209 – The future of WTO

Posted on February 3, 2013 by


159 member states are about to select the new WTO Director General. I’ve attended a beauty contest among some of the candidates. Their personalities are impressive. But what about the policies they should implement in the organization?

An impressive success for the treaty system

The WTO treaty system is all about reducing barriers to trade – intended and unintended. Over the last 50 years the record of liberalization has been impressive. The system has also proven resilient: we have gone through possibly the gravest economic crisis of the last 70 years and the surge in trade restrictions has been contained[1] (admittedly, currency manipulation has been used increasingly to alter trade flows).

Not only has WTO’s membership increased from 35 to 159: trade barriers in over 5000 sectors (and one has to add services to this number) have dropped drastically. Disputes are settled within WTO framework – and the system works, albeit slowly.

While one may always aim for improvements, one might be allowed to point to the solid achievements that have been obtained. I’d call it one of the great success stories of the post-WWII years. The platform that constitutes the WTO treaty system is a solid one. Sure backsliding is always possible, but compared to the excesses of the ‘30s such an implosion is implausible.

The Doha Round is stalled

The WTO treaty system is based on negotiating rounds lasting several years. The last successful one was completed in 1994. Launched in 2001, the Doha Round[2] appears stalled.

There are infinite reasons for the stalemate. Let me pick a few.

The treaty system in “state-driven” – it depends on the will of the parties. Not only has the world become multi-polar, but the relative “weight” of the major countries is shifting rapidly. China has become the “producer of last resort” – and China was a country that in 1978 produced little of value for international market. Yet China is to shed 80 million low-paying jobs soon as it shifts from export to internal consumption to fuel its continued growth. BRII(C)s are fast on the heels – and Africa is advancing. Add to this monetary and financial turbulences linked to the overbearing preponderance of the financial sector. Under the circumstances steadfast leadership is more difficult to obtain.

Among the major outstanding issues of the Doha negotiations one might further flag the scope and duration of “special and differential treatment” to be granted to emergent economies and borne by developed economies.

Additionally, the sheer complexity of the consensus-based negotiating process adds to the confusion. When so many countries negotiate on so many sectors – and all the deals have to be on a “most favored nation” basis, we get gridlock easily. The “nothing is agreed until everything is agreed” rule adds oil to the fire: just too many possible combinations and permutations. “Formulas” have been introduced, but these abstract solutions lower transparency and may yield unintended effects. Politicians are wary of such solutions, which seem akin to cutting the Gordian knot and are difficult to sell nationally.

More fundamentally, globalization finally has transformed what were once bilateral trade flows into complex trading structures poorly reflected in trade statistics[3]. Trade flows have become opaque, making policy prescriptions increasingly difficult. Add to this the likely impact of UNFCCC on trade flows, as well as increased volatility in raw materials’ prices. Seeing the forest for the trees has become more difficult.

Unsurprisingly, “clubs of the willing” – Regional and Preferential Trade Agreements – have proliferated. As countries solve their most pressing trade issues in this way, the incentive to go for multilateral solutions is reduced.

Looking ahead: globalization as emergent complex system

To quote WTO DG LAMY: “the world is multi-polarizing at an unprecedented scale and speed. Production and trade value chains are multi-lateralizing.” This is undoubtedly true, but it fails to highlight the qualitative change accompanying the multi-lateralization process.

Trade globalization dissolves national boundaries and creates an emergent complex trading system in which every country has a stake, but it cannot shape to suit its own interests. When firms have cut their national moorings and float free in the fluctuating world of world trade, when firms no longer are “national champions”, then the national interest is primarily in the good functioning of the system as a whole, rather than in bringing home a sectorial advantage (and in fact this approach my turn out being ephemeral or even counterproductive). The perspective needs to be changed – to use a cliché – a new paradigm is needed.

No longer is a “balance of interests” the sole or primary criterion for the negotiating outcome; rather it is the perception of a stable and resilient system that serves all “well enough” and on which all countries can intervene constructively to strengthen it against vicissitudes and “black swans.”

This implies a change in mindset from “talionic cultures” where national autonomy and payback is the sole criterion for action[4] to one of shared responsibility. This will not happen overnight, not through a revolution, but by many small steps that familiarize us with the ever surprising reality.

To put it another way: freedom is not protected by a vacuum of power, but by sharing a common project for which we share collective responsibility. That’s why democratic constitutions protect free markets, and society has to secure an protect the rights of participants.

This implies that beyond trade liberalization – which sooner or later will be obtained (but for exceptions or back-sliding events) – a world-wide structure is needed in which trade can flow to the advantage of all. Such a structure needs an institution to anchor it, and this is what WTO is bound to become eventually. As we near the primary goal of trade liberalization states need to look beyond and be aware of the ensuing task of identifying and confronting the inevitable novel challenges that may surprise the world of trade.

Farewell Ye Rounds

The “rounds” approach dates back 50 years and relies on “batch-processing” of trade issues. Is it still useful in a complex trading world that moves on continuously, and fast? The cycles last too long, and one justification – to prevent back-sliding while negotiating is in process – would seem dodgy.

What could come after – or in place of Doha? Her some proposals.

A biennial “state of international trade” ministerial review based on an impartial Trade Development Index may be fruitful, particularly if it leads to quick adaptive solutions for critical “nodal hot spots” that have been identified and targeted for immediate action. Many small steps would replace the overlong strides of yore. This approach might allow a more differentiated view of trade expansion, and a better appreciation of trade flow structures than a “flat earth” multilateral approach.

In such a paradigm it would be natural for the WTO Secretariat to provide the impartial overview and identify the “hot spots” – this even more as trade issues tend to spill out over more than one sector or bilateral setting.

Trading System Governance

Existing functions of the trading system need strengthening. One mentions regular trade policy reviews. Standard dispute settlement will be reinforced. There might be room for innovation here: just as in commercial transactions arbitration – a quick and fast solution to a dispute, but without binding precedent effect – might be considered. The WTO Secretariat might create an independent unit to assist in this “fast-track solution”.

When WTO-DG LAMY says: “The thickness of borders today costs two to five times more than import tariffs, depending on whether you look at macro or micro economic impact studies”[5] one would be inclined to put good governance of the trading system by all parties on the front burner. Trade facilitation is on the Doha agenda. The outcome should evolve in an ongoing process aimed at changing the “customs cultures” and bring about convergence worldwide. Nationally minded authorities too often fail to perceive import/export simply as part of doing business.

There is however what one could call a further “pillar” to the WTO system: it is a deep and timely understanding of the trading system and beyond that of the globalization process. There is more to globalization that tariff reduction. Beyond what is being done (and this a lot already) innovative research and statistical analysis of trade flows, of value chains, and more, should aim to obtain a multi-dimensional “state of international trade”.

Reconcile Regional and Preferential Free Trade Agreements

The multilateral side or trade policy has viewed R/PTA with misgiving – the term “spaghetti bowl” is cliché. R/PRA are notified, but a review under WTO rules has been neglected.

These agreements are a fact of life. Rather than worry about conformity with WTO rules a more useful approach may be a concerted and constructive effort to reduce discrepancies with multilateral rules. Their perception as “blocks” might be replaced by one of components of a structured international trading system. A first are would be the streamlining of preferential origin rules.

Involve private sector

Under the main heading “WTO and you” the organization’s website recognizes journalists, students, Parliamentarians, and NGOs. It is slightly puzzling that those who are directly affected by the international trading system – firms that in one way or another trade over the border – have no dedicated portal in the organization or specified and institutional role to play. Of course contacts take place, but what is needed is a definition of the private sector’s role in managing the trading system.

The current situation reflects the traditional approach where the state was the sole representative of the national interest. In a complex trading system, where many firms have become “transnational”, the role of the country of origin loses focus. At least in the problem-defining and the solution-shaping phase (i.e. in setting the agenda, the objectives, and a list of desirable outcomes) the voice of the private sector should be recognized directly and in a structured manner. Firms should have a choice of channel in which to voice their concerns. This would be the best way to secure their support for the process. Involving the private sector in a multilateral structure might collaterally lead to more nuanced national positions and may become a stabilizing factor (not to speak of chances of getting agreements through Parliament).

Climate change challenge

If trade and development can, in some ways, be seen as complementary in their effects, particularly in the area of climate change compromises between trade and environmental protection may be necessary. At the moment the two processes coast along in parallel. One might consider creating docking stations between the two processes to resolve conflicts achieve synergies.

A strong WTO Secretariat

If the underlying theme is accepted – that the international trading system is a complex structure with emergent solutions – the role of the WTO Secretariat changes fundamentally. No longer it is simply the “servant” of the “member states”, but it is foremost their “eyes, ears, and analytical body”, where emergent realities are quickly spotted and set in a framework for action by the WTO Council.

As WTO becomes the locus where collective management of the international trading system occurs the Secretariat might take on a more pro-active stance. Its active role is to look beyond the equilibrium of particular interests to the functioning and resilience of the system as a whole, and to identify weaknesses in the system needing attention.

No eutopia

Complex systems are realities. We encounter them everywhere, and we use them unthinkingly. We understand them poorly. What we know, however, is that they yield more – and different outcomes – than just a balance of opposite interests. Adam Smith dimly perceived the “invisible hand”. Globalization is confronting us with such a complex system and an “invisible hand” of its own. Only if governments move from “looking out for oneself” to creating common and fair rules will the system become stable and resilient. This is a creative and learning process[6]. This is the long-term challenge ahead.

[1]           WTO Director General Pascal LAMY has indicated “the accumulation of post-crisis trade-restricting measures now affects around 3 per cent of world trade. http://bit.ly/XbBWVW

[2]           http://bit.ly/14zPkuf

[3]           http://www.wto.org/english/news_e/sppl_e/sppl261_e.htm . See also : World Economics Journal, January 2013 : The OECD and the WTO have released an extremely important set of new international trade data which in the long-run may revolutionise the way current trade imbalances are discussed in public narratives. Trade in Value-Added (TiVA) data is a new way of presenting economic reality as it seeks to take into account the increasing dispersion of production chains across the world. Current trade statistics record the gross flow of goods and services each and every time they cross borders; the inaccuracy of this method of measurement is exemplified by the Apple ‘Made in China’ question, where the iPhone is considered to be a Chinese export to the US despite the product being entirely designed and owned by a US company, and being composed largely of parts produced in several Asian and European countries. The TiVA database is an attempt to redress this flaw by measuring only the value added to a product by each country. It thus also better reflects the importance of services in creating goods. Whilst there are, at present, limitations to the widespread calculation of trade in value-added data, this OECD-WTO initiative is to be applauded for providing a more revealing look into global trade and integration, and for paving the way for further development in this area.

[4]           William Ian MILLER (2006): Eye for an eye. Cambridge University Press, Cambridge.

[5]           http://bit.ly/XbBWVW

[6]           Robert C. H. CHIA and Robin HOLT (2009): Strategy without design. The silent efficacy of indirect action. Cambridge University Press, Cambridge, U.K.;  xii + 248 pp.