The Globalization Machine Needs Some Repairs

By Philip Bowring - International Herald Tribune

DAVOS, Switzerland - The great and the good of multinationalism and globalization assembled here were genuinely puzzled at the groundswell of apparent opposition to further reductions in trade barriers through another round of WTO negotiations.

It is certainly surprising that developing countries which have benefited most from freer trade and investment are treating them with some suspicion. That in turn is swelling the doubts among more recent converts to open markets like India.

There are two obvious trade-specific reasons for the new skepticism. First, the failure of the developed world, especially the European Union and Japan, to talk seriously about ending the distortions of agricultural trade which cost developing nations and Eastern Europe tens of billions of dollars.

Second, the efforts of the European Union and the United States to drag labor and environmental questions into trade issues makes the rest of the world believe that this newfound morality is just a new form of protectionism.

Beyond these particular obstacles to a new trade round, the developing world has grievances which generate attitudes hostile to the trade agenda.

Resentment at pressure that has been applied by the West through bilateral negotiations, and in some countries via the IMF, to push through financial market opening and the agenda of free movement of capital. These have gone far beyond what is required under international trade accords and impinge on domestic economic and fiscal policy. The Uruguay Round had already provided liberalization of financial services, in which the United States is especially competitive.

In Asia in particular, lingering bitterness at Western and Japanese banks' role in creating the recent crisis. Western efforts to place the blame largely on Asian economic systems rather than on weaknesses of the international system were accompanied by efforts to force open access for foreign (often multinational) investors to acquire assets at depressed prices.

Reaction against U.S. lecturing of the rest of world about economic management. Although all countries recognize the flexibility and creativity of American business, they find it hard to reconcile current U.S. equity valuations with the notion that the market always knows best. They also resent the ability of the United States to use the dollar's preeminence to escape the trade-account and savings rate disciplines required by others.

Belief that globalization has been undermining the tax systems of developing countries even more than those of the developed world. In the process, indigenous companies are disadvantaged compared with multinationals able to use transfer pricing and concentrate earnings in offshore tax shelters.

Recognition that the overseas investment policies and the merger activity of multinationals often are not driven by productivity and profit considerations. Mergers often happen because size is seen to provide some protection against hostile takeover. Global reach and market presence become ends in themselves, not means to improved return on capital. The sin of obsession with size attributed to Korean chaebol on their home turf is evident among many multinationals.

Awareness that the companies driving international capital markets will say or do almost anything legal to maximize their own profits, regardless of the interests of nations and businesses in greater financial market stability and longer-term assessments of capital allocation. Until the major OECD countries show that they are seriously doing something to improve international financial market stability, others will stall on trade issues.

In short, developing countries want progress toward free trade in goods and services. But they, and many smaller developed countries, do not want to be forced to live by the doctrines of Wall Street investment bankers, to conform to the empire-building strategies of a few giant corporations, or to have their exchange rate policies judged by inefficient markets run by 25-year-olds in London who know the price of every currency and the value of nothing.

The World Trade Organization has a deserved reputation for bringing order as well as liberalization to international trade. But a new round of trade negotiations will be fruitful only if other aspects of the international economic system are seen to be fairer and better balanced than now.