Author: Uri Dadush
Originally published by the Carnegie Endowment for International Peace
For the first time, the G20 communiqué has omitted any reference to a Doha completion deadline. This surprise raises questions about not only Doha, but also the role of the World Trade Organization. As the ultimate regulator of global trade, the WTO is an integral part of the world trading system, but it is only one part: national laws and regulations in some 200 countries, several hundred bilateral and regional treaties, and dozens of plurilateral agreements also govern international trade.
Deepening international integration, increasing influence of new players in the WTO, and growing complexity of the trade issues have made enacting comprehensive multilateral agreements more difficult—a trend spectacularly obvious in the Doha Round—and now threaten the efficacy of the WTO. Though regrettable, this does not necessarily represent a disaster for the world trading system or for world trade, as regulations and agreements outside of the WTO have, to varying degrees and in different ways, made trade more predictable and increasingly open in recent decades and are likely to expand. Furthermore, there are increasingly powerful economic incentives to maintain trade open. Nevertheless, the WTO can take important steps—from supporting autonomous, regional, and plurilateral liberalization processes to binding existing agreements—in order to further promote open trade and reaffirm its role, thus making the world trading system stronger and more resilient.
More than the WTO
The WTO has certainly played a pivotal role in securing trade since it was established in 1995. Its influence is clearest in the accession of China and other countries and its settlement of disputes. Attempts to promote multilateral liberalization and bind existing agreements have been significantly less successful, however. In fact, according to Will Martin and Francis Ng of the World Bank, multilateral agreements accounted for only about 25 percent of the large liberalization in developing countries over 1983–2003, while autonomous changes in national law were responsible for the overwhelming majority (roughly 66 percent) and regional and bilateral agreements accounted for the rest.
Today, a similar analysis would almost certainly find that autonomous liberalization continues to dominate but that bilateral and regional agreements have increased in importance. Multilaterally-negotiated liberalization, on the other hand, has stalled since 1995, when the Uruguay Round was concluded and the WTO was created, as has the binding of tariffs and subsidies. The Doha and, in the view of many, Uruguay Rounds have been disappointing. During the Uruguay Round, agriculture, services, and intellectual property were firmly brought into the WTO for the first time but progress on multilateral disciplines in these sectors has been excruciatingly slow.
Despite the stall at the WTO level, world trade has continued to advance at historically unprecedented rates. Over the last 25 years, world trade has grown about 5 percentage points faster than has world population, compared to about 1 percentage point faster from 1870 to 1950. While many factors, including transport innovations, communication technologies, and economic growth, help account for this, liberalization clearly helped—even as multilateral trade negotiations stalled.
Most recently, WTO disciplines helped keep protectionism in check during the crisis, allowing world trade to recover at the same spectacular rates at which it fell. However, the increasing worldwide dependence on trade for production (trade in components and intra-firm trade has soared) as well as consumption (consumers have become accustomed to a diversity of imported products), as well as fears of retaliation inside and outside the WTO, must also have played an important role.
A more demanding international context for multilateral processes
Looking forward over the next twenty five years, it is difficult to see how a slow-moving WTO, dependent on the consensus and single undertaking principles (which require that virtually every item of the negotiation be part of a single package, and that everyone agree), can produce timely results. Four salient features of the post-crisis world economy will further challenge the current WTO set-up if it continues in the future.
First, advanced countries are no longer able or willing to lead the process. Slow domestic growth, unaffordable entitlement spending, and high and rising public debts—which are predicted by the IMF to reach 120 percent of GDP on average in advanced countries by 2050—will make the United States, Europe, and Japan more self-absorbed and defensive than they have been in the past. Europe’s large internal imbalances, exposed by the Greek crisis, will make things worse.
Second, the trading system is increasingly multipolar, with China, Brazil, and India playing a much larger role, reflecting the relative ease with which they navigated the crisis and their rising economic weight. These countries are, however, more focused on development and on dealing with huge internal poverty gaps than on leading a free trade offensive, even if the advanced countries were inclined to let them.
Third, though the rise of these economies opens vast new markets, advanced countries increasingly view them as powerful commercial rivals, rather than as poor cousins in need of assistance—directly counter to the declared motivation of the Doha Development Agenda.
Fourth, many complex issues, including services, investment, agricultural subsidies, and the import of manufactures in developing countries, remain de facto outside the WTO’s reach. Though most technically fall within the WTO, imposing disciplines on them in a highly differentiated and rapidly changing development context has proven difficult, and, as the weight of developing countries in negotiations rises, the difficulties are likely to increase. Formidable vested interests in both the developing and industrialized countries will continue to oppose the resolution of these issues.
These trends are likely to be with us for a long time. For example, in a generation or so, over half of the ten largest economies will be developing countries, China will be the major trading partner of most nations, including the United States and Germany, and, while developing countries will double their share of world trade to 2/3, they will remain relatively poor.
Future scenario
How, then, will the trading system evolve over the next generation? Here is the author’s best guess:
- Growth: In the absence of macroeconomic collapse or major geopolitical strife, trade will continue to grow rapidly, driven mainly by rising living standards in developing countries and the spread of technology there.
- Autonomous Liberalization: Autonomous action will continue to account for most trade reforms, in areas as varied as the EU’s common agricultural policy, financial sector liberalization in India and China, and the facilitation of FDI across the poor countries.
- Bilateral and Regional Agreements: Agreements will proliferate at this level, with the more successful ones seeking to deepen and broaden reforms on services, investment, and government procurement. However, selective agreements among the largest economic blocks, such as an agreement on services trade and regulations between the United States and the EU, may represent the next wave of regionalism, further undermining the multilateral process.
- Plurilateral Agreements: An increasing number of highly specialized plurilateral agreements may be negotiated outside the WTO, some bearing directly or indirectly on trade, including issues such as financial regulation, clean energy, and climate change mitigation. Plurilateral agreements may also come to address trade needs that remain unmet within the WTO—for example, duty free, quota free access to least developed countries in conjunction with a heightened effort to address the Millennium Development Goals.
- The WTO: The institution will eventually bring Russia—the sole G20 country that is not yet a member—into its fold and will continue to play an important role as enforcer of legacy agreements, which may at some point also include a heavily diluted Doha deal. However, the WTO will progressively lose share in enforcement too, as national courts and arbitration mechanisms for regional and plurilateral agreements gain weight. It will probably remain an important forum for discussing trade, as well as a source of analysis of trade trends, but multilateral liberalization will be at the margin of rapidly evolving trade relations. G20 and G8 sherpas—diplomats who prepare for the high-profile summits—will resist pressures to set deadlines that embarrass leaders and undermine the credibility of broader agendas.
Implications
This scenario is certainly not optimal for the WTO, but will it be bad for world trade? It will clearly mean increased complexity of trade relations, many lost opportunities for broader trade-offs and multilateral disciplines, and an increased possibility of backsliding if an economic crisis deeper and longer than the one from which we are emerging arises. But, the other forms of liberalization will help consolidate gains, and judging from the last twenty years, such a scenario will not necessarily spell disaster for world trade or the world trading system.
Can the outcome be better? Yes, but only if the WTO membership adopts a very different business model in negotiations. At the heart of the needed reforms—discussed extensively elsewhere—is increased flexibility and an improved ability to address the needs of individual countries and groups. What would this entail, exactly? Plurilateral agreements that provide a degree of protection to excluded countries; the WTO helping countries with autonomous trade reforms, as well as the shaping and negotiation of bilateral and regional agreements; and, last but not least, finding ways to progressively and selectively “multilateralize” the liberalization that has already occurred without attempting another unproductive and divisive global trade round.
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