Global challenges to multilateralism
WTO must step up as the world is plagued by economic, climate, and trade crisis.
The forces of globalisation have always taken both the developing and developed countries by surprise. Just as increasing trade in goods and services has integrated the global economy, the ongoing tariff wars between the US, China, EU and other countries, has also spread through these networks to affect most countries. Indeed, the changed global reality has sprung new public policy challenges not just for individual countries, but also the world as a whole and highlighted the need for multilateral responses as never before.
In my view, there are three crises facing the world which will test the limits of the existing multilateral framework. These are the economic/financial crisis, the Climate Change crisis, and the trade crisis. To address these, there has been a flurry of meetings at the highest level since the Paris Accord as well as the recent tariff wars. Needless to say, if the countries don't back down, we will be back to the recession years, when the Smoot-Hawley tariffs in the US in 1929-30 had led to competitive tariff hikes and worsened the recession of the 1930s.
An efficient and stable global financial system ensures that foreign investment and capital move around with predictability. It also acts as a lubricant in the international trade of goods and services. Such a financial system is, therefore, a classic global public good. Similarly, we know that the WTO facilitates free trade by providing a rules-based platform for negotiating tariff cuts and greater liberalisation in goods and services trade. To that extent, trade liberalisation is a global public good. Finally, managing the deleterious effects of Climate Change is also a global public good. Everyone stands to gain if CO2 emissions are reduced. I believe that the three international mechanisms to address the three issues are under threat.
The three global public goods are classic prisoners' dilemma situations: i.e. situations where members maximise individual benefits, rather than collective benefits. That said, it also needs to be mentioned that the global response so far has not inspired much confidence. While the Doha Round is as good as dead, the Climate Change discussions have given an accord but eluded a consensus. Finally, the silver lining is that the economic/financial crisis is behind us, but it took a toll and has slowed down global economic growth. In any case, these crises are far too important to be ignored and multilateralism can't be allowed to fail. If a solution is not crafted, we will see a continued rise in protectionism and no caps on emissions. Climate wars will spill into trade wars in the form of border measures and the economic crisis will continue to impact trade flows. We can see that the consequence of letting each of the crisis drift is being felt most in the WTO through an increasing burden on the dispute settlement mechanism and a declining faith in negotiations and diplomacy.
In short, the need to have a supply of 'global public goods' such as a Climate Change accord, a global financial regulation, and a global trade agreement means that we need to ensure that global collective action dilemmas such as emission cuts, global financial regulation and tariff cuts are overcome. For this, incentive structures need to be tailored to suit the needs of all the countries involved.
The economic/financial crisis
Arguably, the financial crisis in developed countries has its roots in the repeal in the USA in 1999 of the Glass-Steagall Act of 1933. Recall that the 1933 Act had separated commercial and investment banking in response to the banking crisis of 1933. There was a felt need to separate the business of deposit-taking and lending (to be carried out by commercial banks) from the business of underwriting and issuing securities (to be carried out by investment banks). Clearly, the lessons of 1933 were forgotten and, in 1999, the Act was repealed after hectic lobbying from banks. The repeal took the US financial system back to the pre-1933 days with bankers and brokers again becoming indistinguishable. As a result, banks such as American Express and Citicorp began to accept deposits as well as trade in securities such as collateralised debt obligations and mortgage-backed securities. Even as recently as a year ago, one could see op-eds in financial newspapers about keeping investment banking far from the regulatory embrace of the Federal Reserve or the Securities and Exchange Commission in the US. Even the Federal Reserve, under the chairmanship of Alan Greenspan, not only agreed to the logic forwarded by the investment banks, but also encouraged such logic by stating that regulation of these banks would stifle financial innovation and, hence, would lead to a squeeze in the credit and financial markets.
This new freedom of investment banks led them to create and experiment with new financial tools such as collateralised debt obligations (CDOs), asset-backed mortgages (ABMs) and other derivatives. This was manifested fully in the housing sector, where, unfit borrowers got loans on liberal terms and the lenders repackaged and resold such loans to others as CDOs or ABMs down the line. This continued until a situation was reached where the asset underlying the security was unclear. The crisis slowly spread to the financial sector, first in the US and then to other OECD countries and then to the whole world.
The response to the crisis was quick and seen on the following fronts, predominantly by the G20 group of countries:
-Stabilising financial markets and enabling families and businesses to get through the recession.
-Reforming and strengthening the global financial and economic system to restore confidence and trust.
-Putting the global economy on track for sustainable growth.
At the multilateral level, the role of the IMF was limited to raising resources and supporting banks through adequate capitalisation while meeting commitments of development assistance. Oddly enough, the WTO was on the sidelines, even though it should have been debating various issues and raising questions related to financial services arising out of bailout actions.
The most glaring instances where such questions become immediately relevant were those of AIG, which had 80 per cent ownership and Citibank, which had 33 per cent ownership by the US government at the end of the bailout. The US had already violated its commitments at the WTO in doing so.
Not only should such issues be debated in the WTO, but also, a more serious effort to have disciplines in subsidies should be undertaken. In the absence of such efforts, the dispute settlement mechanism is likely to come under increasing pressure. More the loopholes in the WTO law, the more will be the resort to courts. In particular, developing countries have a vested interest in preserving and strengthening the multilateral framework since they would be harder hit in the event of similar mishaps in the future. This is simply because developing countries have too many development challenges where the resources would be required and it would be impossible for them to sponsor the mega-bailouts that we witnessed in the decade beginning in 2010.
Indeed, even today, developing countries continue to experience tighter credit conditions, higher interest rate spreads etc.
(This article is the first of a two-part series. The author is Principal Resident Commissioner, Government of West Bengal. The views expressed are strictly personal)