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A dangerous mix of politics and trade
Philip Bowring

MONDAY, MAY 23, 2005
HONG KONG China's move on Friday to raise textile export tariffs is the just the latest of a series of threats to rules-based international commerce. Bilateral deals and short-term horse-trading are overshadowing the multilateralism on which the global trading system is based.
 
China will come to regret resorting to tariffs on certain exports as a way of fending off protectionist pressure from the United States and the European Union. The measure may look good in Washington and Brussels while being seen in China as an expression of sovereignty - an export restraint created by Beijing, not by foreigners.
 
But how much better it would have been to let the United States and the European Union go ahead with quotas based on World Trade Organization clauses allowing "safeguards" against sudden export surges. These would only have been temporary and in any case are subject to WTO appeal procedures. There would have been a lot of noise - as there was over U.S. steel tariffs - but the issues would have been settled within established procedures.
 
Meanwhile, in another departure from the system, China and the EU have been reported to be negotiating a deal whereby the Europeans would soften their position on textile imports from China and in return agree to end or at least modify their arms embargo against China. This is grotesque. If the EU has a complaint against Chinese textiles, it should take it to the WTO. To make life easier in the short term, the EU seems willing to step outside the rules, while China senses it might be able to swap some small trade concession for the bigger prize of sophisticated arms sales.
 
The EU seems willing to ignore, for the sake of gaining a short-term advantage, the fact that the arms sales issue goes to the heart of its global role, including its relations with the United States and with the whole of Asia, not just China. Arms sales are never a purely commercial issue. Least of all should they be linked to garment sales and the WTO.
 
Such myopia now seems to be the norm in Europe. Piling absurdity on absurdity, President Jacques Chirac of France is presenting the European constitution, supposedly the basis for the Continent's future, as a way of continuing to protect Europe's high-cost farmers!
 
Do not be surprised if this virus spreads. China is never going to make a strategic policy change for the sake of a few garments. But do not count on the United States and the EU to be similarly focused on long-term interests.
 
The free-trade deals that the United States has been making with political allies such as Australia, and China's deals with sundry Asian neighbors, confuse trade and geopolitical issues. Such confusions will come to haunt the global trading system, which the United States led for so long and which had such a beneficial impact on the world.
 
Such deals, done in the name of extending free trade, are creating a confusing system of preferences and regulations. They threaten the complex, decentralized, logistics-driven manufacturing systems and international division of labor which have been at the heart of global trade growth, in Asia in particular. These systems have brought huge manufacturing productivity gains and have helped export industries spread to poor countries such as Bangladesh. They cannot work without common rules, as well as low tariffs. Nowhere is this fact better recognized than in Hong Kong, a global trade hub, where crucial WTO ministerial talks will be held in December
 
The excuse that is often given for bilateral trade deals is the slow progress of the current round of trade talks, known as the Doha round. The outlook for these talks may have brightened now that Pascal Lamy, a former EU trade commissioner, is to head the WTO and the new U.S. trade representative, Rob Portman, has been well received by his peers. But whatever happens to the Doha round, most bilateral deals are neutral at best and more often reduce or divert rather than create trade.
 
Global arrangements are also being sidelined in the financial realm. The question of China's undervalued currency lies outside the scope of the WTO and China makes much of it as a "sovereign" issue. Likewise the United States contends that its fiscal and monetary policies are no one else's business. But both are members of the International Monetary Fund, which does have rules - admittedly rather vague - on the linkage between fiscal and exchange-rate policies and the equilibrium of international financial markets. China and the United States are both ignoring these rules.
 
We will all pay a high price for the erosion of the multilateralism in trade and finance - and sooner than we think.
 
 
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