JORGE RODRIGUES SIMÃO

ADVOCACI NASCUNT, UR JUDICES SIUNT

(1) World Trade Organization

WORLD TRADE ORGANIZATION

WTO

There is no dearth of books and research papers that offer detailed economic and legal explanations and interpretations of the agreements of the WTO. There are also many papers written by civil society activists – some less judiciously researched than others – for the purposes of policy advocacy. But analyses that focus on the politics of the WTO are rare to find.

These papers seek to fill this gap in the literature, and try to get to the heart of the WTO as an international organization and the politics that underlie its origins, functioning, and evolution.

Two features of these papers are worth highlighting. First, my central approach to the study of the WTO as an international institution is through the lens of negotiation process. By analysing the constant interplay between existing structures and underlying processes, I present an account of not only the initial bargain that led to the creation of the WTO but also how the organization has evolved in terms of its membership, mandate, and everyday functioning. Contingency, path dependence, and negotiation process go a long way in determining how the WTO has got to the point it has, rather than rational design of the institution. Second, developing countries form an integral part of the story presented here. This attention to developing countries is not one that I had initially intended. But all my research findings continuously pointed in a direction that has been largely neglected: the link between power asymmetries and international institutions. I found that power differences between developed and developing countries played a crucial role in the making and shaping of the WTO, and that the institution itself affects power discrepancies in many different ways. As a result, power, marginalization, discontent, and development are recurring themes in these papers.

I have also chosen to engage directly with the many public debates on the WTO. The organization presents a fascinating mix of contradictions. It is, by far, the smallest and youngest of the three international economic organizations (the other two being the International Monetary Fund and the World Bank). But it makes rules that often encroach into areas that have traditionally lain within the domestic jurisdictions of states, and with which all 147 members must comply. It is true that many of the WTO’s activities lie in the obscure and esoteric realms of trade policy. But the deep and far-reaching impact of its rules on the everyday lives of peoples means that it is not an institution of interest to economists alone. On paper, the WTO has the most democratic procedures of the three economic organizations; in practice, the WTO has come under immense criticism for its almost ‘English club atmosphere’ and exclusionary meetings. The WTO is simultaneously accused, in broadsheets and elsewhere, of not doing enough and of doing too much: some argue that the WTO should cover issues of labour, gender, and development, while others view its already expansionist tendencies with alarm. Contradictory proposals for institutional reform abound. The WTO is adored by some, and vilified by many. By presenting an account and explanation of the evolution, purpose, and political workings of the WTO, it is hoped that these papers will help the reader to better navigate the murky waters of international trade politics.

 

Who needs an international trade organization?

 

For a relatively youthful organization concerned with esoteric trade affairs, the WTO has already aroused unprecedented fury and passion. The extent to which controversies about the WTO have entered into the public domain was most graphically illustrated in the popular demonstrations at the Seattle meeting in 1999.

At the Cancun meeting in 2003, these passions showed little sign of abating. Given the anger the WTO has generated, in these papers we ask the question: who needs an international trade organization anyway?

 

Is there a case for an international trade organization?

 

To make a case for or against an international trade organization, we need to identify the role that such an institution might be expected to play in the global economic system. The Agreement establishing the WTO commits its member states to a variety of noble objectives: improved standards of living, full employment, expanded production of and trade in goods and services, sustainable development, and an enhanced share of developing countries in world trade. The Agreement further commits its members to contribute to these objectives ‘by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations’. The WTO as an institution is clearly committed to trade liberalization. It is worth emphasizing that this commitment is not an end in itself, but is seen as a means to achieving the broader social ends mentioned above.

Barring a few qualifications, economists view the commitment to trade liberalization as a welfare-maximizing pursuit. Economic theory since the middle of the 18th century has presented the advantages in lowering tariffs for most parties in most situations. The gains from trade derive from specialization on the basis of comparative advantage. Put very simply, if each country were to produce that which it is best at producing (in comparison to all the other products that it could still produce but with lesser efficiency), there would be a bigger output of each of these efficiently produced products in each country. The countries could then trade among themselves, with each exporting the good or service in which it has the comparative advantage and importing the good or service in which it has a comparative disadvantage. Such an exchange would benefit all the countries involved. In fact, as per classical trade theory, the gains from trade accrue to any country that lowers trade barriers irrespective of what other countries do, thereby suggesting that the rational actor may be expected to pursue unilateral trade liberalization. Indeed, as Paul Krugman puts it: ‘If economists ruled the world, there would be no need for a World Trade Organization.’

A quick peek into the real world suggests that despite the promise of free trade, countries have historically been reluctant to reduce trade barriers and quick to raise them. A frequently cited example of this policy inclination, and its disastrous consequences, is that of the United States and other countries in the years of the Great Depression. Following the stock market crash of 1929, the US Congress adopted the Smoot-Hawley Tariff Act in 1930 that raised US tariffs to an average of nearly 60%. Most of the major trade partners of the US retaliated by raising similar tariff barriers and engaging in a competitive devaluation of their currencies. Prices fell further, tariff barriers went up, and a race to the bottom ensued that worsened the Great Depression. The cataclysmic effects of these beggar-thy-neighbour policies of the 1930s left a long-lasting impression on the minds of policy-makers in the post-war years. It was recognized that cooperation among states is difficult to organize or sustain without the presence of international institutions, even if states are aware that non-cooperation will adversely affect all parties.

There are several reasons – economic and political – why states act in ways that turn out to be detrimental to their self-interest. The first insight on why some states may choose the path of protectionism, despite the benefits of trade liberalization, comes directly from economic theory and the notion of the ‘optimal tariff’. While it is unambiguously in the interest of the small country to liberalize trade, economic theory tells us that the situation is different for large countries. The optimal tariff argument tells us that it may be in the interest of a large country to restrict trade at acertain ‘optimal’ level, as it will be able to change the terms of trade in its favour by so doing. Should the large state intervene unilaterally and solely in its foreign trade relations, it would incur gains at the cost of other producers and consumers abroad. Such restrictions would hence translate into reduced welfare for the world as a whole, though they would work to the advantage of the large state concerned. However, as the example of the Smoot-Hawley tariffs in the US showed, other states are unlikely to accept such restrictions passively and would impose similar, retaliatory restrictions. The result would be a downward spiral in the welfare of all states caught in the tariff war. Economists Bernard Hoekman and Michel Kostecki provide a succinct interpretation of this problem in terms of the classic Prisoners’ Dilemma game: ‘it is in each country’s interest to impose restrictions, but the result of such individually rational policies is inefficient.’

What would the impact of such a tariff war among large states be on smaller countries? The African saying ‘When two elephants fight, it is the grass that gets trampled’ applies well in this context. High tariffs, targeted specifically between the US and the EU, for instance, might at first glance imply that small countries find these vast markets opened up to them without the competition of the giants. But the race to reach these large markets would draw the small countries too into a war of their own, involving unsustainable price-cutting and an expensive race to the bottom. As a result, a tariff war between the larger states would result in reduced world welfare and adversely affect both large and small countries.

The Prisoners’ Dilemma problem in international trade is well known, and governments recognize the costs of retaliation that they risk if any one of them imposes trade restrictions. But there is still no guarantee that one renegade and powerful state will not resort to this individually rational but collectively sub-optimal outcome, thereby dragging all the other states into a chain reaction of retaliations. Equally plausible is the danger that one (or more) state may withdraw from its commitments to trade liberalization, imposing unexpected and heavy costs on its trading partners. The plausibility of these risks often acts as a deterrent for most states from committing to trade liberalization. The best way of preventing such a mutually destructive situation from emerging is by ensuring that countries commit to trade liberalization on a reciprocal basis.

Reciprocal trade liberalization increases the gains from trade by further expanding the output to be traded. But more importantly, if countries have some mechanism of binding themselves and each other to commitments on tariff reductions, the risk of a retaliatory trade war (akin to the 1930s trade war) is reduced. Herein lies the logic of multilateral trade liberalization. An international trade organization establishes rules of reciprocity on a generalized basis across three or more countries, and thereby multilateralizes reciprocity. By monitoring and enforcing these rules, the multilateral trade organization guards against cheating and defection by member countries. Indeed, the raison d’être for most international organizations across most issue-areas lies in a similar logic.

Besides facilitating international cooperation, institutionalized rules of reciprocity, monitoring. and enforcement in a multilateral trade organization also offer some important political advantages to member governments. Trade liberalization may improve overall national welfare, but it also entails disruptive distributive consequences within societies by producing losers and gainers. Political economists have pointed out that the greatest losses from liberalization accrue to import-competing industries, whereas the biggest gains accrue to consumers. One might expect the consumer interests gaining from the liberalization to balance out against the protectionist producer interests that stand to lose. But the problem with such a distribution is that producer interests tend to be far more concentrated, organized, and vocal than consumer interests.

Multilateral liberalization opens up several foreign markets and thereby ensures that domestic firms seeking foreign market access will balance out against the protectionist firms. The process of trade  liberalization becomes not only economically beneficial but also politically feasible.

Adherence to the rules of an international trade organization also serves an important domestic imperative for governments by allowing them to resist protectionist demands. When faced with such pressures, particularly when the going gets tough and interest groups are demanding a reversal of liberal policies, governments can claim that their hands are tied by appealing to the international codes of conduct of the organization with which they are bound.

The fact that the particular government had taken on its liberalization programme within the auspices of a multilateral trade organization means that reneging on those commitments will have punitive consequences of various types. Depending on the nature of the organization and its enforcement mechanism, these consequences could range from international disapproval, to compensating all the members for the costs they incur as a result of the particular country’s action, to direct retaliation. Indeed, governments frequently appeal to such rationales to justify unpopular actions that are supposed to have longer-term benefits (and not simply in trade matters) by claiming that their international commitments bind them to act thus. It is not surprising that across developing countries, many of the programmes of economic reform and restructuring in the late 1980s to early 1990s, particularly those involving some difficult distributive consequences, were taken on in the shadow of the international economic organizations.

All the benefits of having an international trade organization noted so far apply to countries irrespective of their economic size and bargaining power. But developing countries have an additional set of stakes in the existence of such an organization. It is now a generally accepted argument in international relations theory, first put forth by Stephen Krasner in 1985, that weak states seek rules-based, authoritative international regimes. Such regimes introduce a greater measure of certainty in international relations and thereby help mitigate a rampant abuse of power by stronger states. This certainty is a valuable resource for developing countries, which have limited resources and can put them to better use if the rules of the game are established. The regulation of international trade through a multilateral trade organization further provides developing countries one of the few safeguards that they have against arbitrary arm-twisting by the powerful. Unlike in a bilateral context, developed countries cannot easily renege on their commitments in a multilateral institution; if they do so, they must face the penalties that follow from breaking international rules. And finally, the existence of a multilateral trade organization provides developing countries with an important institutional context within which they can build coalitions and thereby improve their bargaining position. As a result, developing countries tend to prefer more defined rules, and greater enforcement capacity in the institution administering those rules (with the caveat, of course, that much depends on the nature of the rules and who actually administers them). A multilateral trade organization can present the most rigorous codification of rules. It may be safe to say that, especially if a country is small and weak, its international economic life without an international trade organization would be ‘nasty, brutish, and short’.

 

Defining developing countries

 

For many years now, academics have been engaged in a debate on the concept of the developing world. Many have argued that the concept has been rendered obsolete due to

the increasing differentiation among developing countries.

Indeed, the vulnerabilities of the small economies of the Caribbean, with their proximity to the US, are very different from the threats faced by the smaller economies of Africa or the Pacific, let alone their divergence from the emerging powers of the developing world such as Brazil, China, and India. However, these differences notwithstanding, developing countries share two sets of characteristics – marginalization or peripherality, and ‘Third World schizophrenia’.

Marginalization, or peripherality, refers to the inability of developing countries to shape international institutions to their advantage or emerge as full players in the international system. Due to domestic and international weaknesses, often derived from their colonial past, these countries find themselves in the position of rule-takers rather than agenda setters.

This is as true of countries like Brazil and India, which have traditionally been invited to the negotiating table but nonetheless have repeatedly complained that their concerns are disregarded, as it is of the smaller developing countries that have found it difficult to get a place in key decision-making meetings.

Related to marginalization is the phenomenon that Mohammed Ayoob succinctly terms ‘Third World schizophrenia’. As the intruder majority in a system of states that was not built to suit their advantage, developing countries have sought to bring about systemic change. But as a result of their vulnerabilities, they also have an incentive to preserve the existing system of rules that provides legitimacy to their statehood and ensures their very survival.

The shared features of marginalization and schizophrenia impair the bargaining skill and resolve of developing countries. These characteristics are not confined to the smallest and the poorest developing countries; rich developing countries (such as the Southeast Asian economies even prior to the Asian financial crisis) and large developing countries with regional clout (such as Brazil and India) share the trait of limited bargaining power. The group of countries sharing these features are often collectively referred to as the South (in contrast to the developed countries, the North), the Third World, or the developing world.

Belonging to the developing world is at least as much a product of self-designation by the countries concerned and recognition by other members of the group, as it is of any objective criteria applied by outsiders. In keeping with this, most international organizations leave the task of claiming developing country status to the countries themselves. Often, this is a matter of negotiation between the particular country and other countries that will be affected by the decision. For instance, this proved to be a bone of contention in China’s negotiations for accession to the WTO. China claimed developing country status, which would allow it to use special provisions reserved for developing countries, such as longer transition periods in the implementation of certain rules.

Developed countries baulked at the idea. A compromise was finally arrived at, but only after long and protracted negotiation. Note that within the developing world is a sub-group of countries, referred to as the Least Developed Countries (LDCs). Unlike the term ‘developing country’, which is intersubjectively defined, LDCs are countries identified by the UN that meet all three criteria of low income.

 

 

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