The rich world's economy
The gift that goes on giving
A seasonal offering for rich-world governments to give their people—and everybody else
Dec 22nd 2012
THE holiday season is a time for expansive thoughts, and not just about waistlines. It allows people time to step back from the daily grind and think about how they could do things differently. Has lack of imagination blinded them to simple solutions? With a little effort, could they make 2013 a lot better?
For the rich world’s governments, the answer is yes. We offer three ways to improve confidence and increase growth in what otherwise looks like being a pretty bleak year. Regular readers will not be astonished to hear that all three involve trade liberalisation. This is, indeed, a theme we have returned to with some frequency since this newspaper was set up in 1843 to oppose Britain’s protectionist Corn Laws. But the gains to be had from sluggish rich countries opening their borders to each other’s goods and services look enticing. The world is less integrated than most people realise (see article). And trade also offers a chance for liberal democracies to re-establish their credentials as the world’s guides towards prosperity.
On the first day of Christmas my true love sent to me…
According to the IMF, in 2013 America’s economy may grow by around 2%, Japan’s and Britain’s by 1% or so, and the euro zone’s will be lucky to grow at all. Policymakers in each of these economies could do plenty of things to improve this dour prognosis, but most involve unappealing choices. A further monetary boost may help add zip to the recovery, but risks producing asset bubbles. More fiscal expansion could help growth but could weigh governments down with extra debt.
Freer trade, by contrast, does not involve spending any money. It demands nothing of participating governments other than a bit of leg-work and a lot of political courage. And even if some lobbies, such as farmers, will fight hard, the benefits for the overall economy of cutting barriers—the tariffs, subsidies and red tape that gum up international markets—are large. Workers’ wages will go further as the cost of imported goods and services falls, exporters’ markets will expand and productivity will improve as the helpful consequences of freer trade filter through the whole economy.
The three big barrier-bashing opportunities are the Trans-Pacific Partnership (TPP), a free-trade agreement that straddles the Pacific; an Atlantic-spanning free-trade deal between America and the European Union; and a true single market in services within Europe. Each of these initiatives has recently moved from the politically fanciful to the just-about plausible, with serious progress possible over the next year or two. Each in isolation would improve confidence and increase prosperity. Together, they would transform the rich world’s prospects.
In an ideal world a big trade deal would be global, since dismantling barriers for all is far better than lowering them on a bilateral or regional basis (see article). But in the real world, the last set of global trade talks, the Uruguay round, was concluded back in 1994, and its successor, the Doha round, is moribund. Rather than flog a dead horse in Geneva, it is time to make progress in places where trade negotiators have momentum and politicians have interest. And that is across the Pacific and the Atlantic.
The TPP is already well under way. Eleven Pacific countries are taking part in the negotiations, including Mexico, Canada, Australia and New Zealand as well as America. South Korea might join them next year. So, too, could Japan if Shinzo Abe, the new prime minister, is serious about boosting his country’s economic potential. With Japan and South Korea, the TPP countries would account for some 30% of global trade in goods and services. And the TPP has aspirations to do much more than cut tariffs: the goal is to hash out a far bigger joint rule-book, from regulation to competition policy. One study reckons a deal could raise the region’s GDP by more than 1%.
The transatlantic trade agreement is still just an idea, albeit one that is being pushed hard by European politicians, and which has been cautiously embraced by Hillary Clinton, America’s secretary of state. Here, too, there is plenty of potential: to streamline supply chains and raise productivity by getting rid of tariffs and to ease the burden on business by harmonising regulatory standards, so that a car or drug deemed safe in Europe need not be tested again in America. One analysis suggests that just getting rid of tariffs could raise Europe’s GDP by around 0.4% and America’s by a percentage point.
The really big gains will be reaped if these deals spur broader global liberalisation, particularly with the fast-growing big emerging economies. That cannot be taken for granted: the TPP and an EU-US deal could split the world into competing regional blocks from which China, especially, would be excluded. But that can be avoided by making sure that both deals are easily knitted together and easily opened to others. Both should be based on a similar template, should avoid unnecessarily restrictive prescriptions—whether on capital controls or intellectual property—and should create a set of rules that China or India can plausibly embrace.
…a boost for the rich world’s GDP
As for domestic markets, there is no shortage of American industries where Barack Obama could start to remove needless red tape. But the opportunity is greatest in Europe. The single market still largely excludes services, which make up more than 70% of the region’s GDP.
Customs formalities, for instance, add inordinate bureaucracy and costs to the 40% of goods that are shipped within the EU by sea. Rail companies in one EU country cannot operate domestic services in another. The online market is another bugbear: it is often easier for Europeans to buy things online from America than from their neighbours. Depending on how many barriers are dismantled, the EU’s GDP could be raised by 2.5% or more. All the politicians know this; most (outside France) pay lip service to the idea of expanding the single market. Now is the time to act.
By championing freer trade and open markets, the West taught the rest of the world how to grow. Nowadays, globalisation is associated with the surging middle classes of the emerging world, and some illiberal dictatorships. Let 2013 be the year when the West claims back its creed—and its oomph.