When the G20 leaders meet in Cannes in early November, it will be clearer if, and why, the world economy has entered into a second recession in the space of less than four years. Even at the most optimistic, the world economy has performed less well than was anticipated at the time of the last two, or perhaps even three, G20 summits.

Part of the reason for this current stretch of poor and unstable economic performance, particularly in the developed world or OECD countries, has been a lack of confidence — on the part of consumers, financial and non-financial institutions, firms, investors, and even governments. This economic uncertainty has begun to spread into one of the few areas that, historically, has been working well, but now needs considered attention by the G20 leaders.

Over the past 65 years, the international trade regime has been a symbol and manifestation of successful international cooperation, coordination and consensus on the rules of the game, and a major contributor to global prosperity. It has, to date, escaped close scrutiny by the G20 leadership because, despite fears expressed when the 2008 global financial crisis broke out, nations have, by and large, resisted the temptation to lurch towards protectionism. Whether they will continue to do so — in the face of continuing financial instability, very slow growth and debt problems — remains to be seen. At the very least, G20 leaders must remain vigilant to any 1930s-style threat of beggar-thy-neighbour policies and new strains of protectionism.

While the evidence at one level gives the sense that all is well on the international trade front — millions of goods and services transactions cross borders every day, and governments are, on the whole, abiding by internationally agreed trade rules — stresses and strains in the international trade regime are becoming increasingly evident. These pressures on the system will intensify with time, posing the risk of serious longer-term damage to the global economy.

The contributing factors are many, including: shifts in influence among the major world economic powers; growing diversity of interests on the part of the big and the small, the rich and not-so-rich; structural changes in global manufacturing and in a growing range of services; and the instability and uncertainty created by volatile exchange rates.  Less support for the belief in more open markets, particularly at a global level, in many countries is another possible factor.

The World Trade Organization (WTO), the centrepiece of multilateral trade governance, is feeling tremendous strain from the weight of regional trading arrangements (RTAs), which now include negotiations among developed economies such as Canada and the European Union, as well as among developing countries. RTAs are proliferating, becoming more comprehensive in their terms and embody many differing rules. Further, the WTO’s centrality is weakened by the incapacity of nations to cooperate or reach agreement on a number of trade issues and the spectacular failure to conclude the Doha Development Agenda (DDA), the current multilateral trade round. Some observers believe a number of leading economies are losing confidence in the WTO system. Cracks are also starting to show in the WTO’s dispute settlement machinery.

So, although the WTO has worked well in the sense that its members still adhere to its rules, there are growing doubts that the function, credibility and even the institutional form of the trade system as presently organized — its governance — is still suitable. Experts have warned that further delays in addressing much-needed institutional reform and embracing currently uncovered trade-related issues, will increasingly call into question the WTO’s centrality.[1]  

A forward-looking, revitalized trade regime will have to: grapple with the trade-related aspects of climate change (for example, border tax adjustments), food security and energy security; deepen market openings for many services; make trade facilitation measures more efficient; promote innovation and its diffusion across borders; and support the expanded movement of skilled persons internationally — all matters that are currently outside the purview of the WTO and most regional trading arrangements, or are inadequately dealt with.

There can be little progress on these broader issues while the Doha impasse remains. The G20 leaders have collectively pledged their commitment to complete the DDA since their first meeting in Washington in 2008. At Cannes, they should express regret and accept responsibility for the failure to reach an ambitious outcome for the Doha round. While their credibility on this issue is wearing thin, they should, nonetheless, pledge redoubled efforts to agree on an outline of a balanced outcome by mid-2012.

The G20 has a unique chance to jump-start the revitalization process when the eighth WTO Ministerial Meeting convenes in Geneva on December 15–17, 2011, six weeks after the G20 summit. A strong expression of political support for the trade system must emerge from the Cannes summit. Leaders should reassert the importance of the multilateral trade system and the WTO as providing a canopy of rules, disciplines, consultation and judicial procedures covering all cross-border, non-financial economic transactions, one that works in the interests of all countries, big and small. In addition, the leaders should reaffirm earlier pledges to maintain a standstill on protectionist measures, notwithstanding current slow growth and debt problems. They should agree on more stable macroeconomic frameworks to lessen exchange rate volatility. As they look ahead to the December meeting, leaders also should instruct their ministers to look at the mandates, institutional capacity and processes required to re-invent the WTO and, thus, the global trade regime for the twenty-first century, including the integration of the many praiseworthy RTAs into the broader global system.

John M. Curtis was a CIGI distinguished fellow between 2006 and 2011, and founding chief economist, Foreign Affairs and International Trade Canada. Currently, he is Adjunct Professor Queen’s University.



[1] See, for example, Ujal Sing Bhatia, “WTO’s Role in the 21st Century” and the surrounding discussion at http://groups.google.com/group/cuts-tradeforum/browse_thread/thread/ed366d8244d91f5b/91afc15f047676d2?lnk=gst&q=Bhatia#91afc15f047676d2.

G20 leaders must remain vigilant to any 1930s-style threat of beggar-thy-neighbour policies and new strains of protectionism.
Thematics
Program
As leaders of the G20 nations prepare for their summit at Cannes, France on November 3-4, CIGI experts offer policy analysis and prescriptions on the most critical issues amid growing uncertainty about the global economy and the G20's effectiveness as an international policy forum.