Time for the Little Guys to Bloc Up

When it comes to trade, there's an easy way for small nations to compete.

For the past 12 years, the World Trade Organization has demonstrated its utter uselessness in lowering barriers to the movement of goods, services, and money. Trying to reach consensus with so many members simply doesn't work. Regional trading blocs are clearly the way forward, but progress in that area has been halting at best -- until now.

The general case for trading blocs is easy to make: A bloc with uniform rules for trade and investment spurs new economic activity both inside and out. Companies inside the bloc can move merchandise duty-free and without customs clearances; they can also set up accounts in other countries with no legal restrictions. Foreigners can use the same rules for trade, foreign investment, and the movement of funds across the entire bloc. Multinational companies no longer need new lawyers, accountants, insurers, and bankers in every country. The more rules shared by the member countries, the easier it is to do business in each of them.

Despite the growth in emerging markets, big economies continue dominate global trade, in part because of the challenge of dealing with scores of small countries. In 2001, world merchandise exports amounted to about $6 trillion, of which the United States, the current countries of the European Union, Japan, and the BRIC countries (Brazil, Russia, India, and China) shipped about 69 percent. By 2011, global exports had almost tripled, but the same countries were still responsible for about 64 percent of them.

To break the big economies' stranglehold on global trade, small countries need to bloc up. Plenty have started moving in this direction, often citing the European Union as the example to follow in trade, if not in monetary policy. Yet there is no counterpart to the EU's free trade zone today, because the regional hopefuls are making the same mistake as the World Trade Organization: trying to get everyone under the same big tent from the very beginning. As the WTO has found, moving all the members of a large group past square one is pretty much impossible.

This is where the EU's example is especially important. The EU started with a core group of just six countries and then added new members that could meet the same economic and legal standards. By creating a leader-follower dynamic, the EU generated powerful incentives for countries to open their markets, crack down on corruption, and bolster protections for investors. It ran into trouble only when it started to relax these standards and incentives for political reasons (see: Greece, Bulgaria).

The same leader-follower dynamic could be the genesis of dynamic trading blocs all over the world. Last month's announcement by Chile, Colombia, Mexico, and Peru that they would dispense with most tariffs and visa requirements was the first step in this direction. Their Pacific Alliance, with total output of about $2 trillion and a population of more than 200 million, could become the basis for an EU-like union capable of attracting huge flows of investment and trade. The United States has trade agreements with all of them, and with most countries in Central America, so a broader regional agreement could follow.

A growing free-trade area would exert a strong pull on its neighbors once it began to attract new business and members. Big-tent trade deals never have this chance to gather momentum. Indeed, the Free Trade Agreement of the Americas, an all-or-nothing attempt to bring together 34 countries in the hemisphere, has been stalled for years.

Where else could a small group of countries lead to a broader free-trade zone? The ten countries in the Association of Southeast Asian Nations have been talking about greater economic integration for years, but their plans through 2015 consist mostly of studies and reports with vague objectives. A faster route would be to get Indonesia, Malaysia, the Philippines, and Singapore together.

As a group, they have a population of almost 400 million people and gross domestic product of more than $1.6 trillion. Despite their geographic proximity, their economies supply diverse goods and services. All are big exporters, but some of their markets are not very open to trade. Bringing Indonesia and the Philippines up to the level of Singapore or even Malaysia would make the bloc an extremely attractive destination for foreign companies. And the rewards of joining the bloc could induce reforms in smaller economies like Cambodia, Laos, and Myanmar.

Another possibility is East Africa. The 19 countries of the Common Market for Eastern and Southern Africa haven't managed to form a common market, though six of them have been slowly adopting uniform trading rules. Ethiopia, Kenya, Rwanda, and Uganda could move even more quickly. They are some of the most forward-looking countries in Sub-Saharan Africa in terms of trade and investment, and together they comprise more than 170 million people and close to $100 billion a year in GDP. The latter is not an enormous figure, but it's much more likely to get foreign investors' attention than, say, Rwanda's GDP of just $6 billion. English is the official language in all but Ethiopia, where it is increasingly used in education and business.

In the meantime, the big economies aren't sitting on their hands. If their blockbuster trade deals -- the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership -- ever become reality, other countries will have a harder time competing in global trade. To catch up, they could try turning their existing customs unions, monetary unions, and so-called economic communities into truly integrated trading blocs. But that's exactly what was supposed to happen to most of these organizations, and it hasn't happened yet. To start fresh, their members might consider starting small instead. They might even beat the big hitters to the punch.


Daniel Altman

The Case Against Socially Responsible Business

Want companies to invest in a better future for society? Keep them focused on their bottom lines.

Last week, a constellation of corporate heavyweights and other worthies came out to launch the B Team, a coalition devoted to changing how companies do business. In the team's new "Plan B," people and the planet receive equal primacy with profits. That sort of triple-bottom-line thinking might work for some companies, but to abandon the pure for-profit model altogether would be a huge mistake.

"Plan A, where companies have been driven by the profit motive alone, is just no longer acceptable," the B Team's introductory video declares. Putting aside the question of "acceptable to whom?" -- plenty of shareholders seem happy with the profit motive -- the idea here is that most companies are operating in an unsustainable way that dooms society to ruin. If true, most chief executives must be fatalistic good-time Charlies who will get up and leave as soon as the party is over.

As believable as that image may be, the notion that the private sector seeks only short-term profits is naive. When resources are scarce, prices go up, and companies are forced to change. Those that can't are replaced by new companies with different business models. Some chief executives undoubtedly perceive this existential risk in the long term, and they plan their strategies accordingly. For those who don't, the B Team offers another maxim: "In the long run, what's better for the planet and its people is also better for business."

This, by contrast, is often true. Yet instead of invalidating the profit motive, this maxim actually reinforces its importance. As Jonathan Berman and I have written in the past, for-profit companies that take a long time horizon in their decision-making are likely to make more social and environmental investments. Things like training workers, bolstering communities, and protecting ecosystems can take a long time to pay off for private companies. When they do, the return -- including a stronger labor pool, a wealthier consumer base, fewer working days lost to strikes and protests, and greater employee loyalty -- can be comparable to other for-profit investments.

In fact, strictly for-profit companies can be among the best social investors because they apply the same discipline to these investments that they would to other parts of their core business. Energy and mining companies, for example, have some of the longest time horizons in the private sector, and they tend to be big social investors as well. Some European companies have actually stopped issuing quarterly reports to shift the attention of analysts to the long term. And because they are still targeting a single bottom line, profit, there's no loss of clarity about their mission or erosion of transparency for shareholders.

Clarity and transparency are important parts of the for-profit model's inherent value. Chief executives know what shareholders expect of them, and there is a straightforward, verifiable, and comparable way to measure their performance: profit and loss. This is not the case for companies with triple bottom lines. Even if companies measure the effects of their operations on people and the planet, every company may choose a different set of metrics, and the weight given to each metric in their decisions may be far from obvious. Shareholders in for-profit companies already have to worry about executives piling up perks and building empires; a triple bottom line may muddy the waters even more.

This is the essential problem with social enterprises. They may have admirable goals, but investors cannot always be sure of what they're getting; the company's mission depends on a concept articulated by a founder or a statement that's open to interpretation, rather than the simple goal of profit. Moreover, when the management or strategy of a social enterprise changes, so might the company's objectives. The Indian microfinance institution SKS, for example, began as a nonprofit but ended up selling shares on the stock market. At that point, was it purely for-profit or not? Could investors ever really know its goals? These kinds of issues can cause enormous and costly frictions in financial markets.

Social enterprises undoubtedly do great things, yet to encourage every company to be a social enterprise, as the B Team does, is a tremendous error. It's also an error that the B Team's founders would have been very unlikely to make earlier in their careers. When Richard Branson and Mo Ibrahim were building their businesses, did they tell potential investors that they would be trying to help people and the planet as well as turning a profit? Did they inform credit markets that debt repayment would be part of a triple-bottom-line strategy?

More likely, having now reached a comfortable moment in their professional lives, they have chosen to adopt the personas of benevolent elder statesmen. If this sounds familiar, it should. The United States, Western Europe, and other wealthy countries have taken the same attitude toward the developing world. Even though their industrialization occurred with little regard for people or the planet, they now insist that China, India, and the rest grow in a cleaner, greener way.

The B Team's rhetoric is not only hypocritical but also internally contradictory. The profit motive works just fine with the long time horizon they recommend. It keeps companies focused on what they do best, so they make social and environmental investments in the most efficient way.

If owners or shareholders want a company to be a social enterprise, that's great. But not every company has to be one. Strictly for-profit companies make our lives better just by creating and supplying the goods and services that we like, as well as giving us a way to earn a return on our savings. Isn't that enough?

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