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BOut!! Stratfor on WTO



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"littera scripta manet - non omnis moriar"

>STRATFOR.COM Global Intelligence Update
>November 29, 1999
>
>
>The WTO and the De-synchronization of the Global Economy
>
>Summary:
>
>The World Trade Organization (WTO) is meeting in Seattle this week.
>The participants are so divided that they could not even develop a
>formal agenda for the meetings. While everyone is focused on
>China's admission, the fact is that the WTO is moribund, only a few
>years after its creation. Its failure is rooted in the fundamental
>reality of today's global economy: de-synchronization of regions of
>roughly equal bulk. Ever since the Asian meltdown, the world's
>economic regions have been completely out of synch. Indeed,
>individual nations within regions are out of synch. That means that
>the creation of integrated economic policies is impossible. What
>helps one region hurts others. Thus, organizations like the WTO
>cannot function. Instead, regional institutions are emerging. The,y
>too, face conflict among constituent nations, but are more likely
>to create coherent and beneficial policies for their regions. This
>points to increased tension among and within regions. Such de-
>synchronization has been seen in the past. It is, over the course
>of a generation, a warning of the potential for serious
>international conflict.
>
>
>Analysis:
>
>The World Trade Organization (WTO) will hold ministerial level
>meetings in Seattle on Nov. 30. Representatives from 135 member
>countries and several observer countries, including China, will
>gather. Demonstrators protesting the effect of WTO policies on
>workers in the Third World will share space with demonstrators
>protesting the effects of WTO policies on workers in the advanced
>industrial countries. In fact, the demonstrations outside the
>meeting halls will be more interesting than the discussions inside.
>This is not to say that the demonstrations will be all that
>interesting. Rather, the meetings inside the hall will be an
>exercise in near irrelevance.
>
>The purpose of the meetings is to kick off a new round of trade
>talks designed to increase free trade and reduce barriers to
>international trade. Preliminary talks in Geneva revealed such a
>sharp division among the 135 participant nations that it proved
>impossible to create an agenda for the meetings. In other words,
>the members were so divided that they couldn't even agree on what
>ought to be discussed. President Clinton, the host, sought to break
>the logjam by turning the meetings into a summit, on the theory
>that a summit would raise the political stakes and decrease the
>chances of a total breakdown. By last Wednesday, however, the
>president had abandoned his plans for a summit, claiming that the
>logistics were simply too complex. The fact was that few were
>willing to come. Fidel Castro is said to be considering a trip. For
>the others, a WTO meeting has become a no-win proposition. They
>have come to expect little from the WTO but political trouble at
>home. Therefore, at best, nothing will happen at the meetings. At
>worst, a nasty confrontation will take place.
>
>The international economic scene is divided by the usual issues.
>The United States wants Europe to cut its subsidies of farm
>products so that it can sell more products to Europe. The Europeans
>are refusing, since free trade between U.S. and European
>agriculture would devastate Europe's farmers. Developing countries
>want to be excused from further liberalization of their trade
>policies, based on the fact that they still haven't recovered from
>the benefits of the last round of cuts. Labor unions in advanced
>industrial countries want to set minimum labor standards in the
>Third World, which would make the Third World a less attractive
>investment. The Third World wants to do without the labor unions'
>solicitude. None of these issues will be settled in Seattle. If the
>meetings go well, the countries will sign a meaningless document
>that will be hailed as the beginning a new round of trade
>liberalization. Nothing will come of it.
>
>The WTO has ceased to be interesting. And that is very, very
>interesting. Ten years ago, as communism was collapsing, it
>appeared that we were entering a new era in which borders would no
>longer mean very much, corporations would become global and trade
>would become free. The development of the WTO represented a major
>event in human history, because for the first time, a single,
>international organization would exist whose mission it was to
>manage an increasingly integrated, global economy. However, instead
>of a Leviathan, the world delivered itself of a beached whale.
>
>There are many small issues that have paralyzed the WTO. For
>example, the WTO is now dealing with a range of agricultural
>problems that are extremely difficult to manage. Implementing a
>strict free trade regime on agriculture would mean putting masses
>of farmers out of business in Europe and Asia. That would lead to
>social upheaval that the governments in those regions could not
>survive. Another example is the management of international trade
>on the Internet. No one knows how to enforce rules, let alone what
>those rules ought to be. Part of the problem is that the easy
>aspects of trade liberalization are behind us.
>
>But there is a much deeper and much more important aspect to the
>decline in hopes for the WTO and other multilateral organizations,
>such as the IMF (see
>http://www.stratfor.com/SERVICES/GIU/111599.ASP ). The WTO, and the
>international economic system as a whole, is falling victim to the
>deepening de-synchronization of the global economic system, a de-
>synchronization which not only will define the first decade of the
>new millennium, but which also signals intense danger for the
>global system as a whole.
>
>In the fall of 1997, the world's economy went into a massive de-
>synchronization. The collapse of Asia's financial and stock markets
>represented a definitive shift in the fundamental economic patterns
>in the region. The collapse was not accidental, but rooted in the
>region's public policies and economic processes. It has defined
>Asia's economy for a generation, and will continue to do so. Its
>problems will not be solved quickly. The current recoveries are
>quite real, but far from representing a return to patterns prior to
>1996-97, they represent rebounds in general down trends or
>bottoming out. Nothing goes in a straight line. There were several
>upturns during the U.S. depression that seemed to indicate its end.
>
>At the same time that Asia went into a massive downturn, the United
>States continued the expansion that began in 1982 and deeply
>intensified in 1995. This de-synchronization between the U.S. and
>Asian economies is stunning, when one considers the expectations at
>the beginning of the decade. We are not speaking simply of those
>who expected Asia to lead the way into the 21st century. The more
>important expectations were from those theorists who argued that
>the growth of international trade would create greater
>interdependence between countries and regions. This interdependence
>would have, as a key consequence, the emergence of an integrated
>global economy, in which business cycles would be intimately
>linked.
>
>If this theory were correct, the Asian meltdown should have, at the
>very least, aborted American economic expansion. Indeed, the
>expectation was that Asia would lead the United States into its own
>collapse. There was, in fact, tremendous anxiety around the world
>during the last quarter of 1997 and throughout 1998 that precisely
>this would happen. It simply didn't. This meant that the theory of
>the emergent, integrated global market was in error. Or more to the
>point, economic expectations remained regionally and nationally
>based. One of the results of the Asian meltdown was a massive shift
>of money out of Asia and into the American markets. This increased
>capital formation in the United States and actually fueled American
>growth, while limiting Asian growth.
>
>This meant that the markets did not perceive a global market place
>but rather a series of linked regional markets, which could behave
>not merely differently, but in opposite ways. Indeed, they could
>cannibalize each other. The very liberalization of capital flows
>that developed over the previous generation had resulted in the
>creation of processes that weakened one region in the world and
>strengthened another. Each region, rather than converging on a
>single business cycle, diverged into its own cycle. Each region is
>at a different stage of its cycle, and therefore, policies that are
>beneficial to one hurt the others. This is compounded by divergent
>cycles on the national level.
>
>Europe, as a region, behaved more like the United States than Asia
>over the past couple of years. But that is only if it is viewed on
>an aggregate basis. Disaggregated, or viewed nation by nation, one
>can see that Europe's nations behaved in very different ways.
>Germany's economic condition is very different than the United
>Kingdom's. This nationalist aspect extends throughout Asia as well.
>It is increasingly difficult to speak of a single Asian region
>behaving in a single, integrated way. South Korea behaves
>differently than Japan, and both behave differently than Singapore
>or Malaysia. Thus, there is not only de-synchronization among
>regions, there is also de-synchronization within regions.
>
>We have seen de-synchronization before. De-synchronization during
>the post-war period had a very different quality than today, due to
>two additional factors. The first is bulk: Asia, Europe and the
>United States behaved very differently during the 1950s, but the
>consequences of this de-synchronization were severely limited by
>the sheer bulk of the American economy as compared to Asia's or
>Europe's. When two relatively small economies are out of synch with
>a massive economy, the global system does not destabilize. The
>United States had more than enough bulk to stabilize the system.
>Today, the order of magnitude of Asia, Europe and the United States
>is such that there is a very rough equivalency in bulk. That means
>the system as a whole is no longer supported by one stabile mass.
>
>This leads to the second phenomenon, which we will call equi-
>linkage. Three equally bulky economies are now connected to each
>other with a set of linkages that are not identical but
>significant. That simply means that Asian economic policy during
>the 1950s had little effect on the United States. Therefore, the
>United States could permit Asian economies to protect themselves
>from the United States, creating asymmetric rules. That is no
>longer the case. Policies adopted by Asia affect the United States
>and Europe, and so on.
>
>We now have a series of regional economies (Asia, the United
>States, Europe and the Commonwealth of Independent States) and
>numerous nations all at different points of their business cycles -
>all out of synch. Three of these regions are of roughly equivalent
>bulk. Each region affects the other in its policies. The potential
>for political confrontation is enormous.
>
>Consider: The United States is relatively late in a massive up-
>cycle. The Federal Reserve Bank is naturally concerned about
>inflationary pressures, which can be seen in the rise of commodity
>prices on a world-wide basis. The natural response of the Fed is to
>increase interest rates in order to cool off the economy and
>introduce greater discipline. As interest rates in the United
>States rise, money flows out of Asia, undermining the Asian
>recovery. Asia needs the United States to keep interest rates low
>in order to enhance Asia's attractiveness to investors. The United
>States, de-synchronized from Asia, needs higher interest rates.
>
>With regions of equal size leading to equivalent linkages, de-
>synchronization leads to constant friction. Every step taken by one
>region affects the other substantially. Now, since the United
>States is, at the moment, the most dynamic economy, it is affected
>least by the actions of the others. It therefore has the greatest
>interest in trade and finance liberalization, since its dynamism
>can take the greatest advantage of the situation. But, since the
>regions are out of synch, this will change over time. What will not
>change is this: The international trade and financial policies that
>benefit one region inevitably harm another. This means that the
>possibility of creating a single, integrated trade regime
>evaporated when the Asian and American economies went out of synch
>in the 1996-97 period. This can be seen in the trade disputes over
>agriculture with the European Union (EU) and within the EU, just as
>it can be seen elsewhere. De-synchronization is a global
>phenomenon.
>
>In a de-synchronized world, politics take precedence over
>economics. In the case of increased U.S. interest rates threatening
>Asian recovery, there are two solutions. One is to accept the fact
>that Asia's future is in the hands of the U.S. Federal Reserve and
>accept the discipline to become more competitive this imposes. This
>is good economic theory, if the society is politically and socially
>capable of accepting the costs. The other option is the creation of
>institutions to protect the region or nation from the most powerful
>economies. A key idea being discussed in Asia is the creation of an
>Asian Monetary Fund to prevent precipitous capital flows out of the
>region. Built around a pool of money called the Miyazawa
>initiative, it would work by issuing bonds guaranteed by Asian
>governments. This would essentially create a controlled Asian
>regional capital system that managed its relations with the rest of
>the world. The net result would be a currency bloc built around the
>yen or a yen-focused equivalent to the Euro.
>
>The details of the proposals are less important than the fact that
>they are being made, and that they are being made by the Japanese,
>and taken seriously. Several countries, content to be in the dollar
>bloc, are less than enthusiastic. Others are avid advocates. The
>politics of the bloc will be fascinating to watch unfold. But this
>explains why no one is particularly interested in the WTO meeting.
>The real name of the game in a de-synchronized global economy is
>not the creation of global institutions, but the creation of
>regional institutions that function in synch with the regional
>business cycle.
>
>In a de-synchronized world, integrated global trade and financial
>policies are impossible. The needs of each region and nation are so
>wildly different that most nations can't afford to sit at the
>table. Regional policies become much more realistic. But because of
>equi-linkages, it is impossible to create autarkical, self-
>contained regions. What emerges are regions that possess tremendous
>tensions and that are in continual friction with other regions.
>Economic inefficiencies resulting from controlled capital markets
>increase divergences within and outside the bloc. Yet, the
>economies remain linked. What one does affects the other. Tensions
>among and within the blocs grow, beginning as economic tensions,
>then turning into political tensions. This is what is happening
>now.
>
>De-synchronization was visible in the inter-war period from 1920-
>1930. The American boom in the 1920s ran parallel to economic
>depression in Germany, and later Japan. It resulted in American
>protectionism. While the United States was deep into its
>depression, Germany was emerging along with Japan. De-
>synchronization forced the creation of regional economic blocs
>built around regional currencies and regional interests. This led
>to intra-regional conflicts between the dominant power and lesser
>regional nations. It also led to inter-regional disputes. Those
>inter-regional disputes proved politically explosive, as the
>leaders of regional blocs manipulated the other blocs through
>economic and political means.
>
>The inability to develop even an agenda for the WTO meeting is not
>accidental. The Asian countries held an ASEAN meeting over the
>weekend that was much more important to them than anything going on
>in Seattle. There can't be increased liberalization and a central,
>global apparatus for managing the international economic system
>during periods of de-synchronization among regions of roughly equal
>bulk and linkage. We are, therefore, in the early stages of working
>through the political consequences of an economic phenomenon that
>is already in place. It is a phenomenon that the world has seen
>several times before. It is, over the course of a generation, a
>very scary phenomenon. We are still early in the process, but de-
>synchronization in a world of regions of roughly equal size and
>substantial linkage is a difficult process to arrest. It is even
>more difficult to contain the consequences.
>
>
>
>
>(c) 1999, Stratfor, Inc. http://www.stratfor.com/
>
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