Towards a new WTO: An institutional approach

Kent Jones 30 November 2015

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Why isn’t there more trade? The collapse of the Doha Round negotiations in the summer of 2008 raises this question, after a long postwar period of successful GATT-sponsored trade rounds. WTO members have somehow found it extremely difficult, in the 21st century, to reach a comprehensive multilateral agreement to expand mutual gains from trade. The failure has been attributed to numerous factors, including the unwieldy size and diversity of the WTO membership, the complexity of the issues, the inflexibility of the single-undertaking rule and lack of political will, among others. Whatever the reasons, further progress in comprehensive trade liberalisation will require the global trading system to adapt its institutional structure to the new global environment of trade.

Economists have long recognised the role of institutions in economic systems.  North (1990) identified the importance of institutions in reducing transaction costs and establishing rules that facilitate repeated interaction among participants, promoting more economically efficient outcomes.  In the GATT/WTO system, reciprocal bargaining and the most-favoured-nation (MFN) rule reduce the transaction cost of attaining nearly global market access for its members’ exports. Adherence to binding tariff reductions provides a way out of the prisoner’s dilemma of non-cooperative Nash equilibrium tariffs (Bagwell and Staiger 2002).  Commitments to trade policy rules and third-party dispute settlement reduce the uncertainty of future export market access and the risk of members’ backsliding and opportunistic rule breaking (Yarbrough and Yarbrough 1992).  Politically, these features help to build domestic pro-trade coalitions, and provide an anchor for each member country’s trade regime within the global system.  If everyone follows the rules, everyone will benefit from a stable trading system and from increased gains from trade.

Yet the success of earlier GATT-sponsored trade negotiations now appears to have been contingent on special institutional features whose effectiveness has weakened in recent years. In new book (Jones 2015), I argue that the WTO can no longer effectively pursue multilateral trade liberalisation under the framework inherited from the GATT.  The key problem lies in what Searle (2005) identified as the collective intentionality of the organisation, i.e. the fundamental goal of the participants in creating it.  The simplest goal of the GATT was to secure the gains from trade for all participating countries, but upon closer inspection this goal was always subject to political constraints, with terms defined primarily by the interests of high-income countries.  The text of the GATT revealed a balancing act between trade liberalisation and national sovereignty over domestic economic policies.  Thus governments could pursue interventionist policies as long as they did not interfere with basic GATT commitments, a provision John Ruggie (1982) described as embedded liberalism.  Even market-opening measures were subject to exceptions such as antidumping, safeguards, and balance-of-payments provisions for temporary trade restrictions. The political logic of these provisions was that they were necessary to secure domestic pro-trade coalitions.  The collective intentionality of the GATT could therefore be described as securing the gains from trade, subject to domestic policy space considerations.

Collective intentionality also defined the boundaries of trade negotiations.  In the early postwar years, GATT negotiations focused on manufactures, which were of great interest to the developed countries.  The negotiations largely excluded politically sensitive trade in services and most notably in agriculture, which was of special interest to the developing countries.  In order to accommodate their participation, GATT rules exempted developing countries from reciprocal market opening, and later expanded these provisions into broader special and differential (S&D) treatment (see Michalopoulos 2001).  This feature, which worked as long as developing countries had little to bargain for in the negotiations, nonetheless created a serious conflict with the GATT principle of reciprocity. Searle’s (2005) model identifies constitutive rules to be another pillar of economic institutions, including the rights and obligations of members, such as reciprocity, tariff binding, and access to and adherence to the rules.  The GATT framework had cleverly harnessed the mercantilist instincts of governments to regard foreign market access as the gain and import market access as the concession in trade negotiations.   Its success depended on the willingness of all participants to bring meaningful market access bargaining chips to the table, and it became clear in practice that valuable foreign market access could rarely be acquired without offering significant import market access in return.  However, when negotiations later expanded into agriculture and other sectors in which developing countries were becoming major global players, they took the legacy of S&D treatment to heart and sought to minimise the opening of their domestic markets.  During the Doha Round, they also claimed policy space exemptions from liberalisation measures they considered to be in conflict with their development programs. This provision was part of the original GATT, but had not played a significant role until much later, when active developing country participation became essential in order to negotiate an agreement.

The WTO thus found itself trying to expand negotiations into new areas, outside its own embedded institutional limits.  Developing countries became more numerous and influential in the WTO, and emerging market countries such as Brazil, China and India acquired significant bargaining power.  Diverging political calculations of trade-offs in the negotiations rose to the surface.  Agriculture, for example, is politically important in nearly all countries, but for different reasons.  In most high-income countries, it uses its political influence to maintain its relatively wealthy position, but in many developing countries its influence derives from the existential role of domestic subsistence-level food prices.   Exchanges of agricultural market access between developed and developing countries thus take on strikingly different political valuations between the two sides.  Services provide a similar example, causing trouble even among high-income countries.  Services market access is protected largely through behind-the-border regulations, which are controlled by government agencies outside traditional trade deliberations.  Domestic red lines arise quickly in these sectors.  It was therefore not surprising that the WTO could not gain traction on services negotiations, despite the rich harvest of gains from trade they offer.  In addition to these problems, the Doha Round did not address important new trade issues, such as the emerging pattern of supply-chain trade (see Baldwin 2014).  Progress on this issue compounds the WTO’s institutional problem by removing the traditional exchange of market access in favour of investment-for-trade deals, as found in bilateral and regional investment agreements.  The WTO is not designed for the trade-offs necessary to complete such agreements, which typically involve investment-related regulations in the host country and investor-state dispute settlement.

It is tempting to conclude that governments, in their Doha stalemate, have simply sacrificed economic for political logic by bending to domestic anti-trade forces.  Yet political barriers to trade agreements have always been present, and must be overcome in order to get an agreement.  An effective international economic institution will allow all participating decision makers to maintain the necessary political logic while achieving mutually advantageous economic goals.  GATT’s tariff bargaining on manufactures trade managed to accomplish this goal in the past.  It is now time to establish new WTO institutional structures to pursue the gains from trade in the 21st century.

Some signs of institutional reform are already present.  The 2013 Bali trade facilitation agreement introduced a new pattern of negotiating trade-offs, i.e. reduced administrative barriers to trade, mainly in developing countries, in exchange for technical assistance and capacity building aid to support these goals, provided by the developed countries.  Such aid-for-trade exchanges are likely to be necessary in any future broad-based multilateral trade agreements.  In addition, the laboratory for new trade agreements has been occurring largely in mega-regional negotiations, such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.  The proposed Trade in Services Agreement is also structured as a “regional” agreement under GATS article V among (at present) 23 countries.  All such regional agreements are inherently discriminatory and are therefore suboptimal economically; they also risk encouraging a defensive, exclusionary approach to trade liberalisation.  Yet such agreements, in expanding the scope of trade negotiations and the gains from trade, may yet create incentives among those outside the agreements to multilateralise them, thus driving negotiations back to the WTO.  It is also possible, although less likely, that subsets of WTO member countries can create special plurilateral agreements under WTO Annex IV.  The problem is that such agreements must abide by the consensus rule, even among non-participating WTO countries, some of which will usually have strong motivations to block them.

In the end, success in expanding global trade will depend on major trading countries’ willingness to seek new institutional paths to multilateral agreements, through new negotiating modalities, openness to the expansion of regional agreements to new members, and flexibility in structuring linkages across sectors, in setting red lines on policy space, and in establishing reciprocity expectations for members according to their development status.  These changes may then re-establish a collective intentionality that allows WTO members to find new common ground for multilateral trade agreements. 

References

Bagwell, K and R W Staiger (2002). The Economics of the World Trading System.  Cambridge, MA and London; MIT Press.

Baldwin, R E (2014). “WTO 2.0: Governance of 21st Century Trade.” Review of International Organizations 9 (2): 261-283.

Jones, K (2015). Reconstructing the World Trade Organization for the 21st Century. New York: Oxford University Press.

Michalopoulos, C (2001). Developing Countries in the WTO.  Houndmill and New York: Palgrave.

North, D (1990).  Institutions, Institutional Change and Economic Performance.  Cambridge and New York: Cambridge University Press.

Searle, J (2005).  “What is an Institution?”  Journal of Institutional Economics, 1 (1): 1-22.

Yarbrough, B and R M Yarbrough (1992).  Cooperation and Governance in International Trade. Princeton: Princeton University Press.

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Topics:  International trade

Tags:  WTO, institutions, Doha Round

Professor of Economics, Babson College

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