Trade Coalitions of the Willing

Forget about the WTO. Here's how Obama is about to change the game on free trade.

Feel that whiplash? Trade has gone from zero to 60 in the White House's agenda just weeks after Barack Obama's second inauguration. Two blockbuster deals -- the Trans-Pacific Partnership, which Japan will soon join, and a free trade agreement with the European Union -- could finally leave the World Trade Organization's ill-fated Doha Development Round in the dust. In fact, these deals offer more hope for world trade than the WTO ever did.

At its founding in 1995, the WTO was the first global mechanism for lowering barriers to commerce. Since then, it has done very little to fulfill its primary mission. The Doha Round, projected by the World Bank to raise global economic activity by $500 billion, has dragged on for a dozen years without agreement. In the meantime, estimates of its potential economic gains have dropped as low as $84 billion -- about 0.1 percent of global output -- with just $16 billion going to poor countries.

Any deal now would be lucky to generate even that amount. The Doha Round is a failure because of its complexity and the WTO's negotiating system. Everything except military hardware is on the table, and it has been impossible to reconcile every country's views on agriculture, services, and manufactured goods. Yet because every country has a veto, that reconciliation is exactly what is required for a deal.

Throughout the past 12 years, the WTO's most ardent supporters have urged countries big and small to stay committed to the Doha Round, resulting in a massive waste of resources. This has been especially tragic for poorer countries that have only small teams of diplomats and lawyers responsible for pursuing bilateral, regional, and global trade deals around the world. Dozens of them, from Belize to the Gambia, don't even have permanent representatives at the WTO's headquarters in Geneva, and have to rely on semi-annual "Geneva Weeks" to touch base with their colleagues.

Yet in spite of the futility engendered by perennially lower expectations, negotiators have kept on meeting because, as one put it, "the problem is no one knows what Plan B is." Now there is a plan B: the formation of big trade blocs including big and small countries, which will eventually find it in their mutual interest to negotiate with each other.

This is a huge step forward. In global trade talks, a few countries -- notably France and India -- have relished the role of spoiler. Deals that don't insist on being global don't have that problem; these big trade blocs are essentially coalitions of the willing. Their members are the leaders, and the laggards will have two choices: join, or get the short end of the stick.

When Japan signaled its intent to sign onto the Trans-Pacific Partnership (TPP) last week, it joined Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States in negotiations. The most important aspect of this bloc is its diversity, which will result in big gains from trade. Together, these countries will lower trade barriers -- and get richer.

For the United States this represents the next logical step in trade liberalization: bilateral and regional deals becoming the building blocks for a bigger free trade bloc. The TPP includes several countries with which the United States already has free trade agreements: Canada and Mexico through NAFTA, plus Australia, Chile, Peru, and Singapore through bilateral arrangements.

The White House hopes to attract other members of the Asia-Pacific Economic Cooperation to the TPP, including China, Russia, Indonesia, and South Korea. It's unlikely that every country will join, but that hasn't stopped the United States before. Even though the Free Trade Agreement of the Americas failed, Washington managed to sign bilateral and regional deals with 10 of the potential members, including Chile and Peru.

Of course, those would pale in comparison to a U.S. free trade agreement with the European Union, which Obama proposed last month in his State of the Union address. The economic gains could be enormous -- these are the two biggest economies in the world -- and they could not come at a better time. But there are still plenty of legal, political, and perhaps even cultural hurdles. For one thing, any agreement would have to be consistent with the obligations of all the other pacts that both economies already have on their books, presumably including the EU's special programs for its former colonies in Africa, the Caribbean, and the Pacific.

The creation of big blocs may just change the game, however. While the United States pushes forward with the TPP, the EU has been seeking deals with members of the Association of Southeast Asian Nations, in hopes of bundling them into a regional agreement. A deal with the United States would pave the way for a megadeal between the TPP and an EU-ASEAN bloc. In total, these countries represented about 65 percent of the world economy in 2011, and a pact between them would come a lot closer to a global trade agreement than anything the WTO has done lately.

Once that happens, the world will be split into trade leaders and trade laggards. The leaders will get richer as their trade intensifies, but, as I wrote in my 2011 book, their living standards and product offerings will also converge. As a result, they'll be looking for new trading partners to restore the diversity of their blocs. At the same time, the laggards will see their own living standards fall behind, which could make them more eager to pursue foreign trade and investment.

These incentives will bring even more countries to the bargaining table, ultimately leading to trade agreements that cover the entire globe. And unlike the Doha talks, which haven't lowered a single trade barrier in 12 years, the benefits of free trade will build at every step of the way. Obama may have gotten a late start on trade, but a shift to regional deals will give him a great chance to finish strong.

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Daniel Altman


Was Chávez good for Venezuela?

What is the economic legacy of Hugo Chávez? A common criticism is that by changing how Venezuela sliced its economic pie, he also reduced the size of the pie for his fellow citizens. The Venezuelan economy did perform dreadfully through much of his presidency, and it continues to suffer from high inflation and rising debt. But when you strip away the ideological debates about Chávez's 14-year tenure and just look at the numbers, it's not entirely clear that he left Venezuelans worse off.

A happy recent development in economics has been the recognition that increases in equity and efficiency can go hand in hand, especially when inequality has reached a level that threatens living standards for everyone. In the 1990s, Venezuela may well have reached that level. The country had high inequality in incomes and one of the most inequitable distributions of wealth -- at least judged by land -- in the world. As research by the International Monetary Fund has suggested, so much inequality can indeed reduce economic growth. The reason is simple: The wealthy can grab economic opportunities that might be a better fit for poorer people with more suitable talents.

Of course, economic theory also suggests that too little inequality can stifle growth completely. In a socialist state of the kind Chávez professed to pursue, incomes would be equal regardless of effort. Notwithstanding the commitment of ardent socialists to their national project, workers' effort might lag, resulting in an economy that failed to fulfill its productive potential.

So what happened in Venezuela? Chávez undertook an enormous agenda to redistribute income and wealth through a variety of social programs and the nationalization of assets in industries ranging from agriculture to telecommunications. According to the Venezuelan government's statistics, inequality did eventually fall quite a bit during his time as president, or at least through 2009.

Four years later, the end of Chávez's rule has left two big questions for economists: First, were his programs truly responsible for the reduction in inequality? And second, did these changes in the distribution of income result in more growth or less?

Though it's never possible to compare a country's economic history to what might have taken place with difference policies -- you only live once -- in this case the timing of the trends offers some answers. Inequality in Venezuela didn't start dropping until 2006, seven years into Chavéz's presidency. So if the incomes of the poor were increasing during that time, the incomes of the rich had to be increasing at the same rate.

Assuming the Venezuelan figures on inequality are correct, the most likely explanation is that the steep climb in oil prices starting in 2004 allowed Chávez to spend much more on programs for the poor, including those that raised their incomes merely by distributing cash. At the same time, by taking over private assets that would have gained value because of higher oil prices, he may have prevented rich Venezuelans from profiting during the boom.

Did this decrease in inequality have any effect on growth? Adjusted for inflation, average incomes in Venezuela fell until 2003, then began to rise again until hitting a plateau around 2009. The turnaround began before income inequality started to shrink, again coinciding with the upward turn in oil prices. Indeed, about a third of Venezuela's GDP comes from oil, and per capita income tracks the oil price fairly closely.

A more interesting gauge of Chávez's success is to look at how much the non-oil portion of the Venezuelan economy expanded. Based on a rough calculation of oil revenue -- Venezuela's annual production multiplied by the average price of a barrel of crude -- sales accounted for only about 20 percent of GDP in 1999, yet by 2005 they were already peaking at 37 percent. After taking a big knock during the global financial crisis, sales settled at about 25 percent of GDP in 2011. (Note that this measure does not include refining and other oil-related industries.)

The size of Venezuela's non-oil economy also fluctuated during this period. From 1999 through 2005, just before inequality started to fall, per capita income not from oil sank by 16 percent, adjusted for inflation. It's likely that these were dark days for those who neither worked in the oil industry nor benefited from social programs funded by oil revenue.

Starting in 2006, the non-oil economy began to grow again. It, too, suffered during the global financial crisis, but by 2011 non-oil income per capita was 11 percent higher than when Chávez took office. That was progress, but 11 percent was still a pretty mediocre figure; on an annual basis, non-oil income per capita grew just 0.9 percent during the majority of Chávez's presidency.

The numbers look even worse in comparison to Venezuela's neighbors. Peru's oil production is about 6 percent of Venezuela's, but its per capita income managed to grow by almost 60 percent between 1999 and 2011, according to the IMF's estimates. The pie also expanded much more quickly in Ecuador and Colombia.

Venezuela certainly reduced inequality, but it hardly seems to have resulted in more economic growth. It's not hard to guess why. Chávez's moves to reduce inequality weren't the only relevant parts of his economic strategy. His hostile attitude toward wealthier countries, combined with the threat of nationalization, undoubtedly discouraged foreign investment. While neighboring countries modernized their regulations and improved their business climates, Venezuela maintained a reputation as one of the toughest places in the world to run a company.

Economic growth and rising incomes aren't everything, however. Economists are taught to care most about wellbeing, which can and should be gauged in other ways. And here's the kicker: If there is one area where Chávez appears to have succeeded, it is in enhancing human development as measured by the United Nations. Even though Peru's incomes grew much more quickly between 2000 and 2010, Venezuela passed its neighbor in the U.N.'s favored metric.

Could Chávez have done even better with higher economic growth? Perhaps, but we'll never know for sure. Instead, we'll see whether Venezuela can cement its progress in human development atop a rather shaky set of economic foundations.