international analysis and commentary

International trade after Bali: Why we still need the WTO

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The WTO Ministerial Conference in Bali, on December 3rd-6th, concluded with a surprising success – reaching an agreement on a number of issues contained in the Doha Development Agenda. The Doha round of trade negotiations opened in 2001 and aimed to further reduce tariffs on manufacturing goods (after the successes of the previous Uruguay round in the same sector), eliminate production subsidies, especially for agriculture goods, and tackle the thorny subject of services trade liberalization. Several things went wrong, however, and major interruptions in negotiations took place in 2005, 2008 and 2011. The EU and  the US ended up pitted against a group of developing countries led by India and Brazil. The main (but not only) disagreement centered on agriculture.

Bali was considered the last attempt to revitalize the Doha Agenda, no matter how diluted in contents, and the multilateral system of trade negotiations along with it. The topics in discussions were:  

  • Trade facilitation, or measures to smooth the passage of goods at borders by improving custom procedures. This agreement is the most significant achievement of the negotiations, possibly creating 31 million jobs and $400 billion to $1 trillion in income per year worldwide, and mostly in developing countries (although these estimates  by the International Chamber of Commerce have been already criticized).
  • A set of provisions on agriculture, in particular quotas for the stockpiling of agriculture products by governments in developing countries. These measures aim at preventing future food crises, but they translate into unfair government support for domestic producers and therefore need to be regulated under the WTO. A concession to break the general WTO rule has been agreed for the next four years, when a more permanent solution will be discussed.
  • Some provisions for “Special and Differentiated Treatment” of the Least Developed Countries (LDCs), in particular duty-free access to export markets, and preferential rules of origin establishing when a good can be considered as produced in one of the LDCs.

As this is the first signed multilateral agreement since the creation of the WTO in 1995, the outcome may seem disappointing. Indeed, Bali left unsolved some important controversies contained in the Doha Agenda (such as export subsidies), and it did not approach important policy challenges raised by recent evolutions in global commerce, such as digital trade, trade in services, state-owned enterprises, among others. Nevertheless, failing to reach any deal in Bali would have represented a major setback in global governance, for trade in particular. This may come as a surprise, considering the ongoing negotiations for the Trans-Pacific (TTP) and Trans-Atlantic (TTIP) regional free trade agreements, which involve the largest economic areas in the world. Why should we mourn the death of the system of extenuating multilateral trade negotiations if countries have found other forms of international cooperation, which appear to be even deeper and more comprehensive?

The first answer is that there is a threat to the existence of the WTO. The institution has three broad functions: carrying out and coordinating trade negotiations, producing regulations applicable to international trade globally and settling trade-related disputes. The leading role of the WTO in dispute settlement and rule making is well-recognized, even though its role in trade negotiations is not. Advancements in trade regulations, however, mainly emerge during the negotiations, and dispute settlement requires the existence of internationally recognized regulations. It follows that, without trade negotiations, the other two functions of the WTO are also impaired. This is especially true if a failure to reach an agreement on negotiations translates in a loss of credibility for the Organization as a whole.

The survival of the WTO is also justified by the existence of trade-related issues which cannot be solved without global cooperation, such as food security, energy security, commodity price volatility, trade aspects of climate change. A concrete example on food security: in a year of bad crop yields, if India has to reduce the export of domestically produced food or to buy food on the international market to feed its population, prices for the same products may rise tremendously and constrain the capacity of poorer countries to face the same emergency. Should all regional free trade agreements among countries which are concerned by a food crisis also involve India?

A second type of answer to the question on the usefulness of the WTO is that the emergence of Global Value Chains (GVCs) reinforces the case for global multilateral negotiations. GVCs require a stable trading environment, low trade barriers and great international coordination in standards and procedures. If a substantial part of the value added of an exported product is made by imported inputs from a third country, a trade agreement limited to the producing and destination country but excluding the country where inputs are originated may be decreasing everybody’s welfare by reducing the amount and the quality of traded goods. On the other hand, this would not happen if GVCs were mostly regional (despite their name), so that macro-regional free trade agreements would suffice to reap the benefits of international trade. Should this be the case, what would happen to producers willing to join the chain from outside the trade agreement? They would surely face a higher entry cost than under multilateral negotiations, a cost potentially so high to discourage entry in the first place. This “balkanization of trade” may generate frictions among blocks and therefore reduce aggregate global trade.

The multilateral system is neutral in the distribution of the gains from trade, as it promotes the interests of all nations at the same time. With bilateral and preferential trade agreements only, smaller nations may have to accept relatively unfavorable agreements, in light of their limited bargaining power. A global multilateral system therefore does not incur the risk of creating conflicting geopolitical blocks through the exclusive access to trade.  

A final consideration looks at the relationship between non-tariff barriers and the WTO. Since multilateral negotiations must take into account the instances of very different economies in terms of regulatory measures and gaps in production standards (say, the EU and LDCs), a deal is harder to reach than in preferential trade agreements binding similar countries. What is more, restricting the number of negotiating parties can help achieve a more ambitious deal when identifying and reducing non-tariff barriers is complicated. It is not clear, however, how the provisions signed by a country in one regional trade agreement fit in successive agreements the same country will sign. In the occurrence that slightly different rules are signed off within the TPP and TTIP, for instance, how should American firms react to these double standards? Instead, a common (if only minimal) set of regulatory standards for all countries would avoid major trade frictions. 

The success of the December Bali negotiations is certainly good news for the multilateral negotiation system, but we should not forget that an agreement on the Doha Development Agenda at large remains elusive. Doubts on the adequacy of the current design of the WTO have not been dispelled. That is why it would be wrong to argue that preferential or free trade agreements are hurting the global economy. However, they are simply not enough, and a WTO-like institution will still be needed in the future to maximize the global gains from trade. This is not the time for complacency.