Financial crisis boosts trade reform calls

GENEVA (Reuters) - The hurricane tearing through financial markets has had a muted impact so far on trade flows.

But with inadequate regulation widely blamed for the biggest financial disaster since the 1929 Wall Street Crash, the debacle is reinforcing calls to strengthen the rules of commerce by agreeing a new trade deal.

"If we can conclude the negotiation we can send a positive signal to the world economy, to business people, because the Doha round is a round of liberalization of trade and investment," said China's deputy World Trade Organization (WTO) ambassador, Xiang Zhang.

Conversely, failure to agree a deal now after seven years could lead to a new crisis of confidence in business, said Zhang, who was instrumental in steering China into the WTO.

WTO Director-General Pascal Lamy still hopes to reach an outline deal on agriculture and industrial goods by the end of the year in the WTO's Doha round, launched in 2001, even though ministers failed to secure a breakthrough in July.

Both Lamy and EU trade chief Peter Mandelson warned last week the financial crisis could fan protectionism, which would hurt economic growth, making a new trade deal to secure the benefits of globalization all the more urgent.

The crisis could also monopolize the attention of countries' leaders, distracting them from trade issues and getting a deal.

Agreement on a proposed $700 billion bailout for the U.S. financial industry, which could be announced on Sunday, would go some way to easing that concern.

DELAYED IMPACT

Any trade deal, which would not be finalized until well into 2009 or even 2010 at the earliest, would not have an immediate impact on flows because of implementation periods of 5 years for rich countries and up to 17 years for developing nations.

That delayed economic effect would also argue against any immediate financial market impact, as exchange rates or company earnings would respond only later to changing trade flows.

A deal would boost business confidence, by showing that barriers to business were coming down, that the world trading system was in good shape, and that the international community was able to cooperate to solve global problems, experts said.

In any case, existing WTO deals limit the extent to which countries can raise tariffs, said Fredrik Erixon, head of Brussels trade policy think-tank ECIPE.

"I don't think we are going to see a 1930s repetition where a financial crisis is going to lead to tit-for-tat economic nationalism as it did then," he said.

The prospects for a new trade deal opening up markets may not seem propitious in a climate where deregulation is blamed for the crisis, and Anglo-Saxon laissez-faire liberalization has come under attack from French President Nicolas Sarkozy and German Finance Minister Peer Steinbrueck.

That atmosphere could hurt one aspect of the talks -- liberalizing trade in financial services, diplomats said. But, at a meeting in July where governments signaled a readiness to open up markets to different services, the credit crunch did not seem to force negotiators to hold back on banking.

In any case, there is a difference between market access, which is what trade negotiations are about, and financial contagion, which is a matter for regulators, said John Cooke, chairman of the Liberalization of Trade in Services Committee, which promotes U.K. financial services around the world.

"The fact remains that the world will continue to globalize: with more trade and investment there will be more international dependencies between the real economies of different economies. And, as trade and investment develop, they have to be financed."

Trade rounds are not just about liberalizing commerce but also about drawing up rules for the international trading system that are fair to all countries.

For instance in the current Doha round developing countries are seeking the reduction of rich nations' agricultural subsidies, which artificially depress prices, squeezing farmers in poor countries out of the market.

Munir Ahmed, secretary-general of the International Textiles and Clothing Bureau, compared such subsidies to short-selling, where investors borrow and sell shares they believe overvalued, hoping to buy them back at a lower price and pocket the difference. The practice has been widely blamed for falls in bank stocks in recent weeks.

"The first casualty of a failed Doha round would be the loss of opportunity to set regulations on many areas of international commerce," said Ahmed, a former Pakistani ambassador to the WTO.

The financial crisis also adds urgency to a Doha deal by serving as a reminder that good times do not last for ever.

With business booming over the past few years, many companies have seen little need to push for a reform to trade rules that would prevent a resurgence of protectionism.

So businesses have not lobbied as aggressively for a deal as in previous rounds, and so governments may have felt under less pressure to conclude one. That would mean that unilateral tariff and subsidy cuts they have made could be reversed.

"If the financial world goes backwards you can go backwards, and the only bulwark against that is to shrink down the entitlements that people have to go backwards," said New Zealand's WTO ambassador, Crawford Falconer, who chairs agriculture negotiations at the WTO.

"I think that's an added reason, not the only reason, it's an added reason which I think has more force than ever before for getting this damned job done now."

(Editing by Matthew Jones)