Viewpoints : What Now, for World Commerce, After GATT?

W ith the breakdown of world trade negotiations last week, hopes for a more open world economy have faded, at least for now. The Uruguay round of talks on the General Agreement on Tariffs and Trade was supposed to complete an agreement to break down trade barriers in farming, services, textiles and other goods, with benefits to flow to developed and less - developed nations alike.

But talks broke down in part because of the European Community’s refusal to significantly lower farm subsidies. Now there is a question as to whether GATT itself can survive.

For views on the future of world trade amid the collapse of the GATT talks , Sharon Bernstein interviewed Sebastian Edwards, professor of business economics at UCLA’s Anderson School of Management and a specialist in South American and Latin American economies, and Bill Lewis, a principal in the McKinsey & Co. management consulting firm .

Assuming that there will be no world trade agreement like that sought in the GATT talks, what will international commerce look like in the coming years?

Lewis: At first, the new direction would be towards curtailing the growth rate of world trade and, if things deteriorate enough, we will actually have a contraction in trade as we had back in the 1930s.

The world’s economies had been heading towards liberalization. If that direction changes, the impact would be different among different economies, with unfortunately the strongest impact on countries potentially in a period of very rapid economic development--such as Brazil, Mexico, Argentina and Chile.

Then, secondly, it will impact both Europe and Japan, which depend on trade more heavily than the United States and also don’t have as large or as homogenous or as integrated a market as the United States. The United States would also be affected, because to the extent that barriers are put up against the export of our skills--or to the extent we retaliate and prevent the import of products or skills into the U.S. economy--then U.S. consumers and U.S. corporations will suffer.

Edwards: The poor countries will be reluctant to protect intellectual property and open their economic systems to us. At the same time the developing countries will find that they can’t compete in terms of agricultural goods.

Are there any major trading blocs on the horizon?

Lewis: The obvious trading bloc that everybody thinks about is Europe itself. There is also potential for an Americas trading bloc, if world trade deteriorates to the point where Europe and Japan and the United States end up setting up barriers. An Asian bloc is harder to see, in part because of fragmentation and also for political, historical and cultural differences across the region.

Do regional trading blocs present potential problems?

Lewis: There’s nothing wrong with blocs, they’re just clearly a sub-optimum solution to open trade worldwide. The volume of trade among the potential blocs is about the same as the volume of trade within the blocs. What that implies is that trade among the blocs is very, very important, and to the extent that it is constrained, worldwide efficiency is diminished. There is, however, the concern that . . . the economic blocs could evolve into political blocs, with political disputes arising.

What role is likely for developing countries?

Lewis: The breakdown of the GATT talks will make it more difficult for them to generate the export performance they need to pay off their existing foreign debt and demonstrate their credit-worthiness for additional debt. It could also spill over into the political sphere, because it could make it more difficult for democratic forces that are aligning their destinies with market economies.

Edwards: The talks broke down just at a point when many developing countries, especially those that have been hit very hard by the debt crisis, have decided to open up their international trade and abandon protectionism and move toward freer trade. In particular, it may hurt Argentina, Chile, Mexico and Brazil.

I don’t think they will reverse their policies. But what we will see is that the much needed recovery in South America and Latin America is going to be delayed and it’s not going to be as vigorous or as strong as it would have been in a more open trade climate. It means we will see some social unrest in these countries, and we may see some political problems.

What is the future for agricultural trade?

Lewis: It just means that European housewives and taxpayers are going to continue to pay extraordinarily high prices for food, and especially developing countries are going to be able to export less in agriculture.

Edwards: The European countries are going to continue to protect their own agriculture. At a very high cost for their own consumers, it’s also going to hurt North Africa, the United States, New Zealand, Australia and South America.

What is the likely future for international trade in services, such as banking and insurance?

Edwards: Instead of having an automatic and broad-based agreement, we will have to rely on bilateral negotiations, which are more cumbersome, costly and much more complicated. We have been successful in these kinds of negotiations with Korea, but it has been a very, very long and costly negotiating process.

There will continue to be a fragmentation between the industrial countries, where banking and insurance is pretty much integrated, and the less developed countries, where there are a number of barriers for the international banks and insurance companies.

The United States would not be able to come in and do business in these other countries as much as we would like to. We will be able to participate less actively in the world trade of those areas where we have efficiency, such as banking and insurance. That means that the trade deficit will probably be larger and the economy as a whole is going to grow more slowly.

What should the United States do to improve its role in international trade?

Lewis: The biggest problem of other countries being protectionist is that it engenders retaliation on our part, which penalizes us because it denies access of our consumers to the best skills in the world. On the other hand, that retaliation is what it takes to get liberalized trading policies and the lowering of barriers. . . . It just may be that we’re in a stage where it’s going to take retaliation for us to get the message across.

Edwards: I think that there are a number of areas--textiles, for example--where we should revise our quotas and allow more goods to come in. There is also the issue of manufactured goods from Korea and Japan that one way or another we try to keep out. We should open up and by so doing encourage efficiency.