Why the WTO still matters

A trade spat between India and the US was the most serious threat to the WTO in years. Reuters

Despite sluggishness in the world economy, global trade reached an astonishing US$23 trillion last year. The World Trade Organization has been the primary guarantor of this extraordinary growth in global interdependence since its founding as the General Agreement on Tariffs and Trade, or GATT, in 1947.

But this new era of globalization is under threat by a breakdown in the current WTO negotiations, the Doha Round, which began in 2001 but have since become bogged down by disagreements between developed countries and the fast-emerging economies.

Reacting to this failure, some commentators have suggested the WTO has become unworkable or even superfluous, destined to be replaced by the bilateral and regional trade deals that have proliferated in the past two decades.

I disagree. The multilateral trading system embodied by the WTO remains critical to maintaining global interdependence, something that is vital to the economic and security interests of the United States and the rest of the world. The organization’s 160 member states must continue to push the Doha negotiations forward, perhaps by tackling more tractable issues first and only moving to more complex problems once momentum has been restored.

Reciprocity and non-discrimination

The GATT began its life as a forum for multilateral trade negotiations. These involved a series of multiyear “rounds,” each focusing on a different set of goals and followed by breaks to allow for implementation. The GATT has always been a very state-centered organization, and its negotiations are based on two key norms: reciprocity in liberalization and non-discrimination in trade protection (that is, offering other members “most-favored-nation” status).

If the WTO were to collpase, trade could increasingly be used as a weapon to change other countries’ policies, as some said was the case when Russia banned pork from Poland. Reuters

The most important negotiation in GATT history was the Uruguay Round, held from 1986 to 1994. It incorporated the GATT into the more institutionalized WTO and produced landmark agreements on everything from intellectual property and agriculture to environmental and health regulation. Members were given several years to implement the accords.

The WTO began a new round of negotiations in Doha in 2001. Unfortunately for the multilateral trading system, this round quickly foundered on a number of controversial topics, key among them the opposition of many developing countries to US and European agricultural subsidies. A Uruguay Round agreement that tightened global rules on intellectual property also remained unpopular with developing countries, which saw it as a threat to their ability to import new technologies and distribute needed medicines.

US, Europe losing clout

In the past, the US and the Europeans (who negotiate jointly) have controlled the multilateral trade agenda. But the rise of emerging market economies, along with the accession to the WTO of China in 2001 and Russia in 2012, has meant that other powerful players are demanding accommodations. More to the point, WTO negotiations have moved from relatively straightforward debates about tariffs and quotas to much more controversial and “political” questions involving the environment, health, development and a host of other issues.

These emerging challenges have stalemated Doha and have led trading countries to turn instead to bilateral and regional accords, often called preferential trade agreements. There are now several hundred of these agreements in force, producing a complex web of differing trade rules across the globe.

In the meantime, efforts to restart Doha have mostly come to naught. India and the US remained deadlocked on the issue of stockpiling food. Just last month, however, the impasse was broken by a deal that at least temporarily resolves the dispute. Nevertheless, serious challenges remain to a more complete reboot of the Doha Round.

Why should we care?

All of this, of course, begs the question whether we should even care if the multilateral trading system fails. After all, can’t bilateral and regional trade agreements accomplish many of the same goals more easily? Before we give up on the WTO, however, we should consider two important reasons why it should be salvaged.

WTO Director-General Roberto Azevedo smiles after India and US ended an impasse that threatened the future of his organization. Reuters

First, the WTO system continues to operate very successfully in overseeing the implementation of past agreements. The institution is not only a forum for negotiating but is a place where countries can resolve their disputes peacefully and rationally without the tit-for-tat of trade wars. More than that, the WTO, through its trade policy review procedures, is among the most important sources of information on global trade and trade protection in the world. It is largely due to the WTO that the world trading system has been resilient during the Great Recession, something that was most definitely not true during the Great Depression.

Second, the consequences of abandoning this multilateral trading system could be dire. From a purely economic standpoint, there is a risk that bilateral and regional agreements are “trade diverting,” meaning that their primary effect is not to create trade but rather to shift it in less rational directions. This might happen because differences in trade protection generated politically may incentivize goods and services to flow in directions that are not efficient from a market perspective. Perhaps more seriously, a global trading system made up of hundreds of overlapping bilateral and regional agreements would create a very serious information burden for firms. They would have to master a much more complex legal environment than they do under the WTO’s single undertakings.

Trade as a cudgel

From a more political perspective, a world without the WTO could lead to trading blocs, either of a regional character or around a major power. In other words, it might be a world where trade is increasingly used as a political weapon by great powers to reward friends and punish enemies. Small or poor countries, whose interests are at least somewhat protected by their status as WTO members, should be particularly concerned about the weakening of the multilateral trading system.

How, then, can the United States and other WTO members jumpstart Doha? The approach of slicing off more tractable portions of the agenda is a promising one. The Obama Administration’s recent deal with India is a step in this direction, and more should be done in the future.

Making progress on these less controversial issues could restore momentum to the overall process. We may also need to be ready to address smaller issues in a more incremental way in the future rather than trying to negotiate the grand and sweeping trade deals of the past.