Trade crunch

The next few months will be crucial not just for China's trade relations, but for the global trading system. At the same time as trying to live with US-East Asia trade imbalances . the greatest the world has seen – nations are trying to negotiate further liberalization of trade in goods and services.

September looks to be a particularly critical month as Europeans and Americans return to work from summer holidays, the US Congress reassembles, the World Bank/IMF annual meetings take place and the WTO negotiations on the Doha Round reach a crucial stage. The WTO is due to hold a decisive ministerial meeting in Hong Kong in December. Unless major progress can be made before then towards agreement on issues such as farm trade and services, there will little in the way of a basis for final horse-trading in December.

Failure of the Doha Round, which an unproductive meeting in Hong Kong would represent, would not only be a setback to further liberalization. Lack of progress on agriculture would disillusion many developing countries that have been trying to pursue more open trade. It would likely cause other countries to shift from multilateral to regional and bilateral trade deals. These usually make more political than economic sense and tend to divert, not create, trade.

Dim outlook
On the face of it, the outlook is not bright. The US and China are mired in a long-running dispute over currency valuations, with one arguing that a weak, pegged yuan is creating the trade imbalance, and the other that the problem lies in excess US consumption. That both are right does not solve the problem. Nor does it help that both have entrenched public positions that again owe more to politics than economics.

Meanwhile, China has been engaged in a high-profile trade dispute over textiles with the US and the EU in the wake of last year's ending of the quota system embodied in the Multi Fibre Arrangement (MFA). This restoration of market forces to textiles has naturally led to some big supply shifts benefiting China and some other countries. The impact on US and the EU producers has doubtless been exaggerated, but democratic politics, particularly in the US, has required a protectionist response. China is also accused of intellectual property violations. In Europe, the vote against the EU Constitution has been seen in some quarters as a vote against globalization and free trade and making farm trade reform a harder sell than ever.

However, there is no need for outright gloom. First, the textile issue is unlikely to be permanent. The EU and US restraints against China have been in accordance with procedures and can at best provide only temporary relief from market forces. There is a framework for settlement of the issue. Meanwhile, China faces lost opportunity more than lower exports. Temporary restraints should mollify Congress without as in the case with steel tariffs two years ago – becoming a permanent barrier to trade.

Secondly, the currency issue may be manageable once East Asian countries as a group recognize the potential benefits of stronger currencies in suppressing inflation, boosting local consumption and stimulating regional trade. All realize that the US cannot continue its consumer import binge forever and that investment of their reserves in low-yielding and increasingly lower-grade US debt is not a wise long-term strategy. The US and east Asia all recognize that there is a delicate balance of interests involved here and that imbalances must be resolved in a way which acknowledges their mutual dependence – Asia on US exports, the US on Asian savings.

Pressuring others
Unfortunately, by focusing on China rather than on east Asia as a whole, the US has made currency change more difficult. It would have been much easier had the US applied its pressure to countries with proportionately much bigger overall surpluses i.e., Japan, Taiwan, Korea and Malaysia.

Currency moves by East Asia will not solve the US deficit problem, but they could take much of the political heat out of the issue. The negative impact of revaluation is probably a lot less than the threat of specific anti-China measures, which must now be viewed as a real possibility given the mood in the US Congress.

On the Doha front, much now depends on whether developing countries will give some concessions of their own in return for a breakthrough an agriculture. Time is short but the prospects are not too bad. China, as a relatively new WTO member and one nervous of being thought a threat to smaller developing countries, has been keeping a low profile but will not be an obstacle to agreement. Despite much rhetoric, India and Brazil recognize that, for different reasons, they have plenty to gain from the success of Doha.

Of course, broad agreement by the major players does not easily translate into meeting the diverse specific demands and interests of members – of which there are 148. It could yet fail over such issues as African cotton or protection for small African and Caribbean sugar producers.

But there may also be a growing recognition that regional and bilateral deals are a poor substitute for multilateral progress. While sounding good on paper, they easily create a "spaghetti bowl "of tariff levels, preferences and rules of origin which are disruptive of trade. That is especially the case in east Asia, the hub of so many manufacturing and distribution systems – which rely on specialization of production and exchange of parts and processes between two or more regional economies before finding their way to end users in the West and elsewhere. These are particularly vulnerable to varied rules of origin.

It is fitting that the crucial Doha meeting will be in a territory which has long been not only a primary beneficiary of multilateralism in trade but is now the logistics hub for these manufacturing and supply systems. For its own sake as well as the good of the Hong Kong Special Administrative Region, China will want to do all it can to help the success of the meeting and hence of the Doha Round. A statesmanlike approach to current difficult trade and currency issues will surely earn China thanks and respect from its global partners.