Trading ritual and reality
Saturday, 29 September 2007
Alan Beattie
It has become a familiar sight. Two beaming trade ministers side-by-side at a table sign a weighty dossier of papers in the glare of television lights. Banalities are exchanged about the bonds of commerce and friendship that link whichever two great nations it is this time. Occasionally, real live business executives from each country are brought out to sign a contract as evidence that the deal actually means something.
Then the media and the politicians pack up, everyone goes home and the actual world trading system carries on much as before.
The reality is that the great wave of globalisation since the end of the cold war has had a lot less to do with ministers signing paper trade agreements - most of which are anaemic - and a lot more to do with innovative businesses getting on and doing things. Often those are supported by governments unilaterally cutting tariffs. But with the current so-called Doha round of multilateral trade talks in trouble, and strong political opposition to some more substantive bilateral deals such as a proposed US-South Korea pact, bureaucrats are set to continue playing only a minor role in encouraging trade in goods and services.
In earlier decades, particularly during the 1960s, trade agreements undoubtedly did a great deal to encourage world trade. But after the previous Uruguay round of trade talks was concluded in 1994, something changed. It was not that trade agreements stopped being signed but that they stopped mattering so much.
Formal trade liberalisation - the reciprocal reduction of manufacturing and agricultural import tariffs and restrictions on foreign ownership of companies - if it has played a role at all, often follows on behind an innovative company, or a whole industry, that has already laid the groundwork through business deals.
One place where this trend is particularly apparent, say experts, is Africa. Countries there have been trying for many years, in various often overlapping groupings, to create regional trade areas by cutting tariffs. Success has been mixed, with many countries suspicious of their neighbours and often using non-tariff barriers to prevent imports.
But as Sev Vettivetpillai, chief executive of Aureos Advisers, a private equity fund with offices in 12 countries in sub-Saharan Africa, says: "Generally it is the private sector that just gets on with it on its own." For example, when Aureos worked with Safepak, a company that wanted to expand its sales of plastic bottles in east Africa, an "East African Community" trade agreement linking five countries including Kenya, Uganda and Tanzania proved of little use. That pact was supposed to create a single market in the region but has been so mired in bureaucracy that Mr Vettivetpillai says: "If [Safepak executives] had done what they initially wanted and exported bottles across borders or set up their own company outside Kenya, it would have taken them ages to get licences and permission and the rest of it. It was easier just to acquire a Tanzanian company."
Similarly, official attempts to create trade zones in southern Africa have been hampered by different overlapping regional agreements and the persistence of non-tariff barriers such as hygiene requirements. But Shoprite, a South African supermarket chain, has done much within the countries of southern Africa, including Zambia, Botswana and Namibia, not just to bring goods over the borders but to lengthen, broaden and even create national supply chains.
Similarly, in Asia, which over the past 15 years has provided one of the most impressive displays of international trade integration in history, almost nothing of that performance stemmed from formal bilateral or regional trade agreements. The 10-member Association of South-East Asian Nations, for example, signed a free trade agreement in 1991. But although trade within the region has grown rapidly, less than 10 per cent of exports use the special tariff rates available under the pact, partly because the rules are so complex. Digitisation, lower transport costs and improved supply chain management have had far more impact on the region than lower tariffs.
Bill Austin, Asia-Pacific regional managing director of Halcrow, a UK-based engineering, planning and design consultancy, says formal trade pacts in the region frequently hang off the private sector, not the other way round.
"Sometimes there is a big contract signing for something or other, but what you tend to find is that the deal has already been going along in the background," Mr Austin says. "Then the governments decide they want to do a trade deal and they look for a flagship project to attach to it ... They look for a project that is nearly done, which can then be signed when the minister is visiting."
Although a new flurry of trade deals has started in Asia, as China and Japan seek to outdo each other in establishing themselves as the centre of a network of trade agreements, most are heavy on talk and light on action - tending to exclude sensitive industries and maintain restrictive rules on using inputs from other countries.
The Asia-Pacific Economic Co-operation gathering of nations held recently in Australia is a perfect example. This year Apec reiterated its proposal for a trade agreement of the Asia-Pacific, which would stretch most of the way round the world from St Petersburg to Newfoundland. The deal, which would involve getting the US Congress to agree to expose more of the US economy to imports from China, is greeted with polite scepticism by many companies and commentators.
This year in Sydney at a gathering of the Pacific Economic Co-operation Council, an association of academics, business representatives and other experts, it was widely acknowledged that official encouragement was lagging way behind reality. Mark Johnson, chairman of Apec's business advisory council and former deputy chairman of Macquarie Bank, told the meeting: "Business is well ahead of Apec. Integration is much more market-led and business-led than it is policy-led."
Moreover, where formal trade barriers have been lowered in Asia, many of the cuts have been unilateral, with governments believing it to be in their own interests that their consumers have the cheapest goods and their companies the cheapest inputs available. China cut its average applied goods tariff from 42 per cent to 11 per cent in the 10 years after 1992, partly as a result of joining the World Trade Organisation; India's fell from an average of 59 per cent to 28 per cent in the same period.
So why have multilateral deals been elusive and bilateral and regional trade deals so weak? Partly, the system is a victim of its own success. Most of the easy liberalisation gains have already been made in successive trade rounds, particularly on tariffs for manufactured goods. For manufacturers, the benefits of trade deals are clearer and liberalisation agreements relatively easy to write, since they usually involve a simple percentage tariff on a physical object passing through a port, and the price effects of tariff cuts are easier to see.
Those companies that are strong public supporters of trade negotiations, such as Caterpillar, the vehicle and equipment manufacturer, can point to some recent examples where a deal really did appear to unleash a flood of trade that had been pent up behind tariff walls. The US-Chile bilateral deal signed in 2004, for example, eliminated big barriers: Caterpillar says that one of its 140-horsepower motorgraders (a type of earthmover) previously attracted a $13,000 (£6,530, €9,380) tariff. The abolition of such tariffs led to Caterpillar's US-made exports to Chile doubling: a bilateral Australia-US deal that came into effect in 2005 led to a 26 per cent increase.
But such tariff cuts become less important as goods and services traded across borders become more complex and higher value-added. Where profit margins are wider and quality, branding and market positioning are more important than price, simple goods tariffs have less impact. Sanjiv Mehta, head of Unilever in the Philippines, says that as far as his consumer goods sector is concerned, once tariffs have got down to 10 per cent or so, it is hard to see trade barriers having much influence on producing and sourcing decisions.
The most protected sectors now are either - as in much of agriculture - ferociously defended by the beneficiaries or - as in services - sufficiently complex that writing binding agreements is hard. Witness the lack of progress in official attempts further to liberalise transatlantic trade, one of the biggest and most vibrant trading relationships on earth.
The Atlanticist administration of chancellor Angela Merkel in Germany made the EU-US relationship the centrepiece of its trade agenda during its presidency of the EU in the first half of this year. But big breakthroughs proved elusive. Talk of a formal Transatlantic Free Trade Agreement (Tafta) foundered, not least because achieving EU agreement would have required exempting large parts of European agriculture from the threat of US competition - unacceptable to the American farm lobby.
The Transatlantic Business Dialogue, the association of companies set up to push the issue forward, has had to content itself with one or two fairly technical measures, such as the US Securities and Exchange Commission's dropping of its requirement that foreign private companies issuing stock in the US should publish financial statements that reconcile the International Financial Reporting Standards system, used in Europe, to the Generally Accepted Accounting Principles used in the US.
Jeffries Briginshaw, director of the TABD's EU office, says he still hopes an economic council to be held next month will produce more results. But he warns: "We need a mechanism that will keep pushing forward the integration of markets, not just deal with one or two issues that happen to be in the pipeline, and it is not clear there is enough enthusiasm for that."
Perhaps it will take a severe dislocation of world trade to shock ministers into signing trade liberalisation deals that really mean something. The evidence so far is that with world commerce itself doing fine, there is little contribution to greater globalisation being made by negotiated reductions in official barriers to trade.
It has become a familiar sight. Two beaming trade ministers side-by-side at a table sign a weighty dossier of papers in the glare of television lights. Banalities are exchanged about the bonds of commerce and friendship that link whichever two great nations it is this time. Occasionally, real live business executives from each country are brought out to sign a contract as evidence that the deal actually means something.
Then the media and the politicians pack up, everyone goes home and the actual world trading system carries on much as before.
The reality is that the great wave of globalisation since the end of the cold war has had a lot less to do with ministers signing paper trade agreements - most of which are anaemic - and a lot more to do with innovative businesses getting on and doing things. Often those are supported by governments unilaterally cutting tariffs. But with the current so-called Doha round of multilateral trade talks in trouble, and strong political opposition to some more substantive bilateral deals such as a proposed US-South Korea pact, bureaucrats are set to continue playing only a minor role in encouraging trade in goods and services.
In earlier decades, particularly during the 1960s, trade agreements undoubtedly did a great deal to encourage world trade. But after the previous Uruguay round of trade talks was concluded in 1994, something changed. It was not that trade agreements stopped being signed but that they stopped mattering so much.
Formal trade liberalisation - the reciprocal reduction of manufacturing and agricultural import tariffs and restrictions on foreign ownership of companies - if it has played a role at all, often follows on behind an innovative company, or a whole industry, that has already laid the groundwork through business deals.
One place where this trend is particularly apparent, say experts, is Africa. Countries there have been trying for many years, in various often overlapping groupings, to create regional trade areas by cutting tariffs. Success has been mixed, with many countries suspicious of their neighbours and often using non-tariff barriers to prevent imports.
But as Sev Vettivetpillai, chief executive of Aureos Advisers, a private equity fund with offices in 12 countries in sub-Saharan Africa, says: "Generally it is the private sector that just gets on with it on its own." For example, when Aureos worked with Safepak, a company that wanted to expand its sales of plastic bottles in east Africa, an "East African Community" trade agreement linking five countries including Kenya, Uganda and Tanzania proved of little use. That pact was supposed to create a single market in the region but has been so mired in bureaucracy that Mr Vettivetpillai says: "If [Safepak executives] had done what they initially wanted and exported bottles across borders or set up their own company outside Kenya, it would have taken them ages to get licences and permission and the rest of it. It was easier just to acquire a Tanzanian company."
Similarly, official attempts to create trade zones in southern Africa have been hampered by different overlapping regional agreements and the persistence of non-tariff barriers such as hygiene requirements. But Shoprite, a South African supermarket chain, has done much within the countries of southern Africa, including Zambia, Botswana and Namibia, not just to bring goods over the borders but to lengthen, broaden and even create national supply chains.
Similarly, in Asia, which over the past 15 years has provided one of the most impressive displays of international trade integration in history, almost nothing of that performance stemmed from formal bilateral or regional trade agreements. The 10-member Association of South-East Asian Nations, for example, signed a free trade agreement in 1991. But although trade within the region has grown rapidly, less than 10 per cent of exports use the special tariff rates available under the pact, partly because the rules are so complex. Digitisation, lower transport costs and improved supply chain management have had far more impact on the region than lower tariffs.
Bill Austin, Asia-Pacific regional managing director of Halcrow, a UK-based engineering, planning and design consultancy, says formal trade pacts in the region frequently hang off the private sector, not the other way round.
"Sometimes there is a big contract signing for something or other, but what you tend to find is that the deal has already been going along in the background," Mr Austin says. "Then the governments decide they want to do a trade deal and they look for a flagship project to attach to it ... They look for a project that is nearly done, which can then be signed when the minister is visiting."
Although a new flurry of trade deals has started in Asia, as China and Japan seek to outdo each other in establishing themselves as the centre of a network of trade agreements, most are heavy on talk and light on action - tending to exclude sensitive industries and maintain restrictive rules on using inputs from other countries.
The Asia-Pacific Economic Co-operation gathering of nations held recently in Australia is a perfect example. This year Apec reiterated its proposal for a trade agreement of the Asia-Pacific, which would stretch most of the way round the world from St Petersburg to Newfoundland. The deal, which would involve getting the US Congress to agree to expose more of the US economy to imports from China, is greeted with polite scepticism by many companies and commentators.
This year in Sydney at a gathering of the Pacific Economic Co-operation Council, an association of academics, business representatives and other experts, it was widely acknowledged that official encouragement was lagging way behind reality. Mark Johnson, chairman of Apec's business advisory council and former deputy chairman of Macquarie Bank, told the meeting: "Business is well ahead of Apec. Integration is much more market-led and business-led than it is policy-led."
Moreover, where formal trade barriers have been lowered in Asia, many of the cuts have been unilateral, with governments believing it to be in their own interests that their consumers have the cheapest goods and their companies the cheapest inputs available. China cut its average applied goods tariff from 42 per cent to 11 per cent in the 10 years after 1992, partly as a result of joining the World Trade Organisation; India's fell from an average of 59 per cent to 28 per cent in the same period.
So why have multilateral deals been elusive and bilateral and regional trade deals so weak? Partly, the system is a victim of its own success. Most of the easy liberalisation gains have already been made in successive trade rounds, particularly on tariffs for manufactured goods. For manufacturers, the benefits of trade deals are clearer and liberalisation agreements relatively easy to write, since they usually involve a simple percentage tariff on a physical object passing through a port, and the price effects of tariff cuts are easier to see.
Those companies that are strong public supporters of trade negotiations, such as Caterpillar, the vehicle and equipment manufacturer, can point to some recent examples where a deal really did appear to unleash a flood of trade that had been pent up behind tariff walls. The US-Chile bilateral deal signed in 2004, for example, eliminated big barriers: Caterpillar says that one of its 140-horsepower motorgraders (a type of earthmover) previously attracted a $13,000 (£6,530, €9,380) tariff. The abolition of such tariffs led to Caterpillar's US-made exports to Chile doubling: a bilateral Australia-US deal that came into effect in 2005 led to a 26 per cent increase.
But such tariff cuts become less important as goods and services traded across borders become more complex and higher value-added. Where profit margins are wider and quality, branding and market positioning are more important than price, simple goods tariffs have less impact. Sanjiv Mehta, head of Unilever in the Philippines, says that as far as his consumer goods sector is concerned, once tariffs have got down to 10 per cent or so, it is hard to see trade barriers having much influence on producing and sourcing decisions.
The most protected sectors now are either - as in much of agriculture - ferociously defended by the beneficiaries or - as in services - sufficiently complex that writing binding agreements is hard. Witness the lack of progress in official attempts further to liberalise transatlantic trade, one of the biggest and most vibrant trading relationships on earth.
The Atlanticist administration of chancellor Angela Merkel in Germany made the EU-US relationship the centrepiece of its trade agenda during its presidency of the EU in the first half of this year. But big breakthroughs proved elusive. Talk of a formal Transatlantic Free Trade Agreement (Tafta) foundered, not least because achieving EU agreement would have required exempting large parts of European agriculture from the threat of US competition - unacceptable to the American farm lobby.
The Transatlantic Business Dialogue, the association of companies set up to push the issue forward, has had to content itself with one or two fairly technical measures, such as the US Securities and Exchange Commission's dropping of its requirement that foreign private companies issuing stock in the US should publish financial statements that reconcile the International Financial Reporting Standards system, used in Europe, to the Generally Accepted Accounting Principles used in the US.
Jeffries Briginshaw, director of the TABD's EU office, says he still hopes an economic council to be held next month will produce more results. But he warns: "We need a mechanism that will keep pushing forward the integration of markets, not just deal with one or two issues that happen to be in the pipeline, and it is not clear there is enough enthusiasm for that."
Perhaps it will take a severe dislocation of world trade to shock ministers into signing trade liberalisation deals that really mean something. The evidence so far is that with world commerce itself doing fine, there is little contribution to greater globalisation being made by negotiated reductions in official barriers to trade.