How Can We Miss It When It Never Went Away?

When the World Trade Organization negotiations broke down in July 2008, the global financial crisis was so quickly upon us – October panic, bailout, US election, stimulus package – that it’s easy to forget that the Doha Round didn’t end after seven years, it simply took a break. It’s still out there, zombie-like, waiting to be recalled to life, to resume generating attention-numbing headlines.

Now US-China relations are beginning to dominate the news: China powering out of its slump, China celebrating the sixtieth anniversary of its revolution with military displays, China investing in its cyber-spies, China low-balling its currency, China pinching jobs from poorer nations.

It’s a good time, therefore to consider Misadventures of the Most-Favored Nations: Clashing Egos, Inflated Ambitions, and the Great Shambles of the World Trade System, by Paul Blustein.

One of the best American economics journalists of his generation, Blustein took a buyout from The Washington Post in 2006 but stayed on the beat, thanks to the Brookings Institution and a series of foundation grants. The author of two well-regarded books about the International Monetary Fund – The Chastening, about the Asian financial crisis of 1997-98; and The Money Kept Rolling In (and Out), about the Argentine banking crisis of 2001 – Blustein is uniquely qualified to make a lively story out of the bureaucratic roundelay that began in Doha, the shimmering capital city of the desert kingdom of Qatar, in January 2001.

Misadventures is a beguiling story, 344 pages about the ins-and-outs of the global trading system and the personalities who preside over it, almost always in expensive settings. There are occasional field trips, too, to locations where things actually get made – a French vineyard, a Punjabi wheat farm, a Zambian dairy – but most of the action takes place in the elegant villa on the banks of Switzerland’s Lake Geneva that is WTO headquarters.

Blustein somehow makes it all readable (not that I read it all). He is the sort of fellow with whom you would be happy to sit down at lunch in order to explain your business – confident that you would be understood and fairly treated, expecting that both of you would see things more clearly afterwards as a result. In turn he gracefully illuminates the organizations that he covers: in this case, the 630 staffers of the WTO’s Secretariat, as opposed to the 2,600 persons who work for the IMF and the more than 10,000 who work for the World Bank.

He traces the WTO’s history, from its 1948 beginnings as the General Agreement on Tariffs and Trade, run for 45 years much like an English gentlemen’s club by a relative handful of powerful nations, to the far more complicated body that came into existence in January 1995, after eight years of negotiations, which apparently has become home to every form of blocking strategy known to humankind.

When negotiations finally break down in 2008, after nine intense days of dickering, Blustein concludes, “There has got to be a better way. That is one obvious lesson to be drawn from this book – from both its content and its length.” But how exactly might the WTO be saved from the Doha Round? He summarizes the various prescriptions that followed the breakdown:

Put the round out of its misery.

No, harvest the organs.

No, stay the course and just get it done.

No, try doing smaller deals with “coalitions of the willing.”

No, switch to negotiating bilateral pacts.

No, aim for a much bigger, more meaningful agreement on issues that really matter.

Naturally Blustein has some ideas of his own. After eight rounds of negotiations, he says, after fifty years, trade is today reasonably free. The important thing now is to keep it that way: to stick to a rules-based system, and prevent protectionism from becoming an ingrained feature of the global order. So he would, for instance, like to see a moratorium on the bilateral agreements that have become a familiar way of dividing up markets in recent years. He also boosts the expand-the-agenda ideas of a pair of economists whose article in Foreign Affairs last year, he says, “threw the Geneva trade community into a tizzy.”

In From Doha to the Next Bretton Woods, Aaditya Mattoo, of the World Bank, and Arvin Subramanian, of the Peterson Institute for International Economics, argued then that the Doha talks had become a distraction. Negotiators, they wrote, had “Nero-like, spent too much time dwelling on minor issues while ignoring the burning questions. These include food policy (big exporters like Argentina sometimes withhold production from world markets during periods of scarcity); climate (the Appellate Body of the WTO cannot be asked to make judgments on carbon tariffs in the absence of a major treaty, as it is sometimes asked to do); and above all, currency matters

Blustein writes, “The world needs an effective multilateral approach for dealing with countries that use their currencies to subsidize exports and penalize imports.” It doesn’t need a direct confrontation between Washington and Beijing, he says; that probably would end badly. But trade wars, or a cycle of beggar-thy-neighbor currency devaluations, are a distinct possibility if the Yuan doesn’t appreciate considerably.

And that brings us back to China.

There may have been no one better overall on the global crisis than Maurice Obstfeld, of the University of California at Berkeley, and Kenneth Rogoff, of Harvard University, co-authors of the leading textbook on international macroeconomics. Starting in 2001, they argued in a series of papers that growing global trade imbalance would eventually pose a serious threat to prosperity. They were not always right about the mechanisms, or precise course events would take, but they were always ahead of events – especially after January 2008, when Rogoff and his research partner Carmen Reinhart published a startling analysis of the likely consequences of the US subprime lending crisis – nine months before its panic phase began.

In a new paper, on Asian economic policy, prepared for a meeting of the Federal Reserve Bank of San Francisco earlier this month, Obstfeld and Rogoff look back on the decade of rapidly growing trade imbalances that they say were at the heart of the crisis – not the cause exactly of leverage and housing bubbles, they say, but an important co-determinant. A key factor in creating those continuing imbalances, they say, was Chinese exchange rate policy. Monetary policy in the US and euro zone was another, plus faulty regulatory frameworks in the US, Britain and some European countries, which permitted low interest rates to create explosive financial vulnerability.

“Until now, China has followed the model that Japan pioneered, orienting its economy towards exports in order to exploit scale economies, to learn by doing, and to move up the value chain.” Keeping its currency artificially low has worked very well indeed to this point. But now China, unlike other Asian nations, is in a position to reorient its economy towards internal growth, and to let its currency appreciate substantially, without losing its advantages in global markets. Coupled with some deficit reduction in the United States, such measures would go a long way in redressing the balance between surplus and deficit countries.

The trouble is, they write, with its position as the leading international lender, China has little incentive to undertake those reforms, even though they’d be good for its citizens and good for the world. Nor is it particularly vulnerable to pressure. The huge volume of foreign reserves it holds amounts to a form of self-insurance. And even threats of trade wars have evoked only small changes in its policies.

So what’s going to happen? More negotiation, that’s what, over the coming decades. And not just at the level of the IMF, which has the responsibility of assessing when a currency is undervalued, but at the WTO, where sanctions might be sought against countries found to be in violation of the rules. That’s the kind of world we live in now – and why reporting like that of Paul Blustein is important. Meanwhile, as Obstfeld and Rogoff conclude, it is a wise country, poor or rich, that increases regulatory oversight whenever the money starts rolling in.