Are We Ready for Trade Liberalization?

Howard Rosen (Visiting Research Fellow, GLOCOM)

In September, representatives from more than 100 nations will gather in Cancun, Mexico to discuss the future of WTO multilateral trade negotiations. The timing is rather auspicious, in terms of recent economic developments:

• Although the US economy appears to be slowly coming out of its recent recession, the Bush Administration has been aggressively pursuing bilateral trade agreements, which may divert attention from multilateral negotiations.
• The European economies – no great bastion of economic growth over the last decade – seem to be falling back into recession.
• The Japanese economy – the second largest economy in the world -- has been "stuck in the mud" for almost a decade. Although the economy has recently showed some signs of recovery, it is not clear if the improvement is sustainable, since there is little evidence that serious reforms have been undertaken.
• The dollar has recently weakened against the other major trading currencies. Although this is good news for US manufacturers – the few that are left – it is bad news for the export-dependent economies of Germany, Japan and others in the Far East.

Behind these developments lays a more fundamental question: Are the WTO members prepared for further trade liberalization? Do they have the appropriate mechanisms in place to enable their economies to accommodate the changes that can be expected to result from trade liberalization?

Increased international trade gives consumers greater choice, keeps prices low and promotes economic growth. These "gains" from trade tend to be shared rather widely throughout an economy. Realizing these gains is dependent on the flexibility of labor and capital. Countries opening up their markets to international trade are certain to face increased competition in certain industries.

There are no roses without thorns – in exchange for reaping the benefits of freer trade; certain industries, workers and communities may experience costly dislocations.

The United States has recently taken a major step in enhancing the flexibility of its labor market by reforming and expanding Trade Adjustment Assistance – a program that provides assistance to workers who lose their jobs due to changes in international trade and investment. It was no accident that the provisions to reform program were included in the Trade Act of 2002 – the legislation that granted trade promotion authority to President Bush. These provisions must now be faithfully implemented and the necessary funds must be appropriated to enable the program to operate as Congress intended.

By contrast, the Europeans, long the source of generous labor market programs, may be moving in the opposite direction. Under the EU "separation of powers," the practice of trade policy has been reserved for Brussels, while labor market adjustment programs remains the responsibility of individual member countries. De-linking trade policy and labor market adjustment may end up making it harder for the EU to pursue trade liberalization. For example, shouldn’t all EU members share the responsibility and costs associated with assisting European farmers adjust to the reduction in subsidies?

At the same time, several European countries, like Germany, are drastically reducing their unemployment assistance programs. These programs may have become too expensive, given the large number of unemployed. But is this the right time to make the adjustment burden harder on workers?

After decades of a enjoying a tight labor market, Japan has only recently begun to experience growing unemployment. Generous assistance programs put in place when the unemployment rate was 2 percent may no longer be financially affordable with an unemployment rate of 5 percent. Furthermore, unemployment assistance is only a short-term fix. The ultimate objective is to find the worker a new job. This is where capital investment and economic growth come in to play.

The industrialized countries need to build an infrastructure that will support their efforts to pursue trade liberalization. Countries must first put in place credible and effective labor market adjustment programs before further trade liberalization can take place. Assisting workers adjust to changes in international trade is not a topic on the WTO agenda in Cancun, but may be it should be.

Mr. Rosen, an economist based in Washington, DC, is a visiting researcher at GLOCOM.