Global challenges to multilateralism
Failure to reach an agreement means that members will be free to invoke protectionist measures.
Climate Change Issues
At the heart of the Climate Change debate is the need to cap the emission of greenhouse gases. While the science, economics and politics have now converged on recognising the need to have such a cap, there is still no consensus on who will 'cap' how much. There are a number of multilateral, plurilateral and bilateral agreements/frameworks on Climate Change, of which the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol (KP) are perhaps the most well-known and crucial. The objective of the UNFCCC, which came into force in March 1994, is to ultimately achieve reductions in global emissions of greenhouse gases.
Unfortunately, the Copenhagen meeting in December 2009, billed as Kyoto II, has fallen short of expectations. In the meantime, there have been reports of some countries contemplating unilateral action such as border measures. Such border measures could be in the form of tariffs on goods that are not 'green' and would hence raise barriers to trade. Again, the role of the WTO is important in addressing such issues. The issue of Climate Change is built-in in the WTO mandate. The WTO also recognises the principle of special and differential treatment in seeking to protect and preserve the environment.
We need to remember that emissions targets will bring about fundamental changes in production processes and across most important sectors of the economy such as power generation, transportation, agricultural and animal husbandry practices, land-use and consequently on trade. This would be even more important for developing countries such as India, where the nature of emissions is very different from that of the developed countries. It is therefore crucial that we stay clear of remedies such as offsets, which have been alluded and instead adopt a cooperative solution as suggested by Sir Nicholas Stern. Further, any solution that does not take account of the challenges of poverty alleviation in developing countries and least developed countries will not succeed.
We have noted above that in both, trade and Climate Change negotiations, the key issue of discord is the proportionality of commitments and a regime of common but differentiated responsibility that must be overcome to facilitate such international collective action problems. But what exactly is this 'common but differentiated responsibility' in the context of the debate on Climate Change?
It is important to highlight three core issues here: the right to development, resource ownership and technological and financial assistance. Many developing countries have large proportions of their populations living below the poverty line. China and India have half of the world's poor between them. It is a fact that lower emissions can be achieved only by switching to cleaner investment and production processes – this is both time and resource-intensive. If the raised costs have to be borne by developing countries, what happens to the right to development? Moreover, many developing countries have large coal reserves and this is their only economically viable resource for transportation and power generation.
On the other hand, developed countries have already reached substantially higher levels of development and have greater access to clean sources of energy. They have also exported polluting industries such as chemicals, iron and steel and aluminium to developing countries. Developed countries also have access to the latest energy-efficient technologies. Is it therefore not fair that developed countries take the lead in the transition to a greener way of life?
Investment decisions taken in developing countries today involve choices about energy efficient production methods, modes of transportation, type of power generation systems etc. Such choices would determine the levels of greenhouse gas emissions for the next 50 years. In particular, there is a strong demand and pressure to invest immediately in available technology, especially in coal-based power generation systems.
It is obvious that carbon emission targets would have to take into account these core issues with the following components:
Establish 'carbon quotas' for each country, based on which a market for emissions trading can develop.
These quotas would be established in a fair and transparent manner and would be a function of important variables such as levels of development and resource-ownership.
This, in turn, will be factored into various economic decisions by businesses, consumers and the government and ultimately, a fair price of carbon will be established.
Assuming that each country establishes a fair price of carbon, the market for carbon would ultimately ensure an equitable global price for carbon.
Set up a mechanism for transfer of technology, R&D and carbon finance flows from developed to developing countries for a smooth transition to a low-carbon economy.
For this, developed countries will have to bear a substantially larger responsibility of reduction in the next 25-30 years. A part of this responsibility can be met by large-scale financing of large projects in power generation and transportation or retrofitting inefficient plants and encouraging carbon capture and storage in developing countries. Such a mechanism could be modelled on the Clean Development Mechanism (CDM), which was put in place in the Kyoto Protocol.
Trade issues and the Doha Round
Arguably, the compelling logic for trade continues to be the law of comparative advantage as propounded by David Ricardo, which was later modified by Heckscher-Ohlin to state that countries will export products that utilise their abundant and cheap factor(s) of production and import products that utilise the countries' scarce factor(s). Both these theories attempted to explain trade between countries with different characteristics. Krugman (1979), assuming consumer preference for brand variety, explained trade between similar countries as a function of economies of scale. Such economies of scale ensure that production is concentrated in a few countries, as a result of which, countries end up specialising in a particular brand of the same product, rather than in different products. In short, trade would occur if both the exporter and importer stand to gain as a result of which, the post-trade situation is superior to an autarkic situation. There is therefore sufficient theoretical grounding to argue that free trade leads to global welfare gains.
However, the journey from theory to practice is not straightforward, but the WTO seeks to ensure that maximum welfare gains are realised by getting members to commit to least trade restrictive policies and then ensuring that members stick to their commitments. Towards this objective, a number of trade rounds have been launched but the most momentous trade round in recent times has to be the Uruguay Round, which, not only led to the establishment of the WTO but also achieved a multilateral trade agreement of wide scope and coverage. The current Doha Round is equally ambitious since it seeks to address one of the stickiest issues: that of trade-distorting domestic support in agriculture in developed countries. Among other issues that the Doha Round has been addressing are tariff cuts in Agriculture and non-agricultural market access (NAMA), market access in services, rules for anti-dumping and subsidies and trade facilitation.
Even before the current trade war erupted, there were sticky issues that resisted a consensus. In brief, these issues were: agriculture (cotton subsidies, blue box and special safeguard mechanism), NAMA (whether sectoral participation has to be voluntary or mandatory), services (market access from developed countries' firms and service providers' access for developing countries) and rules (anti-dumping and subsidies). With the new positions on trade taken by the US, the Doha Round is all but dead. If developed countries had shown some magnanimity and come forth with proposals in agriculture and services, justifying the 'developmental' nature of the Round, the Doha Round could have been concluded long ago. A Doha deal would have incentivised developing countries and enabled them to seek approvals from their domestic constituencies for difficult issues such as market access in services and sectorals in NAMA. The continued government assistance to the agricultural sectors, particularly in the US and EU is an issue that will have to be addressed when negotiations resume.
A failure to reach an agreement would only mean that members would be free to invoke protectionist measures such as tariff-rate quotas, subsidies, anti-dumping duties and raising tariffs when in difficulty, just as they have done in the current crisis. Another consequence would be a rush towards Free Trade Agreements and Preferential Trade Arrangements, which we are witnessing. But, perhaps the most important consequence that will hurt developing countries would be an undermining of multilateral rules and a resort to unilateral action as mentioned at the beginning. This will lead to the dispute settlement mechanism to be overloaded with fresh cases in many areas. Not only that, this would again work against the interest of developing countries since most such countries don't have in-house high-quality legal personnel and resorting to the dispute settlement mechanism doesn't come cheap.
(This is the concluding part of a two-part series, the first of which was published on August 1, 2018. The author is Principal Resident Commissioner, Government of West Bengal. The views expressed are strictly personal)