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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