Global Policy Forum

By Hamish McRae

Can it really be business as usual after the war ends? Gordon Brown is worried that the US and Europe may find it harder to work together, pointing out that together we account for 70 per cent of world output. Colin Powell is so worried about post-war relations that he has come over this week to try and patch things up. Both are right to be concerned because the world economy is taking a huge hit and, worse, its capacity to recover may be undermined.

The immediate blow is obvious. Here in Britain retailers have just had their worst month for 11 years. The EU is understood to have cut its forecasts for growth this year yet again and unemployment is at a three-year high. American consumer confidence is the lowest for nearly 10 years. Indeed, hardly a day passes without more negative economic news.

But you would expect this, for any conflict is bad for confidence. Wars do, however, come to an end. What is surely more worrying from an economic perspective is the longer-term damage between the world's two largest trade blocs.

By this I don't mean that Americans are cutting back on drinking Perrier or that Britons are switching from Bordeaux. All the experience of trade boycotts suggests that they don't last very long: people buy on quality and price rather than emotion. There may be some longer-lasting damage to international investment flows but I am not concerned too much about that. US investment in "old Europe" may decline, for the flow was already switching to the east, where costs are lower and growth faster. The result would be merely a speeding up of an established shift.

No, the really big worry should surely be that the great post-war liberation of trade and capital movements might slow, or even reverse itself. Most people in the West take that process of economic liberation – and the great burst of prosperity it generated – for granted. But it was the result of post-war determination to avoid the catastrophe of the 1930s depression, when world trade collapsed and major countries grouped themselves into competing blocs. We still live with the legacy of the three institutions created after the war to give order to a more liberal trading environment: the IMF, the World Bank and the GATT – now the World Trade Organisation.

We now live in a world of more or less free trade and payments. We think of it as completely normal to buy a foreign car or CD player, to change money into euros or dollars when we are on holiday or to buy a weekend place in Spain. But for more than half of the post-war period, the latter two freedoms were severely restricted.

Could we now slip back? Well, that won't happen today or tomorrow. But world trade volume actually fell in 2001 and while we don't yet have full figures for 2002, it looks as though trade may have risen by only about 1 per cent. As a general rule, trade has risen at double the rate of growth of world GDP, so any decline or even levelling off should be alarming. International direct investment fell sharply in 2001 and probably fell again in 2002, so that is alarming too.

Worse, the Doha trade round is in serious trouble. Now I know most people's minds cloud over when trade rounds crop up. Mine does. But Doha matters because it made a start at attacking the one set of trade barriers that still exists: agriculture. The really disgraceful aspect of post-war trade liberalisation is the continued protection of its farmers by almost the entire developed world. This is the fault of the EU, Japan and the US administration, with the blame being partitioned depending on who you speak to. (The only large developed country with a half-decent post-war record on this is the UK, but we had to dump our sensible subsidy system, which gives our consumers world prices for food, when we joined the Common Market.)

Doha started to offer the developing countries a better deal but it requires co-operation between the EU, the US and Japan. Within the EU, the French position is the hardest – it was this that provoked the spat between Messrs Blair and Chirac prior to the present froideur. In the present climate it is quite hard to see the EU and the US splitting their differences on this.

As I said, a system assembled painstakingly over half a century will not collapse overnight. It is so massively in the self-interest of the entire world for trade to become more liberal you would imagine something will be patched up. But be it out of pique, arrogance or stupidity, politicians sometimes act against their constituents' long-term self-interest.

The worst thing would be a retreat for multilateralism – the whole world of international rules governing finance and trade – and a descent into competing beggar-my-neighbour trade blocs. It is easy to see the process. First, some minor trade spat, like the row over steel, escalates with retaliation and counter-retaliation. Then some country, enraged by this, digs itself into a diplomatic position from which it cannot retreat. Next, the developing countries, en bloc, reject Doha. Then either the EU or Nafta declares itself no longer bound by international trade rules. And world trade would plateau – and start to retreat.

Unthinkable? Well, that chasm at the UN over a second Iraq resolution would have been pretty unthinkable until about a week before it happened. Things do fall apart; sometimes the centre does not hold.

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