Lori Wallach in the Boston Globe

Calls grow for a new model for global trade

Stock markets in Japan (top) and Brazil went through another tumultuous day yesterday. Many nations are sharing in the panic caused by the bursting of the US subprime mortgages bubble, just as they earlier shared in the wealth it created. (Michael Caronna/ Reuters)

By Robert Weisman Globe Staff / October 9, 2008

Now come the second thoughts on globalization.

Never before have world markets been so integrated. And yesterday's concerted interest rate cuts by central banks in the United States and other countries from Britain to China was a signal that the financial crisis rippling around the globe has grown too big for any one of them - even the US Federal Reserve - to contain on its own.

It also could mark the start of an effort to overhaul the global financial system conceived at the 1944 summit in Bretton Woods, N.H., which set the rules of international commerce for industrial countries.

That model, developed in an era of slower communications and simpler financial transactions, has proved inadequate to govern today's rapid flow of capital across borders. The World Bank's president, Robert Zoellick, this week called for a "new multilateralism."

"We're going to have to build new international financial institutions," said Joseph L. Bower, a professor at Harvard Business School. "Bretton Woods was relatively primitive. We live in a world where trillions of dollars are moved around the globe daily. No one at Bretton Woods imagined that."

The alternative to a new trade model could be a rollback of global business as the voices clamoring for financial controls and trade barriers grow louder.

"At a time of recession, a lot of people will want to look inward," said Bruce R. Magid, dean of the Brandeis International Business School. "We may see a move toward more protectionism. On both the trade and the capital side, there are going to be second thoughts about the free flow of goods and currency."

Critics of global trade and finance, long a vocal minority in many countries, including the United States, have based much of their opposition on such historical factors as job migration. Now they see their cause gaining momentum as lawmakers push for tougher oversight and financial restrictions to stem the mayhem in world markets. US Representative Barney Frank, Democrat of Newton, has called for stepped-up regulation of investment banks and other financial institutions.

"There's going to be a large push for re-regulation," said Lori Wallach, director of Public Citizen's Global Trade Watch, a policy advocacy group in Washington. Wallach said trade pacts have undermined safeguards for workers and consumers worldwide.

"We're seeing the fruits of three decades of deregulation of the financial markets," said Tonya Hennessey, project director at CorpWatch, an antiglobalization group in San Francisco. "Because of that, we've had this complex packaging of securities sold around the world. There's no choice but to go back to strong regulation."

The fear is that fresh regulations or restrictions on the flow of capital could make it more costly and complicated to do business in other countries, said Christopher Meyer, partner at the Monitor Group, a global strategy consulting firm in Cambridge.

"There'll certainly put a damper on the global financial system," he said.

Global commerce, accelerated by technology and the interlocking of financial markets, held the promise of increasing wealth everywhere. For decades, many argued it was doing just that.

As recently as this summer, some economists suggested European nations and developing countries such as China, India, Russia, and Brazil were growing so fast - and spawning such large numbers of middle-class consumers - that they effectively had "decoupled" from the magnetic pull of the US economy. That meant they could weather the turbulence roiling the American economy.

But that theory proved to be an illusion. Just as other countries shared the wealth created by the bubble in US subprime mortgages, as overseas banks snapped up assets backed by those loans, they're now sharing in the panic caused by the bursting of the bubble.

"We're all in this together," said Harvard's Bower. "And we're all connected through the financial markets and through our trade relationships. It turns out that financial institutions in other countries had invested in our instruments. Why on earth the banks in Iceland would invest in US subprime mortgages is something we'll find out."

While the web of global connections is being sorted out, the trans-Atlantic blame game already has begun. Foreign leaders have been carping about US financial stewardship in recent days, even while calling for more collaboration to resolve the financial crisis.

Russian President Dmitry Medvedev said US "economic egotism" was a contributing factor. French Economy Minister Christine Lagarde, referring to the collapse of a US investment bank, said, "We're not going to tolerate a Lehman Brothers scenario." And British Prime Minister Gordon Brown, in an implicit criticism of US actions, said Britain had "led the world" with its financial rescue plan.

So far, leaders have stopped short of threatening to dismantle global business ties. But even before the recent financial contagion, trade deals were increasingly unpopular in countries where workers complain jobs have been shipped abroad.

In the United States, Congress has not renewed the president's "fast track" authority to negotiate new trade agreements. President Bush has been unable to conclude bilateral trade deals with Colombia and Panama. And the so-called Doha round of talks conducted by the World Trade Organization, aimed at lowering barriers to international commerce, have failed to produce agreements.

"They're going nowhere now," Alan Tonelson, research director at the US Business & Industry Council, a Washington business group that has been critical of US trade policies, said of the proposed new international trade pacts. "They're dead in the water."

Last month, a report from the council said the most globalized industries in the United States, such as manufacturing, agriculture, and mining, saw cumulative growth of 38.4 percent over the past decade, just over half the 66.8 percent growth of the entire US economy. Industries unaffected by global trade, such as healthcare, construction, and personal services, grew 73 percent.

"When you see that our most globalized sectors have lagged behind the economy as a whole, that tells me that our globalization policies have failed the economy," Tonelson said.

But many think global business has passed the point of no return, even if governments tinker with its regulatory structure.

"Our global economic infrastructure is out of date," said Magid, the Brandeis business dean." I think you'll see a period of retrenchment, the development of new rules and regulations. There's going to be a pause. Whether it's good or bad, it's needed."

Robert Weisman can be reached at weisman@globe.com