"The WTO Tipping Point"

Is the World Trade Organization endangered?

The WTO tipping point, by Richard Baldwin, Vox EU: Policymakers worldwide are focused on the finishing the Doha trade talks and this is certainly important. The world trade system, however, faces a much larger threat – the erosion of WTO centricity.

One reads much about protectionist backlashes yet the truth is that trade liberalisation is as popular as ever among policymakers. The new century has seen massive liberalisation of trade in goods and services – much of it by nations that disparaged trade liberalisation for decades. But unlike last century, almost none of this has occurred under the WTO’s aegis.

Poor nations have cut their tariffs, opened their services sectors, and embraced foreign investment unilaterally or in bilateral trade agreements. Rich nations have relied on regional trade deals to achieve their market-opening goals. The deals signed this century are not commercially important, but this will change if the European Union’s Asian initiatives succeed, especially if the United States feels compelled to follow suit. The emerging trade powers – China, India, and Brazil – have had worryingly favourable experiences with unilateralism and regionalism in the new century while their commitment to multilateralism is relatively untested. The one part of the WTO system that works well – the dispute settlement mechanism – is increasingly used as a substitute for negotiated liberalisation with the result that de facto compliance by the United States, European Union and others is eroding.

To date, these changes seem more like challenges than threats. The key players believe the world trade system will continue to be anchored by the WTO’s shared values, such as reciprocity, transparency, non-discrimination, and the rule of law. WTO-anchorage allows each member to view its own policies as minor derogations. Yet, at some point derogations become the new norm. The steady erosion of the WTO’s centricity will sooner or later bring the world to a tipping point – a point beyond which expectations become unmoored and nations feel justified in ignoring WTO norms since everyone else does.

A polycentric trading system?

No one knows what happens beyond the tipping point. My guess is that trade would continue to grow and the system would continue to function – but not equally well for all nations. Before the GATT was set up in 1947, the Great Powers settled trade disputes by gunboats or diplomats depending upon the parties involved. Only the naïve thought market access should be reciprocal or fair. A return to this “Belle Époque” extreme is unlikely, but a new Great Powers trade system is likely to emerge. Its core will be the US and EU networks of bilateral trade deals.

Domestic special-interest groups, newly freed from WTO constraints, would push the EU and US templates in divergent directions. Regional arrangements of the new trade powers and Russia could diverge even more markedly, since WTO norms have never fully been internalised by their domestic special-interest groups. This would be a world of “spheres of influence” and bare-knuckle bargaining.

All would lose in this post-tipping point world but not equally. The United States, European Union, Japan, China, and India have enough market leverage to defend their interests. Small nation would suffer much more as they benefit the most from the WTO’s consensus-based rules and negotiations.

Worse yet, moving towards a might-makes-right trade system would be extremely corrosive to global cooperation on the new century’s greatest governance challenges – climate change, pandemics, water scarcity, and the Millennium Development Goals.

What is to be done?

Finishing the Doha Round this year would be a good start. Failing that, leaders must ensure it slips into a quiet coma rather than noisy death throes. But this would not be enough. We must figure out why nations find it so attractive to liberalise outside of the WTO and then change the WTO in ways that restore its central role in trade liberalisation and rule making. The GATT has faced several such historical moments in the past, and GATT members reacted by adopting the necessary reforms. The time has come again for such an effort. Once the old norms are gone, it will be exceedingly difficult to agree to new ones; much better to adapt the WTO’s current norms to address the new century’s realities.

Comments

[hari]

Mark - My reading of it suggests chances, if any, of saving WTO round will be decided next week during G-8 session (in Japan) with India, China and Brazil.

There has been some serious negotiations recently between US-India (at ministerial level) and they seem to have narrowed down their differences on domestic tariff protection of industrial sectors (India). However, subsdies to agri-sector in US/EU might become the final stumbling block....

NB> PM/India and Pres. China and Brazil will take part in G-8 Session in Japan with a view to not only WTO negotiations but also *fixing* fx market and dollar devaluation.

[Bruce Wilder]

Richard Baldwin: "Worse yet, moving towards a might-makes-right trade system would be extremely corrosive to global cooperation on the new century’s greatest governance challenges – climate change, pandemics, water scarcity, and the Millennium Development Goals."

This seems more than a tad histrionic, and sadly out of touch.

The fall of the dollar and the attendant commodity boom are pretty substantial challenges to the global trade regime. And, let's be honest about why: the U.S. has received for many years, a substantial net tribute, via favorable terms of trade due to the issuer of the world's reserve currency, for being both the consumer of first resort and the chief proponent of freer trade.

"Might-makes-right" rhetoric may well remind people that globabilization and "free trade" has been used, in the U.S. at least, as a club to destroy wages and unions. What we've got is a might-makes-right system, where narrow U.S. interest lobby intensely to benefit Cargill and Disney and screw UAW members.

If the U.S. is going to have social protections, labor protections, and environmental protections, we will have to have trade protection. Otherwise, free trade is just another term for exporting slavery and pollution, while securing royalties for Mickey Mouse. Might-makes-right, indeed.

[Michael McKinlay]

LOL ... The WTO is dead ... America and Europe will be afterthoughts.

China is already moving in on Africa and Latin America. China, Japan and Korea will be the industrial core of the world and the rest of Asia will be their workshops.

OPEC will gladly sell to this most productive region leaving America and Europe out in the cold, with only their sins of colonialism to comfort them.

America and Europe can't even get Russia on board. They want to colonize Russia and Russia ain't having any of it, especially missiles and NATO in their former client states, right on their border.

Mr Thoma you are hallucinating. As the free trade areas of Asia, Latin America and finally Africa emerge the WTO will be a relic of the Anglo-Euro colonial, neoliberal, not so fond memories of the rest of the world.

[Lafayette]

Article: We must figure out why nations find it so attractive to liberalise outside of the WTO and then change the WTO in ways that restore its central role in trade liberalisation and rule making.

The last DOHA round failed because the Third-world countries as a block became adamant that the EU and the US make concessions that, at least for the EU, were politically unacceptable at the time.

So, since any DOHA agreement must be universal, none was achieved. Thus, those willing to agree on bilateral (ex-GATT) agreements did so, leaving out the recalcitrant countries.

Meaning this: For the WTO to advance liberalization of trade and commerce, it should come up with decent agreements on a more limited scale and then allow others to opt-in at signature or opt-out until they are ready. And, many will never be ready -- but that is price to pay. Truly comprehensive, international trade agreements are Gas Works in terms of complexity.

For the moment, the GATT (that sponsors DOHA) evolves binary trade agreements. I.e., either everybody agrees or no agreement is made. This has proven to be an unsurmountable obstacle in the past and will, more than likely, remain one in the future. The negotiations spawn splinter groups and everything comes apart. However, some of their gripes are well-founded -- particularly that of subsidized agricultural exports by the Eu and US. Because of which smaller nations have not the means to compete and thus cannot develop self-sustenance in agricultural production.

It is a matter of "beggar thy neighbor" trade policy on behalf of the EU and the US; except in this instance "thy neighbor" is already a beggar. In a word, it is unjust.

The US and the EU have the most to give, in terms of concessions, and the most to lose in terms of agricultural trade competitiveness. This latter factor is a central issue in the EU as Farm Lobbies carry far more moral weight in the eyes of the voting public than their actual political heft.

The WTO needs to find a "work-around" for this obstacle. Besides, expect nothing from lead-head for as long as he is around. His has been a pro-farm lobby administration and McCain will need the donations.

[Lafayette]

MM: As the free trade areas of Asia, Latin America and finally Africa emerge the WTO will be a relic of the Anglo-Euro colonial, neoliberal, not so fond memories of the rest of the world.

Bollocks.

What makes you think that the named blocks are going to hang together to challenge the EU and the US.

They never have in the past, so why should they in the future? You're dreaming, like the nations that can't bootstrap themselves into the 21st century, so they blame their Colonial Handlers.

Where's the money gone that has already been invested or spent in your "finally emerging" countries? In Swiss bank accounts? Invested in villas around St. Tropez? How about shopping sprees for the gals on the Champs-Elysees? How about the high-class pros in London? (All these are verifiable factually.)

You a Mugabe sycophant, perchance?

[hari]

There is need for some clarification here:-

*There is no more GATT (General Agreement on Tariffs and Trade). It was replaced by WTO under political pressure from Clinton/Rubinomics during GATT 4th Round Final Session in Morocco. The GATT SEC and whole lot was taken over by WTO regime with legal power to settle trade disputes...under GATT dispute settlement decisions were advisory at best.

*I consider the concept of Asean developing into a TFA linking with Japan, Korea, Taiwan, China and India as more likely than not. Australia and New Zealand might also join.

*It's (also) conceptually possible for Asian emerging markets to restructure their monetary policy to develop a regional credit market particularly in fixed income government guaranteed bonds and whatnots. For them it is imperative to get away from the domination of dollar peg in their trade.

*Strategically Japan, China and India are now speaking the same geopolitical language with a view to secure the Asian region for posterity.

[Mark]

Baldwin: "The one part of the WTO system that works well – the dispute settlement mechanism – is increasingly used as a substitute for negotiated liberalisation with the result that de facto compliance by the United States, European Union and others is eroding."

On what basis Baldwin has determined that the dispute settlement mechanism "works well"? His observation suggests that the adjudicative process is undermining the negotiations system.

[wjd123]

To date, these changes seem more like challenges than threats. The key players believe the world trade system will continue to be anchored by the WTO’s shared values, such as reciprocity, transparency, non-discrimination, and the rule of law. WTO-anchorage allows each member to view its own policies as minor derogations. Yet, at some point derogations become the new norm. The steady erosion of the WTO’s centricity will sooner or later bring the world to a tipping point – a point beyond which expectations become unmoored and nations feel justified in ignoring WTO norms since everyone else does.--Richard Baldwin

The WTO doesn't have any shared values, nor is it an organization about the rule of law since it has no means of enforcing its sanctions.

If the members of the WTO had shared values you would expect to find like political economies with like institutions. Yet, you find within it countries with diverse political economies. As such it's norm destroying organization. Political economies with the the right to free association and environmental standards have to compete with political economies that have neither.

Where is the "reciprocity, transparency, and non discrimination" when it come to trade between the United States and China? How can countries with different material circumstances have the same political economies? And why speak of laws if there is no enforcement mechanism.

The WTO exist for the benefit of multinational corporations competing in an amoral globalism. Talk about WTO values and norms is a delusion.

Regionalism in trade, where the norms and values expressed in the political economy of nations aren't destroyed by a amoral globalism is the way to proceed with free trade. The WTO can't fit that goal.

There are many stakeholders in a nations political economy that are protected or empowered by its rules and regulations. They are not small "s" special interest but large groups in society who don't want to see their economic morality eroded by amoral globalism.

As such the WTO is not an anchor for nation states. In the United States the consensus in society is away from free trade as practiced today. If there is a tipping point where nations just give up on the WTO it will be its democratic members who tip the balance.

That time can't come to soon. It will free up our energies to get on with international free trade that makes sense. Not global organizations such as the WTO, but international organizations such as the EU where values and norms has some reality in talk about free trade.

[Organic George]

Funny I thought developing countries hated WTO since the WTO always ruled in favor of corporations over sovereign countries in trade disputes.

[hari]

wjd123 - your comments are borderline or closing-in on what I may call a *blasphemy* or a *sacrilege* by turning current international trade law on its head!

It's a blatant *lie* to say WTO has no power of sanctions under its agreed rules and regulations signed and ratified by more than 100 sovereign countries.

Where the hell do you get such foolish information from - not Dani, I hope!

In principle, international trade law is not subject to codification of what constitutes a sovereign state - as long as it is a *de jure* signatory.

International Treaties are not about system of government or economic philosophy. They are manifestation of political will of the sovereigns. I don't understand who taught you about such discrimination under international trade law.

We can argue, as Dani does, about the problems arising from WTO regime. I have done that myself, and relentlessly, but within the confines of the limits of exisitng trade laws. Please don't tell me you're pretending to be an international trade policy *anarchist* without basic knowledge of the existing system.

Learn first why your sovereign gov (US) pushed the WTO regime down the throats of former GATT members ....to satisfy US hi fi sector's globalization dream or what?

[Lafayette]

Stock accusations

wjd: The WTO doesn't have any shared values, nor is it an organization about the rule of law since it has no means of enforcing its sanctions.

This statement could not be more wrong.

I suggest you elucidate yourself regarding the organization before commenting about it in such a manner. Start here.

The WTO exist for the benefit of multinational corporations competing in an amoral globalism. Talk about WTO values and norms is a delusion.

More balderdash. Read the WTO rebuttal, here.

These prepared responses are accessible because of stock-accusations of the nature that you make.

[don]

In my view the WTO is of minor importance relative to the great trade distortions currently underway. Macro considerations are more likely to stress trade relationships as countries compete for scarce global demand. Current policies to keep an undervalued currency are imposing bigger trade distortions than any of the practices monitored by the WTO. For example, when the WTO ruled against the U.S. FSC program, it was by far the biggest case brought. It seems really silly to concentrate on such small things in the face of massive currency interventions, which are beyond the purview of the WTO.

[wjd123]

Why must I be a free trader so misunderstood? I didn't lie. (That hurt coming from you.) If you read what I said more carefully, you'll see that I never made the claim that the WTO doesn't have the power to sanction but that it doesn't have the power to enforce its sanctions. If anything it is the weakness of the WTO that bothers me. It undermines the rules and regulations of our political economy as corporations use the removal of tariffs to play one countries political economy off against another in the name of competition.

When it comes to the rules and regulations that govern our political economy, what I like to refer to as our economic morality, I'm not dealing in philosophy but reality. The statutes and the institutions that enforce our laws are facts. Both can be studied objectively.

The questions I'm interested in answering is, How does free trade effect our economic morality? You have all these nations at different stages of development subjecting their political economies to the tempest of free trade under the aegis of an organization, the WTO, incapable of moral discipline.

I don't understand why you believe I'm pretending to be an anarchist. I desire moral discipline and shared values, that's not anarchism. The WTO is a hodgepodge of diverse political economies that is incapable of delivering either, discipline or shared values.

If you read Lafayette's link to the WTO ten point rebuttal of its detractors, you'll find a common theme when it comes to objectifying the common values the WTO claims for its members: The heavy lifting for commonality of values will have to be done by others. However, when it comes to moral disipline the others are just as weak as we.

How does that make any sense?

[Michael McKinlay]

Lafayette ,

These trade pacts are already in place in Asia, Lain America will be next and finally Africa.

They will be organized around mutual benefit and regional development banks. Asia has their bank and Latin America is on their way now.

As far as the EU and the US they can only offer less and less as finance follows production to these trade areas. When the middle class congeals demand there will even less need for the US and the EU, even their markets.

[wjd123]

Hari and Lafayette,

I forgot to address my last post. It was for you, Hari, my experienced friend. It was also for you, Lafayette, a Frenchman living in Luxembourg (?) who always gets my posts wrong. I thank you for the link.

[Movie Guy]

WTO and some nations' existing trading policies may be in trouble if reverse protectionism isn't addressed in the near future.

Nothing could be more obvious.

---

[hari]

@ wjd123 - Thanks for the reaction. You know my inclination towards you, and you've reconfirmed it.

Let's face it - multilateral trade agreements have very little, if anything, to do with *morality*. It's real business, as usual.

However, means and ends do matter in international relations. For example, in case of Palestine, based on international law and moral principles, Israel has never implemented resolutions of UN/SC because of tacit political support from WH/Beltway....thereby creating the quagmire of middle east politics, since 1967 war.

Who then is responsible for the *immorality* of US foreign policy on Palestine, since 1967?

Yesterday, I noticed on MSNBC, Kissinger's interview on *Ping-Pong Diplomacy* which ultimately introduced *non-discrimination* in relations with mainland China (I am borrowing Bhagwati's argument on international trade here) which finally led to mainland China's international isolation coming to an end. US finally facilitated China's entry into WTO and (today's) globalization....

Was that a good *moral* policy or not to bring China out from the cold into multilateral trade and development? I'd argue, history will judge Nixon/Kissinger diplomacy as pivotal in reinforcing the *peace divident* in global politics.

If it leads to strategic alliance between mainland China and India, it will surely enforce peaceful co-existence between two different social systems (and whatnot) in the region.

You can get an idea of how difficult it was for Kissinger to develop a conceptual framework of policy to deal with a dominant/ancient Asian culture which was more or less closed to the outside world.

The bottomline, my dear friend, is that mainland China is now providing the credit life-line to US Treasury...so it can float the devaluation of dollar...and still get away with it, so far.

NB. Mao was influenced by American Revolution (see his interview with Snow). Current leadership in China will not want to be *discriminated* by US domestic politics....just because the global pendulum has changed.

[hari]

Bhagwati claims Krugman was one of his students at MIT....
Very interesting tit-bit to bite into because Paul is not coming out (any longer) unequivocally for multilateralism in global trade and hiding behind domestic politics and puditry....

Preferential/Free Trade Area are nefarious influence in international politics, as if it was a political *sect* to be protected at any cost. Beware!

[Lafayette]

don: Current policies to keep an undervalued currency are imposing bigger trade distortions than any of the practices monitored by the WTO.

The WTO has no authority in such matters. Its charter relates to distortion free commerce in terms of non-financial criteria, factually provable. It has sanctioning power only to the extent that signatories of the Treaty establishing the WTO prove willing to observe the sanctions. So far, so good.

But undervalued currency is a notional factor. YOU think the Chinese currency is undervalued because YOU are menaced personally by its competition. But, I'll bet you don't even give it a second thought when you buy that Chinese product at such a sweetly low price. It's just a "good deal" and "how can I go wrong?"

My point: The WTO does not deal in "notions". It deals in facts. If it can be proven, for instance, that China is dumping products in the US, China is sanctioned. The number of investigations into dumping accusations is in general decline, but it does exist. (If you like, read about it here.)

The Chinese have the right to peg their currency wherever they like, and they are certainly not the first nation on earth to maintain an undervalued currency.

When the Euro is selling at a 50/60% premium over the dollar, might we not say the American dollar is seriously undervalued? That premium is 40 points above the rate at which the Euro was announced ten years ago. People are hurting in Europe, particularly in hi-tech industries that find their products out-priced by American competition.

But, how many Europeans are complaining in this forum or any other of that consequence? One does not chose selectively the rules of the game. They apply uniformly to all nations.

[hari]

Marquis you are damn right on the punditry dealing with countries currencies pegged to (US)dollar...because Yuan has revalued +20% this year and there is a lot more upside left...in order to blunt domestic inflation pressure in China.

Even our host has a tendency to argue sometimes about lack of equilibrium between major trading partners due to domestic monetary policy. One must however not forget the fact that sovereign nations are independent to regulate their own currency - even under WTO regime.

Next week the G-8 meeting in Japan will focus on why and for how long US Treasury intends to mainatain an undervalued trading currency - the political pressure will escalate in line with commodity prices including oil - US trading partners are paying for overcoming US deficit, in other words.

[Lafayette]

MM: As far as the EU and the US they can only offer less and less as finance follows production to these trade areas.

Well, one can hope for such, but nothing indicates its likely to happen.

World polarity, in terms of trade and politics, will involve four or five poles: The US, the EU, the Far East (Japan, China, Korea and Taiwan) and the Middle East (Oil States). When Russia runs out of oil, Russians will go back to eating potatoes for sustenance.

These poles mentioned have a combination of financial muscle and industrial talent to drive world trade and commerce. The lesson Americans should draw from this is that it is no longer the Big Fish in the pond. And, it needs a leadership to understand how important cooperation is to furthering America's ambitions.

All other countries are just spectating.

Question: What is the purpose of a central bank if there is no common currency? Can you imagine South America with a common currency and very high inflation diversity throughout as is its custom? I can't, because such would be unmanageable.

[Lafayette]

wjd: If you read what I said more carefully, you'll see that I never made the claim that the WTO doesn't have the power to sanction but that it doesn't have the power to enforce its sanctions. If anything it is the weakness of the WTO that bothers me.

I presume the "you" is me, though it's hard to tell. When addressing someone in a blog, don't be afraid to identify them.

The WTO works on the principle of mutual inclusiveness. Sure, a country could say, "Hey, I don't agree with your judgment and you can go to hell!" But, what will happen is that they will be expelled from the WTO. That sanction is not cost-free.

It can significantly disadvantage the country in numerous ways to be excluded from WTO processes and debates. And, it will not be part of any commonly agreed upon WTO treaties or agreements, that are essential for fluent world trade. It will be the odd man out, looking in from the outside rather than participating on the inside.

Besides, if I posted that page regarding WTO dumping investigations, it was to show that they were in decline. I suggest that this proves that the inclusiveness of the WTO has brought this result about. What government wants to be investigated for allowing dumping to happen? It is tantamount to self-discipline for fear of being shamed.

[wjd123]

Hari,

You are going far afield here. Kissinger opened relations with China in an effort to keep his conception of east/west balance-of-power post war politics from shifting against us. I hardly think that he could have imagined then how our trade relations with China would look in the 21st Century.

Today Kissinger has business interest in China so anything he might say about our relations would need to take in mind those interest.

I think our trade relations with China today are helping to undermine the balance of power we had in our politics here at home. The lack of balance, or should I say the lack of political freedom, in communist countries was one of the reasons for Kissinger's machinations to begin with.

I don't mind helping China economically, but not at the cost of undermining the economic morality of our political economy, not at the cost strenghening corporate power over its stakeholders, not at the cost of making America China's creditor.

I don't think the Kissinger of the 1970s would much care for that last cost.

[hari]

Last week Rice was in Beijing and taking a photo with Pres. Hu and declaring in *unisom* their joint preference for deepening and stabalizing bilateral relations.

I don't think we can hijack this thread, morally, to focus on China & WTO - Is it a Tipping Point of Globalization?

Rest assured there is intrinsic national interest - on both sides - which drives their respective national strategic policy. And, inspite of your obvious (moral) coolness toward China, be prepared for *ever closer* bilateral relations....