2007 Allied Social Science Association Meetings
SGE/AEA Distinguished Lecture in Economics
2007 ASSA/AEA Conference, Chicago
Multilateral Organizations and the International Economy
A review of the talk by Anne Krueger, International Monetary Fund.
Multilateralism. An approach to trade policy focusing on multilateral negotiations (as opposed to bilateral negotiations or regional trade arrangements) as the most effective way of liberalizing trade in an interdependent global economy. Because concessions in one bilateral or regional deal may undermine concessions made to another trading partner in an earlier deal, basing a country's trade regime on a sequence of bilateral arrangements can be both technically demanding and politically divisive. In principle, multilateralism broadens the scope of possible deal-making by enabling "cross-trades" (e.g., concessions by country A that benefit country B, enabling country B to make concessions favoring country C, which then may be in a position to make concessions sought by country A.) In the absence of such cross-trades, liberalizing deals may be possible only if two countries each happen to be willing to offer the precise concessions that the other is seeking. (The preceding definition is the one used by the Institute for Trade and Commercial Diplomacy not Anne Krueger.)
Multilateralism is taken for granted by people and institutions. If you look at the past 50 years and before, you will see that multilateral organizations have helped. The international economy has grown rapidly and that the multilateral organizations have provided an essential underpinning for that growth. There is much less poverty than would otherwise be the case. The falling costs of transportation and communications plus the financial stability related to the International Monetary Fund (IMF) and trade liberalization related to the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) were the major engine of growth that permitted rapid rises in living standards and poverty reduction.
Multilateralism is more than just countries working together on issues. It has allowed international postal networks, international air transportation, the Geneva Convention, and the United Nations to develop. It has also been the underpinnings to the success of trade, financial markets, and capital flows between countries.
Trade during the 1920’s involved many favored status clauses. European nations had these clauses; the United States didn’t and was at a great disadvantage.
During the 1930’s countries would devalue currency to get favorable trade situations of reduced imports and increased exports. These activities led to reduced world trade. The Smoot –Hawley Trade Act was part of this activity and contributed to the huge drops in income and employment. The large negative consequences that were felt in the 1930’s eventually led to a reaction against these anti-trade restrictions. It led to the Bretton Woods Agreement and later the GATT which can be seen as the driving engines of world growth in the post WWII era.
Tariffs reductions were part of the bargaining of GATT. Over the course of the next 50 years tariffs dropped from 40% to less than 5% between industrialized nations. Real GDP growth was fast, but trade grew at twice the rate of GDP. Even in the developing world, with high tariffs, trade rose. But the countries with restrictive trade practices lost global market share. Countries that changed to outer-oriented policies fared better during this time. Emerging market countries gradually reduced their trade restrictions.
Airfare, telecommunications, and life expectancy have all been improved. Telecommunications costs for international calls have dropped substantially. In 1931 an international call would cost $298. In 2001 the same call would be $1 a minute. Today it is only a few cents a minute. These reductions have made interdependency more profitable. Life expectancy has steadily increased around the world. Greater wealth allowed countries to improve nutrition and healthcare.
Recently some activities are chipping away at the foundation of free trade. Bilateral agreements are not as favorable to poorer countries as they might be. They provide trade advantages to the agreements parties as compared to excluded trade partners. This reduces efficiency while raising prices. Anti-dumping agreements and countervailing duties are other market skewing activities.
One group that has been consistently open to freer trade and reduced barriers is the European Common Market, and its’ successor the European Union. They have lowered barriers between member countries from 45% to 0%. At the same time they reduced tariffs with nonmember countries to 5% as well with both contributing to the sustained growth that the EU has experienced. Since its’ inception, trade has increased and there has been increased competition. Protectionism of agricultural products is contrary to free trade but is strongly advocated by vested interests.
With greatly increased role of private capital flows it is important that they not be discriminatory. Recent debt forgiveness may not be as helpful as it seems. If some countries forgive debt, others may simply lend more and the debt forgiveness is offset.
Multilateralism is underappreciated. Detractors point to lost jobs and trade imbalances while ignoring the increased growth and improved lifestyles that have been an outcome. The success of multilateral activities is the main reason to maintain the system. One important step is to fund the programs that work. They are important even if they aren’t easy to explain politically.