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Less is More: Reforming the WTO

For the WTO to succeed, it needs to supplement its inclusive, consensus-based negotiating processes with softer, more nimble approaches, says Brett House.

By: /
29 May, 2014
Brett House
By: Brett House

Deputy chief economist, Scotiabank

The Salzburg Global Seminar session “New Dynamics in Global Trade Architecture: The WTO, G20 and Regional Trade Agreements” met on the heels of the provisional end in December of negotiations under the 9th Ministerial Conference of the World Trade Organization (WTO) in Bali. The understandings on trade facilitation reached at Bali have breathed a new sense of possibility into the WTO’s multilateral trade negotiation processes. They also underscore that the WTO’s legalistic, comprehensive and consensus-driven procedures need to be supplemented by softer approaches that, while not legally binding nor fully inclusive, can help crystallize political support and stimulate concerted action for freer international trade.

While Bali undoubtedly marked a fresh achievement and carries substantial positive demonstration effects for the multilateral system, considered views on the long-term import of the Bali discussions are mixed. For some, Bali marks the beginning of a feasible path to rescue the WTO’s 12-year Doha Development Agenda (DDA) negotiating round from a longstanding stupor. It is a tangible step that shows the system works and that the DDA can be brought to a conclusion, perhaps in piecemeal steps.

For others, Bali is a new indicator of just how impaired the WTO’s fully inclusive, consensus-based negotiating processes have become. It’s no exaggeration to say that finding common ground on trade facilitation is almost the least that WTO Members could have done to qualify Bali as a success. Trade facilitation is not one of the DDA’s core issues, but it is amongst the more easily accessible of low-hanging policy fruits. In fact, many aspects of the Bali package had already been implemented unilaterally by WTO Members (WTO 2013). Some aspects of trade facilitation aren’t even narrowly about trade: they’re more akin to international development assistance and capacity building.

All that said, trade facilitation is still a sufficiently prickly issue that we should celebrate a victory on this front. After all, it’s worth reflecting on the possible counterfactual: ministers could have failed to find any common ground at Bali, which would have left the DDA in an even more dire state than we presently find it. Whether small or large, Bali represents an opportunity on which action can be built. But it also points to the challenges of moving forward within the WTO. It’s not clear how the Trade Facilitation Agreement (TFA) shall be implemented. It’s not even clear that WTO Members can agree on a substantive work program for the year ahead.

In this context, it’s worth taking stock of the WTO’s key functionalities and considering how they might be supported, complemented or replaced by “softer” processes outside the WTO’s “hard” legally-binding environment to ensure the possibilities created at Bali are realized. The macroeconomic environment for trade liberalization is unlikely to improve in the near term: “secular stagnation” in the United States, deflation in Europe, competitive devaluations set off by “Abenomics” in Japan, weaker growth in China and mounting public debt stocks across developed and emerging markets are all going to put pressure on governments to tighten trade restrictions and potentially engage in beggar-thy-neighbor behaviour. The world needs to anticipate these developments and act proactively to ensure that recent, hard-won gains in opening up trade are not reversed. Over the last 20 years, most elements of the Washington Consensus have been implemented ubiquitously under national reform programs, which is necessary but not sufficient to generate greater global openness in the current macroeconomic climate. Greater global openness will require closer coordination between the International Monetary Fund (IMF) and the WTO at the country level and at the international level to create the conditions for further liberalization.

At the same time, the nature of trade is evolving: as we’ve long known and a recent study by the McKinsey Global Institute (2014) quantifies, trade is increasingly dominated by knowledge-intensive goods and services. Some refer to this as 21st century trade that cuts across value chains. But this trade is not so distinct from 20th or even 19th century trade. Global value chains trade bread-and-butter goods and services. Digital commerce also leads, often, to the exchange of physical goods and services. This trade still faces old-school protectionism that needs to be prevented, contained and reduced. All of this makes it especially timely to consider how the WTO’s processes can be strengthened from within and enhanced by parallel efforts on the outside.

Even as more and more major countries agree to take on WTO Membership and the sometimes onerous reforms that come with it, they are increasingly liberalizing their trade policies through unilateral, regional, and plurilateral processes outside the WTO’s comprehensive framework. Many of the gains expected to be realized by the conclusion of the DDA are already being achieved outside the WTO. Even as the WTO’s dispute settlement mechanism (DSM) is being lauded as its most effective core competency, countries are increasingly seeking recourse to the WTO’s DSM to resolve problems under their regional and plurilateral agreements rather than WTO-negotiated accords. Ironically, even as the DDA limps along, trade liberalization is advancing by other means—other means that should be embraced by the WTO. WTO Members need to be less concerned about whether we’re putting our trade policy eggs all in one multilateral, fully-inclusive basket with the WTO and more concerned that we’re managing to put together a collection of “hard” and “soft” boiled eggs that can deliver trade reform in a variety of fashions. Building on the Salzburg Global Statement on New Dynamics in Global Trade Architecture: The WTO, G20 and Regional Trade Agreements, this implies a number of lines of action.

Simplifying the DDA

The DDA needs to be simplified, made more relevant to trade in knowledge-intensive goods and made more compelling to business, while still delivering on the “rebalancing” of the international trade system promised to developing countries through the more liberal treatment of agricultural and labour-intensive manufactured goods. We can’t cast the DDA aside. Developing countries won important promises that are personified in it and they will not let it go. Revise, amend and simplify the DDA instead, recognizing that multilateral negotiations have become tougher since the DDA’s inception in 2002 as more countries have joined the WTO.

A slimmed down DDA could focus on limited slices of three things: agriculture, market access for manufactured goods, and rules on services. And each of these three areas should be organized around counterbalancing concessions and interests amongst major developed and emerging countries that set up negotiations for the kind of trade-offs and compromises that can lead to agreement. This should form the core of the WTO’s deliberative efforts to articulate a more effective work program for the DDA.

Embracing smaller negotiating groups

WTO Members need to step back from the DDA’s “Single Undertaking” and embrace smaller groups of critically important Members for at least the initial stages of negotiations. Mega regional trade agreements (RTAs) and plurilateral agreements (PAs) are already consuming most of the attention of major trading economies and they cannot be contained by any amount of wishing for more comprehensive, inclusive and universal processes. Moreover, steadfast advocacy of universalist approaches requires us to acknowledge the key role that major powers—the United States and Europe—played in the past to bring these approaches to cloture and are less able to play now.

At the same time, it’s not clear that new centers of economic and political power are ready, able or willing to play similarly catalytic roles. Amongst them there is interest in taking more incremental, step-by-step engagement in trade liberalization processes, treating each step as a limited experiment, and moving forward only when proof of concept has been established. In some respects, this is positive: new powers provide a powerful demand for the WTO to move away from one-size-fits-all processes and tailor its approaches more closely to diverse circumstances. But with a multiplicity of new poles acting in this fashion, it’s not clear that the fully inclusive, one-country one-vote consensus-dependent processes of the WTO can elicit the kind of leadership needed to reach cloture in negotiating processes—the kind of leadership in the provision of public goods that the “old powers” have traditionally provided.

WTO Article II.3 offers a mechanism for WTO Members to form clubs to advance plurilateral and regional agendas of common interest without necessarily extending involvement to other countries. Resulting RTAs and PAs can be “multilateralized” into WTO structures (i.e., Annex 4) on a consensus of all WTO Members. But this standard is simply too strict and needs to be relaxed. Agreement of countries accounting for a substantial share of world trade should be sufficient for integration of an RTA or PA into the WTO. This would still ensure that truly controversial or problematic agreements could and would be rejected, while at the same time allowing constructive agreements to be brought into the WTO’s more comprehensive framework to advance wider liberalization. RTAs and PAs can be used to engage on policies not currently covered by the WTO and the WTO can use them as the basis for cooperation in new areas.

It’s not clear that the universalist WTO is the place where trade discussions should start: in many ways it is the most difficult path to initiate reform processes. In fact, it’s more obvious that the WTO is where these discussions should finish. With its fully inclusive processes, it’s the venue where agreements made between the world’s largest trading partners can be made more widely operationalizable and extended on a reasonable basis to all countries.

Ending universality in decision-making

Whilst this wasn’t widely discussed at the Salzburg Global session on New Dynamics in Global Trade, WTO Members need to reconsider the organization’s decision-making processes and make a distinction between the universal, equal voice between countries in the Organization’s affairs and equal power in making decisions that come out of its discussions.

We don’t make decisions by an equally weighted consensus of the world’s countries in other multinational economic fora. At the IMF’s Executive Board, decisions are taken by majorities and supermajorities and voting power is tied to a member country’s GDP, trade, capital flows, and international reserves. At the World Bank, voting power is linked to a country’s paid-in capital. In both Boards, countries are grouped into constituencies and represented by chairs on an Executive Board which is composed of 24 Directors at the IMF and 25 at the Bank. Both Boards exercise decision-making authority delegated by the Boards of Governors of their respective institutions, which are the highest-decision making bodies in both organizations. In both cases, voting power of the Governors is the same as that of the respective Directors.

Nevertheless, the Bank and the Fund provide an instructive example for the WTO. Negotiations at the WTO could be streamlined by delegating most discussions to an executive board of the 20 or so largest trading nations, with the most existential questions reserved for treatment by the full WTO membership. Decision-making could also be weighted by the size of a country’s trade flows across the Membership and within a putative WTO Executive Board, with the most fundamental decisions reserved for one-country, one-vote processes in the full WTO Membership. If the goal is substantive trade liberalization rather than narrowly respecting a historical precedent of fully inclusive decision making, then it makes sense to experiment with options along these lines. After all, clinging to notions of universalism that obtain more in the breach than in practice does nothing to change the fact that more than 100 small countries are currently excluded from the mega RTA process under which the bulk of liberalization is presently occurring.

Pursuing concerted unilateralism through “soft” institutions

It’s been said that when lawyers supplant economists on the same public policy issue, it’s a good sign. It implies that the substantive debates have been settled and discussion has shifted to the minutiae of rules and implementation. But the dominance of lawyers in policy processes can also go too far. Trade liberalization negotiations under the WTO have become overburdened by legalism and held hostage to universal consensus. The DDA round has lost sight of one of the fundamental tenets of trade liberalization: at least some form of unilateral liberalization always makes sense. No country needs others to act in order to realize gains from more open trade. Of course, it’s better for everyone if countries do act in concert. But it’s not required.

WTO Members should move on this insight in three ways. First, the Organization and its Members should embrace the G20’s informal efforts, such as those undertaken during the financial crisis, to limit any increase in protectionism. The standstill on such measures negotiated in 2008, which has been subject to some slippage, did an enormous amount to buttress the WTO’s work. Non-institutions or soft institutions such as the G20 can provide a venue, free from narrow legalisms, to create the political support for free trade that may be tougher to generate in the WTO. Second, the WTO should welcome, encourage and support efforts to make trade a more formal part of the G20’s mandate and work program. Third, the WTO should shift its approach to integrating RTAs and PAs into its frameworks. Rather than asking how we can multilateralize regional and plurilateral agreements, it should instead be asking if we can unilateralize them through processes of concerted individual unilateral adoption and Asia-Pacific Economic Cooperation (APEC)-style open regionalist processes, in active collaboration with, inter alia, the respective RTA, PA, G20 and APEC secretariats and their members. This is the clearest way to ensure that, in the pursuit of regional and preferential agreements we maintain the principle of most-favoured nation (MFN) tariff liberalization while also allowing for various kinds of customized liberalization on a country-by-country basis.

The WTO can play a critical role in making action under the G20 and other soft institutions such as the APEC more universal. It can interpret RTAs and assist developing countries in coming along with them on a concerted unilateral basis. In the process, it can also help both large and small countries achieve coherence in their external commitments and prevent fragmentation.

Final remarks

Simpler, smaller, narrower and softer: the agenda for the WTO laid out above is all of these things and it might, to some, seem a rather defeatist line. But it’s also a case in which less is almost certainly more: more prioritization in the Organization’s work program, more focus in its negotiations, more nimbleness in its decision-making, and more engagement with complementary venues that can support the WTO’s work. Far from a scaling back, this four-point agenda represents a strategy to enhance the centrality of the WTO in the pursuit of greater openness between countries. Sticking to a conservative “hard-core” course of business as usual would be clearly inimical to the long-term health of the Organization. In a diverse, multi-polar world, we need a range of different ways to get free trade “eggs” into our collective liberalization basket. Some will be hard boiled, some will be soft boiled, but either way, they’ll produce gains for the global economy.

A version of this piece was published by the Salzburg Global Seminar on May 22, 2014.

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