New Institutional Economics : The WTO imbroglio
NIE+ framework is being used to analyse the presently faltering trajectory of the WTO and suggest a potential way out
I wrote two years ago of the need to strengthen the WTO and step up to tackle multilateral issues, not only in trade but also in related issues such as climate change. Ever since then, the WTO has not just weakened but is fighting a battle for its survival. While many of the major economies of the world such as the US, China and EU have been engaged in trade wars, the WTO has continually lost any persuasive power to stop them from doing so. The US has even threatened to walk out of the WTO. Even the dispute settlement mechanism of the WTO, perhaps its most important institution, is in shambles because of the non-appointment of judges. To add to the misery of the WTO, the pressure to move away from multilateralism and get into preferential trade deals has only increased. Interestingly, this point was aptly made by India's Foreign
Minister at the roundtable of ASEAN-India network of thinktanks, when he said that multilateralism had failed the world when it was most needed. He was referring not only to the multilateral response to the COVID-19 pandemic but also economic cooperation globally. In this article, I will analyse why we have come to such a pass and what may be the way forward. We will analyse these issues with the NIE+ framework, which I have proposed in earlier articles.
What has gone wrong?
This must be the most obvious question that trade economists and public policy practitioners and experts must be asking the world over. Has the 'gains from trade' theory, where each country specialises in the good in which it has a comparative advantage and trades this for other goods suddenly become wrong? Have the global welfare gains that result from free trade as opposed to an autarkic situation not been forthcoming? Why have many WTO members forsaken multilateral negotiations and jumped on to the preferential trade deals with a limited set of countries?
Many answers have been put forth for these questions. Some attribute these outcomes to the rise of more conservative political forces in many countries, while others lay the blame at the doorstep of the USA, which has taken to a transactional approach on most policy matters, including trade. Still others blame China for
not respecting the WTO rules and imposing non-tariff barriers as also manipulating its currency. And finally, another explanation claims that many international institutions have fallen prey to the big power game between the US and China.
While the above explanations may have contributed to the current WTO impasse, I think that the basic problem is the lack of trust between members of the WTO. In other words, there is a lack of social or relational capital among members. Even when the Uruguay Round was concluded successfully and the Doha Round was launched with much fanfare, there was an underlying unease in many developing countries on the Doha Round. Only when the word 'Development' was added to the title of the round and it was christened the 'Doha Development Round', did the developing countries come on board. Many developing countries, even then had reservations on the inclusion of services in the negotiating agenda. Further, while the developed countries managed to put financial services and telecom services squarely at the centre of the services negotiations agenda, issues of importance to the developing countries such as the movement of service providers (called Mode 4 or movement of natural persons in WTO jargon), were not given as much importance. Even in the other areas of negotiations, primarily agriculture, developed countries were not willing to compromise on the trade-distorting support to agriculture that they were handing out. On the other hand, developed countries were not willing to concede the main demand of the developing countries, namely, allowing support to public procurement of food grains for public distribution systems.
With the impasse in the Doha Round, the trade wars between the US and China worked to push the WTO into further inaction. Not only are there no substantive trade negotiations, there are many members who have begun saying that they will withdraw their commitments made at the WTO unless there are fair and reciprocal concessions made by their trading partners. The USTR, Robert Lighthizer has, in fact, made it clear in his statements to the US Congress in June 2020 that there was a need for the US to go for a 'tariff reset'. He made it clear that the US would be looking to renegotiate its tariffs to reflect the new economic realities. The US had earlier renegotiated the KORUS (Korea-US) FTA and replaced the long-standing NAFTA with the US-Mexico-Canada Agreement (USMCA). The US has also raised tariffs on China's exports to 'rebalance' the trade deficit and reviewed its GSP (Generalized System of Preferences) whereby India's exports were also affected. China also retaliated with its own tariff measures.
In view of the above, it is clear that the WTO has lost its persuasive powers to act against those resorting to trade barriers and violating their commitments. Even the Dispute Settlement Mechanism of the WTO is in tatters with many vacancies of judges. It is not a happy state since a free and fair global trading system is in everyone's interests. Further, the global production value chains are only going to take off in the post-COVID period, from where they left off. Sure, there will be many changes and there will be new production centres resulting from the 'reset' that the US initiated and the EU has also emulated. Some of the supply chains will move away from China and go to new production centres (Vietnam, India, Laos, Cambodia etc.) since many global producers would want to de-risk their operations. There will also be a move by many countries to go 'glocal', sometimes, even at the cost of efficiency. The question, therefore is: where does the WTO go from here? Let us analyse this from the NIE+ viewpoint.
Next steps for the WTO
We may recall that basic principles on which GATT was founded were progressive liberalisation, transparency and non-discrimination. The WTO built on these and laid out a much wider and broader architecture for free trade. From the NIE+ perspective, the following general principles have the potential to bring the WTO back on track:
Greater transparency in the flow of information will do away with the problems arising out of asymmetric information and countries can make more informed decisions.
The recasting of the negotiating principles and the various WTO texts (agriculture, goods, services, rules, intellectual property etc.) will ensure that these are more equitable and fair and not driven by developed country interests alone. As a result, many issues that led to the deadlock in the Doha Round will have a better chance of a resolution (if they remain issues at all-since the post COVID world would be a changed world and many of these issues may lose relevance anyway).
The transparency in the flow of information and the recasting of the various texts will result in lower transaction costs for countries, while making commitments at the WTO, particularly for the developing countries.
The creation of structures that raise social capital among countries will go a long way in a better appreciation of each other's issues.
On the basis of the pointers from the NIE+ framework, I believe that the WTO today has its work cut out and needs to address the various challenges squarely. The following specific action points emerge from the above discussion:
The basic principles on which GATT was founded: progressive liberalisation, transparency and non-discrimination, need to be reaffirmed by all WTO members. WTO members also need to recall the unfortunate events in 1930 that led to the imposition of Smoot-Hawley tariffs by the US. These tariffs were opposed not only by the US's trading partners but also by prominent US economists. As a result of these measures, US tariffs went up by 40-50 per cent. There was quick retaliation from other countries, which worsened the recession.
The next step that the WTO needs to take is to get all the groupings (G20, G33, LDCs, Small and Vulnerable economies etc.) that represents the membership, back to the negotiating table and work out a new architecture that addresses the concerns of the developed and developing countries equally and fairly. This new architecture could review the negotiating principles, suggest more efficient ways of decision making and ensuring that developing country concerns are addressed first. This will require loads of leadership from the major players such as the US, EU, China, Japan, Brazil, India and all other regional groupings. Since the US is in the middle of an election campaign, it may be wise to wait until the end of the year.
The WTO needs to somehow wrap up the Doha Round and consider the beginning of a new round perhaps at the beginning of 2021 when there will be a new administration in the US. The new round of trade negotiations should include issues such as climate change, future pandemics and their impact on trade and possible solutions. It should also include the new growth sectors, referred to below.
The WTO must get the dispute settlement mechanism going again. As we know, the appellate body at the WTO is non-functional since there are insufficient judges because the US had blocked their appointment. The EU has come together with 16 countries to set up a multi-party interim appeal arrangement that will allow the participating members to settle disputes among them. However, this is a temporary measure until the Appellate Body is functional again.
Create structures within the WTO that will help the social and relational capital among the members to grow. For example, there could be greater involvement of civil society groups and the private sector. Another step could be to recast the various negotiating councils in different areas of negotiations such as Agriculture, Services, Goods, Trade Rules, Intellectual Property etc. as mentioned above. Different areas of negotiations could be handled in different ways since the issues and the members involved are different.
The new structures referred to above could be for those sectors that will see greater trade potential in the future, e.g. non-renewable energy, electric cars and the related infrastructure, professional services, Artificial Intelligence and its wide applications etc.
Further, the WTO needs to take cognisance of the post-COVID19 world, which will be vastly different. For one, the impact of the tariff wars between the US and China will be felt in various sectors. There are already moves to recast global supply chains and value chains as a result of which new production centres are likely to emerge.
Finally, the COVID-19 pandemic will lead to new growth sectors, particularly in the medical equipment, health, nursing and pharma spaces. With 'work from home' likely to be adopted by many organisations even after the pandemic ends, this will give a huge boost to the IT and ITeS sectors. This, in turn, will have an impact on the real estate markets and the transport choices. For instance, the demand for office spaces and personal transport (cars, scooters) will fall. These will have a significant on the pattern of world trade. The modified structures of the WTO referred to above must reflect this.
It is important to remember that even before the current trade war erupted, there were sticky issues at the WTO that resisted a consensus. However, we should work to revive the multilateral trading system by bringing back WTO to the centre of the action. The steps outlined above would work to create the right incentive structure for all Members to come back to the negotiating table and find solutions. The WTO is too important a public good and hence must not only be preserved but also strengthened. While all countries would have to yield on
their sticky issues, the developed countries would have to show the same leadership that the US displayed in the post-World War II years, when it bore the burden of the Marshall Plan to rebuild Europe. China would have to address the concerns of members on issues such as currency manipulation, large scale state support to its enterprises, trade imbalances and intellectual property. Let us hope that the post-COVID-19 era is one of wisdom and leadership, much like the post-World War II period and WTO can get back to work.
The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal