The WTO tipping point

Richard Baldwin, 1 July 2008

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Policymakers worldwide are focused on the finishing the Doha trade talks and this is certainly important. The world trade system, however, faces a much larger threat – the erosion of WTO centricity.

One reads much about protectionist backlashes yet the truth is that trade liberalisation is as popular as ever among policymakers. The new century has seen massive liberalisation of trade in goods and services – much of it by nations that disparaged trade liberalisation for decades. But unlike last century, almost none of this has occurred under the WTO’s aegis.

Poor nations have cut their tariffs, opened their services sectors, and embraced foreign investment unilaterally or in bilateral trade agreements. Rich nations have relied on regional trade deals to achieve their market-opening goals. The deals signed this century are not commercially important, but this will change if the European Union’s Asian initiatives succeed, especially if the United States feels compelled to follow suit. The emerging trade powers – China, India, and Brazil – have had worryingly favourable experiences with unilateralism and regionalism in the new century while their commitment to multilateralism is relatively untested. The one part of the WTO system that works well – the dispute settlement mechanism – is increasingly used as a substitute for negotiated liberalisation with the result that de facto compliance by the United States, European Union and others is eroding.

To date, these changes seem more like challenges than threats. The key players believe the world trade system will continue to be anchored by the WTO’s shared values, such as reciprocity, transparency, non-discrimination, and the rule of law. WTO-anchorage allows each member to view its own policies as minor derogations. Yet, at some point derogations become the new norm. The steady erosion of the WTO’s centricity will sooner or later bring the world to a tipping point – a point beyond which expectations become unmoored and nations feel justified in ignoring WTO norms since everyone else does.

A polycentric trading system?

No one knows what happens beyond the tipping point. My guess is that trade would continue to grow and the system would continue to function – but not equally well for all nations. Before the GATT was set up in 1947, the Great Powers settled trade disputes by gunboats or diplomats depending upon the parties involved. Only the naïve thought market access should be reciprocal or fair. A return to this “Belle Époque” extreme is unlikely, but a new Great Powers trade system is likely to emerge. Its core will be the US and EU networks of bilateral trade deals.

Domestic special-interest groups, newly freed from WTO constraints, would push the EU and US templates in divergent directions. Regional arrangements of the new trade powers and Russia could diverge even more markedly, since WTO norms have never fully been internalised by their domestic special-interest groups. This would be a world of “spheres of influence” and bare-knuckle bargaining.

All would lose in this post-tipping point world but not equally. The United States, European Union, Japan, China, and India have enough market leverage to defend their interests. Small nation would suffer much more as they benefit the most from the WTO’s consensus-based rules and negotiations.

Worse yet, moving towards a might-makes-right trade system would be extremely corrosive to global cooperation on the new century’s greatest governance challenges – climate change, pandemics, water scarcity, and the Millennium Development Goals.

What is to be done?

Finishing the Doha Round this year would be a good start. Failing that, leaders must ensure it slips into a quiet coma rather than noisy death throes. But this would not be enough. We must figure out why nations find it so attractive to liberalise outside of the WTO and then change the WTO in ways that restore its central role in trade liberalisation and rule making. The GATT has faced several such historical moments in the past, and GATT members reacted by adopting the necessary reforms. The time has come again for such an effort. Once the old norms are gone, it will be exceedingly difficult to agree to new ones; much better to adapt the WTO’s current norms to address the new century’s realities.

Topics: International trade
Tags: trade liberalisation, WTO

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

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