act together, but what wasn’t made clear was that the fund’s actual forecast was for global recession to be avoided.

Though the forecast for growth in the world economy this year WAS cut significantly from the forecast in September, at 3.3 per cent it’s below the long-run average rate of about 4 per cent, but still comfortably above the 2 per cent level generally regarded as representing a world recession.

No one thought it necessary to tell us - even though Wayne Swan reminded journalists of it at his press conference - that, from our perspective, the fund’s revisions were old news. They were surprisingly similar to the revised forecasts the government adopted in its mid-year budget review last November.

The fund has the United States growing by 1.8 per cent this year; Treasury had it at 2 per cent. The fund has the euro area contracting by 0.5 per cent; Treasury had it contracting by 0.25 per cent. For China, the fund has growth of 8.2 per cent, whereas Treasury had 8.25 per cent. For India it’s the fund’s 7 per cent versus Treasury’s 6.5 per cent.

Bottom line? The fund has the world growing by 3.3 per cent, whereas Treasury had it at 3.5 per cent.

Journalists are always criticising politicians for repeatedly re-announcing new spending programs, thus leaving the public with an inflated impression of how much is being spent. But journos aren’t above doing much the same thing.

We get a fuss when the government revises down its forecasts in November, then another fuss when the fund announces essentially the same revisions. And in between we get a fuss when the World Bank announces its revisions. Three for the price of one.

Actually, you can understand why the uninitiated got excited about the bank’s revisions. Whereas Treasury had forecast world growth of 3.5 per cent, the bank revised its forecast down to just 2.5 per cent. But no one remarked on that, just as they didn’t seem to notice when, only a week later, the fund put its prediction at a seemingly healthier 3.3 per cent.

So which one is right? They all are. That’s to say, they’re all saying the same thing. I find it hard to understand how anyone who knew their business could bang on about how low the bank’s forecast was without pointing out that it does its forecasts on a different and inferior basis to everyone else.

Whereas our Reserve Bank and Treasury, and the fund, add each country’s gross domestic product together using exchange rates that take account of the US dollar’s widely differing purchasing power in each country, the World Bank doesn’t bother. It uses market exchange rates.

So it perpetually understates the rate of growth in the emerging economies of Asia, thereby understating world growth, since most of it has for quite some years come from Asia. But not to worry. If you took the fund’s country-by-country forecasts and added them together the same misleading way the bank does, what would you get? Growth of 2.5 per cent. Same forecast on either basis.

The trouble with all these forecasts and pronouncements from international agencies is it’s hard for the public to assess what they amount to by the time they reach our shores. These pronouncements rarely mention Australia. And shock waves from Europe have to come to us via China, India and the rest of Asia.

I think the media could try harder to bridge this gap rather than leaving us with the vague impression disaster for Europe means disaster for Australia. Actually, what matters for us is not world growth so much as the growth in our major trading partners, with each partner’s contribution weighted according to its share of our exports.

When Treasury did this sum in the mid-year review, growth in the world economy of 3.5 per cent translated to growth in our major trading partners of 4.25 per cent. All this despite Europe’s recession.

Fran Kelly of Radio Nation Breakfast did go to the trouble of asking the lead author of the fund’s World Economic Outlook, Jorg Decressin, what the revised forecasts meant for us. His reply deflated most of the hype we’ve been subjected to.

‘Australia will be affected by these downgrades only to a limited extent,’ he said. Oh. ‘At this stage, growth in output for Australia is still reasonably strong.

‘Growth in Australia is importantly driven by major investment projects that are in the pipeline and these are funded by strong multinationals that don’t have problems assessing funding.’ Oh.

‘There is no advanced economy - or maybe there are one or two - that is as well placed as Australia in order to combat a deeper slow down, were such a slowdown to materialise and that’s because, well, you still have room to cut interest rates if that was necessary and you also have a very strong fiscal [budgetary] position,’ he said.

Do you get the feeling you’ve heard all this before? Maybe it’s true.

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Pop bubbles before they can cause havoc

Don't drop your bundle yet. It would be a brave person - braver than me - who denied any possibility of another global financial crisis.

Sure it's possible, but it's far from certain. And another financial crisis might be like we eventually realised the last one was: more North Atlantic than global.

The Bank for International Settlements is the central bankers' club. And central bankers don't warn of catastrophe if they really fear one's on the way. When things really are near crisis point, they are calm and reassuring.

So this is the world's bank manager issuing wayward clients with a stern lecture on the need to mend their ways. The bank is saying, don't assume the problems are limited to Greece, Ireland and Portugal. The big North Atlantic economies - the United States, Britain and much of Europe - have huge, unsustainable levels of government debt, and should the financial markets lose confidence in those countries' efforts to get on top of their debts, another crisis is possible.

It's preaching against the optimistic attitude in those countries that the crisis has passed and it's back to business as usual. No, no, back to the grindstone.

To that extent it's dead right: those economies face at least another decade of low growth as they grind away at reducing their public and private debts.

This is not a message aimed at us. We could be affected by another financial crisis but we're just as well placed to cope as we were with the first.

Our banks remain well supervised, with few loans to the worst-affected governments. Our government debt is laughably small compared with the US and Europe. Our interest rates are not too low.

If there's one lesson from the first crisis, it's that our fortunes depend much more on Asia than on Europe and America.

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