When it comes to trade, there's an easy way for small nations to compete.
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
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.