maybe we need a wee bit of background on wto?

Balachander Krishnamurthy (
Tue, 30 Nov 1999 20:20:17 -0500

here's stratfor's analysis

The WTO and the De-synchronization of the Global Economy


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.


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 ). 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

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

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

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.