WTO: Why multilateralism matters

Michael Garrett (EVP, Nestle SA) and Jean-Pierre Lehmann (Professor, IMD)

(This article originally appeared in the November 24, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)

The rising trade tension between the US and China - currently illustrated by Washington's threat to impose quotas on imports of Chinese textiles and clothing - should forcefully remind us that there are three essential and inter-related reasons why the rules-based multilateral trade order needs not only to be preserved, but also strengthened.

First, from the ashes of the second world war, the architects of the multilateral system perceived the close correlation between the global trade order and peace and security. This remains as valid in the post-cold war era as it was after the second world war.

The second is that, as the World Bank has demonstrated, a successful round of trade liberalisation will inject up to an extra 800 million euros (HK$7.3 billion) annually into the world economy. At a time when many developing countries are experiencing high demographic growth and some 700 million workers will be entering the workforce this decade, these sums are indispensable to creating wealth and jobs.

The third reason is China. We will address the Chinese dimension of the multilateral world economic order in the 21st century, but note should be taken, as we have stressed, that it is highly inter-related with the other two.

The emergence - indeed eruption - of China into the international economy has been, without doubt, one of the most positive and encouraging developments the world has experienced in recent decades. Along with the speed and size of China's entry, is the profound transformation that its economy is undergoing. Although vestiges of its communist past remain, China is moving at a brisk and purposeful pace towards a market economy. The burgeoning private sector today accounts for more than 60 per cent of gross domestic product, more than half the country's exports and all the new employment. Furthermore, China is a highly open economy, judging both by the staggering amounts of foreign direct investment and by the fact that - the country's surging exports notwithstanding - imports are rising faster.

Among the results of China's economic transformation has been poverty reduction on a massive and unprecedented scale. If developments comparable to those in China were to happen in other parts of the developing world - in Africa, the Middle East, South Asia, South America and the Commonwealth of Independent States - the 21st century world economy would really be booming.

While the balance sheet of China's impact on the world economy is overwhelmingly positive, it is inevitable that it is going to cause some disruption. This applies as much to China's immediate neighbours - Japan, South Korea and Taiwan, all of which have felt the sharp edge of China's competitiveness - as it does to very distant countries: Mexico, for example, is said to have lost some 2,000 jobs this year from manufacturing plants that have relocated to China.

As the recent EU-China summit revealed, there are some axes that Europeans have to grind with their Chinese partners, including over market access, intellectual property rights and commitments undertaken at the time of its accession to the World Trade Organisation. However, while relations between the EU and China are likely, for many reasons, to remain reasonably positive and manageable, the relationship with the United States is clearly much more of a powder keg.

Since the early 1970s, when then president Richard Nixon unilaterally imposed tariffs on the import of Japanese textiles, successive administrations have tended to be hawkish on trade, especially, not surprisingly, vis-?vis the countries with which the US has large trade deficits. The main bete noire throughout the 1970s, 1980s and early 1990s was Japan, during which the two countries lived through what Tokyo referred to euphemistically as "trade friction".

The same anger and frustration that used to be directed by American lawmakers against Japan are now veering towards China. For example, on September 9, a day before the start of the failed Cancun WTO ministerial talks, a bipartisan group of US senators proposed new legislation to impose an across-the-board tariff on Chinese imports. They claim that Chinese "unfair practices", specifically the undervaluation of the yuan, have played a major role in the loss of 2.6 million manufacturing jobs in the past two years, and is also causing the migration of service and engineering jobs to China. Although the bill is highly unlikely to become law, appearing to be "tough on China" is likely to become an increasingly prominent feature of the US domestic political landscape. The "attack" on the Chinese currency is one flagrant example, the protectionist moves on textiles and garments is another, and no doubt there will be more to come.

A clash between the US and China represents a major threat to the global economic order, just as it might also risk derailing China's economic reform programme and undermine its growth. This would be extremely bad all round. While China's eruption on the global economic scene has been truly remarkable, the speed with which it occurred and the legacy of China's modern history account for the undoubted fact that the country's economic, legal and administrative institutions are still weak and its human capacities in all these fields are limited. China is putting in a good deal of effort to remedy both, but obviously time is needed.

It is for all these reasons, including both the tremendous opportunities China's economic reforms and performance present, and the threats that loom in political relations that might destabilise the global order, that having a robust rules-based multilateral framework is absolutely indispensable. All attempts to weaken the multilateral order must be resisted; all efforts to strengthen it must be exerted. With this perspective, along with the two other critical dimensions we noted - security and growth - business leaders, academics and responsible members of civil society should be urging their governments to achieve that goal.

The next WTO ministerial meeting will be held in Hong Kong. Making it a success is essential for the world and will prove a major tonic for China and the Asia-Pacific region generally. Energetic efforts to that end must begin now. This is the message that Secretary of Commerce, Industry and Technology John Tsang Chun-wah should be sending to the meeting being convened in Geneva on December 15 to restart the Doha round negotiation process following the collapse of Cancun. And he should be in a position to do so with the full support of the international business community that is committed to developing solid relationships in China and with the Chinese business community.