Zoho CEO Sridhar Vembu feels that the current World Trade Organisation regime is destined to collapse owing to the persistent and growing imbalances. The Padma Shri awardee’s comment comes in response to tweets from finance professor Michael Pettis who elaborated on how the WTO is failing to accomplish its goals.
In a series of tweets, Pettis said, For almost three decades, the World Trade Organization has been lowering barriers to trade and smoothing the path of globalisation.” But it pretty clearly isn’t accomplishing what it claims to want to accomplish.
As per Pettis, basic trade theory suggests that in a well-functioning global trading environment, rising trade volumes should accommodate declining trade imbalances. That’s because trade imbalances should lead automatically to domestic monetary adjustments that reverse those imbalances.
And yet during the past 3-4 decades, as barriers have declined, global trade has been increasingly dominated by a set of countries that run large, persistent trade surpluses and another set that run the large, persistent trade deficits that correspond to those surpluses, he adds
Noting that WTO has a 19th Century conception of trade, Pettis points out, “It believes that capital tends to stay at home and that trade imbalance are largely the consequence of tariffs and other forms of trade interventions.”
“It ignores the sources of trade imbalances in distortions in income distribution. Economies only run large persistent trade surpluses because their workers receive too low a share of their production to allow them to consume enough to import in line with their exports.”
The role of trade, in that case, is not to maximize global output by shifting production to its most efficient location. It is to allow countries to resolve their domestic income distortions by externalizing them.
The main problem with global trade, in other words, is not trade barriers like tariffs and quotas, but rather with a system that encourages (and even requires) that countries compete by directly or indirectly lowering wages, the finance professor says adding, “In fact the WTO actually makes it easier for countries to compete by lowering wages. The more they drive down frictional trading costs, the easier it is for countries to resolve their domestic demand deficiencies by externalizing them through persistent trade surpluses.”
Replying to it Vembu commented, “The present WTO regime is destined to collapse due to persistent & growing imbalances.”
Economic resilience demands that we balance production and consumption more locally, he added.
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