Sources of the WTO’s woes: Decision-making’s impossible trinity

Richard Baldwin, 7 June 2010

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Compared to other international organisations, the GATT/WTO is a huge success. It presides over a rule-based trading system based on norms that are almost universally accepted and respected. Disputes are adjudicated by an international court whose rulings are almost universally implemented. Its membership is almost universal and it makes decision by consensus.

Most importantly, the GATT/WTO achieved its mission – the establishment of an open and rules-based trading system. Its 1940s contemporaries – the IMF (set up to maintain a fixed exchange-rate system), the World Bank (set up to alleviate world poverty), and the UN (set up to keep world peace) – can argue that they accomplished their mission only via a very complicated helix of logic and redefinition.

Despite this relative success, the WTO is widely viewed as suffering from a deep malaise. Susan Ariel Aaronson (2010) wrote on this site: “Many observers believe the WTO is condemned to irrelevance if it does not find common ground among its 153 member states on the Doha Round – now in its tenth year.” In 2009, Martin Wolf wrote an essay for the European Centre for International Political Economy – the title was simply: “Does the Trading System have a Future?”. Pessimism and fatalism are the hallmarks of most of the many commentaries on the WTO.

The negative commentary on the WTO stems from a comparison with its predecessor – the GATT – not other international organisations. After all, how much international cooperation have we seen in the last ten years on climate change, banking regulation, human rights, nuclear proliferation, or any other issue?

Why was the GATT successful?

In a new CEPR Policy Insight posted today, I explore the source of the WTO’s woes, starting with an account of the GATT’s wins. The GATT’s success, I believe, rested on two political economy pillars:

1. The juggernaut mechanism

To put it starkly, GATT did not work by directly fostering international cooperation; it worked by rearranging political economy forces within each nation so that each nation’s government found it politically optimal to remove tariffs that they previously found politically optimal to impose. And such cuts created political economy momentum – weakening protectionists and strengthening mercantilists. A set of GATT rules – especially “tariff bindings” plus the threat of measured retaliation meant that the mercantilist-protectionist-link did not depend on a nation’s own government between rounds; it was enforced by retaliation decisions of foreign governments.

2. The “don’t-obey-don’t-object” principle + MFN

This allowed a consensus-based organisation of highly diverse nations to operate as if it were run by a small group of self-appointed, like-minded nations with big economies. Developing nations did not block progress as they were excused from tariff cutting and free riding (the GATT’s most favoured nation (MFN) principle) gave them a stake in completing rounds.

Central assertion: The impossible trinity

The central assertion of the Policy Insight is that many of the WTO’s woes – and a great deal of the delays and difficulties in starting and concluding Doha – stem from the way the Uruguay Round’s endgame eliminated one of the GATT’s most effective consensus-building tools and pushed the WTO into decision-making’s “impossible trinity” (consensus, universal rules, and strict enforcement).

The Doha Round may conclude despite the trinity. Indeed, WTO groupthink in May 2010 on what is needed to close the Doha Round fits comfortably into the juggernaut’s magic hands. Some mercantilists want more and some protectionists think they have already given too much – exactly the sort of situation faced by the GATT at the end of every round. Indeed, the GATT/WTO was designed precisely to strike such deals. One big difference is that it took a very long time to find the right set of “Green Room” nations to make the final trade-offs.

Looking ahead

Looking ahead, the paper’s analysis of the GATT’s wins and the WTO’s woes suggests that getting the WTO to confront 21st century challenges in a timely manner will require a modification of at least one of the impossible triangle’s corners. Doing another Doha will not work.

Assuming Doha does finish, the next round is unlikely to be concluded before 2020 or 2025. That will not be soon enough to address the pressing problems facing the world trade system. It will not work, for instance, in sorting out conflicts between national climate policies and WTO rules, or updating trade rules to match modern commercial realities, or magnifying the trade system’s contribution to climate adaption and mitigation. Solving the consensus problem with the big-package tactic will not be fast enough.

There are at least three ways to weaken the impossible triangle. 

  • Striking plurilaterals (like the Government Procurement Agreement) erases the consensus and the universal-rules vertices but only for particular issues (Lawrence 2006).
  • Signing RTAs erases the consensus and the settlement of disputes vertices but only for sub-groups of WTO members.
  • Weakening the settlement of disputes vertices, or restricting its authority to Marrakesh issues, erases the strict-enforcement vertex for all members but only for certain issues.

All three ways deserve greater study and the wisest path may involve a portfolio of all three. Without explicit WTO reform however, it is absolutely clear which will win. Over the past ten years, WTO members have “voted with their feet” for the RTA option. Without a reform that eases the impossible triangle, this trend is likely to continue – further eroding WTO centricity and possibly taking it beyond the tipping point where nations ignore WTO rules since everyone else does (Baldwin 2008).

This would put the world trade system back to power politics as usual – a 19th-century-style “Great Powers” trade system. The GATT/WTO would go down in future history books as a 70-year experiment where world trade was rules-based instead of power-based.

This is a scenario that all WTO members should have an interest in avoiding. The first steps in avoiding it would be to identify and agree upon reforms that would buttress WTO centricity. What those steps might be is an important subject for future work.

References

Aaronson, Susan (2010). “How disciplining China could save the WTO”, VoxEU.org, 9 February.

Baldwin, Richard (2008). "The WTO tipping point", VoxEu.org, 1 July.

Baldwin, Richard (2010) "Understanding the GATT's wins and WTO's woes", CEPR Policy Insight No.49, 5 June.

Wolf, Martin (2009), “Does the Trading System have a Future?”, European Centre for International Political Economy.
 

Topics: International trade
Tags: Doha Round, international trade, WTO

Professor of International Economics, Graduate Institute, Geneva; Director of CEPR; VoxEU.org Editor-in-Chief

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