Can G20 leaders save the multilateral trading system? Will they bother?

This week saw the US and EU agree to launch talks on what has been described as potentially the 'biggest bilateral trade deal in history.'

The proposed Transatlantic Trade and Investment Partnership (TTIP) is the latest in a series of so-called 'mega-regional' trade arrangements. Australia is a participant in negotiations over two other mega-regional deals, the Trans-Pacific Partnership (TPP), which recently completed its 17th round of negotiations in Lima, and the Regional Comprehensive Economic Partnership (RCEP), which held its first round of negotiations last month.

As Geoff Miller pointed out on The Interpreter yesterday, if both the TTIP and the TPP were successfully concluded, there would be a case for arguing that the global rules of 21st century trade would no longer be set within the multilateral trading system. That would represent a major shift away from the system which has helped support global prosperity – and global peace – for more than half a century.

This week also brought the release of the ninth in a series of reports by the WTO on trade policy measures taken by G20 members. These reports have been produced since G20 leaders at the April 2009 London Summit asked the WTO and other international organisations to monitor their pledge (the 'standstill') to refrain from trade and investment protectionism.

According to the WTO's latest assessment, over the past seven months more than 100 trade-restrictive measures were implemented by G20 economies, covering around 0.5% of all G20 merchandise imports, or about 0.4% of world imports.[fold]

It's true that over the same period some G20 economies also introduced trade liberalisation measures, but these were outnumbered by the restrictive ones. Moreover, this latest set of restrictions comes on top of a series of measures taken since the WTO's monitoring began. Since many of these earlier measures are still in place, this translates into a slow but steady increase in the cumulative share of trade subject to restrictions or distortions, which since October 2008 account for around 4.6% of G20 imports or around 3.6% of total world imports.

The good news is that, as the WTO points out, these numbers are still low enough to suggest that 'most countries have on the whole resisted resorting to protectionism'. The not-so-good news is that the same numbers also confirm that G20 members have nevertheless been prepared to break their promises on the standstill.

Some more unpleasant news on trade policy arrived last week, when another monitoring exercise – this one conducted by the independent Global Trade Alert (GTA) – released its 12th report on protectionism. According to this report, 'the past twelve months have seen a quiet, artful, wide-ranging assault on free trade.' The GTA emphasises that much modern protectionism is hard to detect and is designed either to exploit the gaps in existing rules or to focus on areas not covered by the rules at all. As a consequence, the GTA report argues, monitoring exercises that concentrate on traditional trade policy measures may significantly underestimate the 'true' amount of trade intervention underway.

Both sets of developments – the rise of mega-regional deals and the spread of murky protectionism alongside G20 backsliding on trade policy promises – are symptoms of a multilateral trading system in decline. There are other symptoms, too, of which the most obvious is the long-running failure to complete the Doha Round of trade negotiations, despite repeated pledges to do so by the world's leaders, including in the G20.

Does any of this really matter? Optimists can mount a fairly respectable case that there's nothing much to worry about. The forces of technology and the logic of global supply chains will continue to bind the global economy together and place strict limits on the case for protectionism, they might argue. After all, the world economy has recently negotiated the biggest slump in international trade since the Great Depression, and done so without the protectionist excesses that disfigured the 1930s. And if the multilateral system is now unable deliver the kind of deep economic integration that the global economy requires, then new initiatives such as the TPP and the TTIP will do so instead.

Under these circumstances, why would G20 leaders want to spend valuable political capital on yet another attempt to conclude a Doha Round that's already well past its expiry date?

The optimists may turn out to be right. But they may also underestimate the dangers and costs involved if the multilateral system continues to decline. That system has its origins in the chaos of the interwar period and the lesson that the world would do well to avoid the fragmentation of trade and competing blocs which characterised that period.

In our world of shifting economic power, fears over resource security and concerns about geo-economic competition, that lesson remains relevant. In a new Lowy Institute Analysis paper, I argue that opting to stand by while the multilateral system unravels is precisely the kind of risky, high-stakes gamble that the G20 in particular should be working hard to avoid. As the world's premier international economic forum, the G20 should have a keen interest in supporting a robust multilateral system, and in the paper I suggest several steps G20 leaders could take to help restore its flagging fortunes.

Photo by Flickr user MorBCN.

Mark Thirlwell