|Blog by: Andreas Freytag, Philipp Lamprecht and Matthias Bauer
Buenos Aires is going to host this year’s Ministerial Conference of the World Trade Organization (WTO). Commencing next Sunday, the 11th Ministerial does not come with a lot of fuss. The WTO has, at best, played only a minor role in international negotiations of further trade and investment liberalization in recent years. At any rate expectations for this year’s ministerial are modest.
Recent years have largely witnessed bilateral or regional negotiations. No signs emerged for big multilateral pushes towards further tariff elimination rounds, let alone the tackling of non-tariff trade barriers or regulatory cooperation in services and modern manufacturing industries.
We are likely to see a continuation of bilateral endeavors, particularly between most already industrialized countries and some emerging market powerhouses. Developing countries had and still have a say at WTO level, but have been given little consideration in the past and are likely to continue to play at the sidelines in the future.
Nevertheless, 2017 already delivered some success stories for the WTO. The trade facilitation agreement (TFA), sealed in Bali in 2013, entered into force in February 2017. Two-thirds of the WTO’s member countries already ratified it. In addition to the TFA, changes in the rules on intellectual property (the TRIPS agreement) took effect in January 2017, aiming to facilitate trade in licensed products for developing countries.
In this respect, WTO Director-General Roberto Azevêdo can indeed open the Buenos Aires Ministerial with some tailwind. At the same time, however, a number of political difficulties prevail for the key negotiation issues of this year’s summit; specifically, policy proposals to facilitate agricultural trade and to increase food security for developing countries. For example, at the recent Marrakech meeting, the European Union (EU) issued a joint statement together with members of the Cairns group of agricultural exporters highlighting the need for a new discipline on trade distorting domestic support. However, to date conflicting interests on this priority issue still divide the governments of WTO member states.
In Europe, Eurochambers and some national business associations have launched an initiative to discuss small and medium-sized enterprises (SMEs). Access to foreign markets requires compliance with complex foreign regulations and standards, which requires highly specialized administrative staff and contacts to (occasionally restive) customs and regulatory bodies. Very often SMEs do not have these resources putting them at a systematic comparative disadvantage to larger firms including multinational corporations (MNCs). Having in mind that trade barriers and regulatory heterogeneity constitute a subsidy of big business, regulations, transparency and greater alignment of standards are at the heart of the initiative. Given that SMEs, after all, account for high levels of employment in all WTO member countries, this initiative is absolutely justified, and we consider it likely that the SME initiative becomes a success story.
Noting that we will not necessarily see big breakthroughs and more promising results than those of the past two conferences (Bali 2013 and Nairobi 2015), WTO Director Azevêdo is actually expecting some significant advances in the talks about agriculture.
One reason for our somewhat pessimistic projection lies in the critical attitudes of the current US administration to international trade in general and the WTO in particular. Talking of ‘bad deals’ and the need for ‘Buy America’ policies, US President Trump has repeatedly expressed his antipathy to the WTO. Of course, this is nonsense from an economics point of view, but – even in the Western hemisphere of the 21st century –, it still comes with significant political weight. Stubbornness of the US on proposals to further dismantle trade-distorting measures – even on a small scale – is likely to prevent any substantial coordinated and codified progress.
In that regard, it is particularly worrisome that other major WTO players such as the EU and China are largely self-absorbed with internal and regional political affairs. Apart from some formal lip service paid to the WTO, the administrations of the two parties are highly unlikely to pull the thick strings to further liberalize trade at a multilateral level, let alone the willingness to facilitate a revitalization of the Doha Round (to commemorate: launched in 2001).
In that sense, however, the EU could at least thoroughly reconsider the extent to which it continues to rely on US approval for new trade policy initiatives. In his recent speech, Germany’s Foreign Minister Gabriel openly pointed out that the EU could only rely to a limited extent on the US on global policy issues.
For the EU (but also China), the obvious trade policy conclusion would be to take the multilateral initiative to a new level. It would imply taking courageous steps in agricultural trade – particularly in light of the recent EU-Africa summit that took place just a week ago.
For the EU, a genuine and honest commitment to a global multilateral liberalization of markets for food and agricultural commodities would require making honest, ambitious, detailed and codified proposals for market opening and the elimination of national subsidies.
Such a commitment could come as a unilateral initiative, in the sense that developing countries themselves do not have to open the markets further in the next five years or so, with phase-out schedules applied over a period of 10-20 years afterwards. Admittedly, this is far from efficient in light of substantial public financial resources transferred to farmers and agricultural companies. It would also come with lower economic benefits over time, knowing that productivity increases in agriculture are driven mainly by import competition. However, even if such an initiative could find consensus, it is unlikely to pop-up two days before the start of the Ministerial.
To sum up: the governments of some WTO Member States (primarily the US) do not want to take an initiative, while EU governments probably cannot take the lead because of its internal political struggles around the reorganization of core European institutions.
The governments of some emerging markets, such as India or China, could take the lead. They should be able to see and communicate a huge national interest of their countries in multilateral trade liberalization. The notion, however, that their governments could drive OECD members forward with courageous initiatives is as attractive as it is unrealistic.
The WTO is therefore very likely to continue to take only very, very small steps after Buenos Aires. The most promising way out of its numerous blockades would be a fundamental procedural reorientation of the WTO, namely the departure from the rule that each member country must ratify and recognize all constituent parts of the agreements (single undertaking).
It is time for governments to think about putting together minimum packages, with voluntary accession to some pillars of the agreements. Following the mechanisms of competitive liberalization, it is much more likely to arrive at much better outcomes for many rather than no outcomes for all. We cannot expect these considerations to rank high on next week’s agenda for negotiations, but the reorganization of the WTO might become the topic to go for at the 12th WTO Ministerial in 2018.
Photo by World Trade Organization on VisualHunt / CC BY-SA
South Africans will remember the second and last business week of 2015 for a long time to come as a week characterized by unprecedented drama in South Africa`s governance structures. This follows the sacking of Finance Minister Nhlanhla Nene and the brief appointment of David van Rooyen. As is already common cause, the firing of Minister Nene led to a shock in the markets which worsened the rand`s already externally induced market volatility. Due to a market outcry President Zuma had to revise his decision and appointed seasoned Finance Minister Pravin Gordhan. South African media was therefore awash with President Zuma`s decisions vis a vis his Cabinet during the second week of December. The media`s attention shifted focus away from one rather important event in not only South Africa`s biennial calendar but that of the world. This was the World Trade Organization’s Ministerial Conference in Nairobi, Kenya, which was being held for the first time on African soil. Despite the event being overshadowed by events at home, South Africa sent a strong delegation led by Minister Davies.
The WTO Ministerial brings together Ministers of Trade from more than a hundred and sixty countries. The 2015 WTO Ministerial had the unenviable task of concluding the Doha Round or pulling the plug on it. When the Ministerial finally ended the Ministers had not overtly pulled the plug on the trade negotiation round which had been underway for a solid thirteen years. However, a conclusion can be made that the conference has pulled the plug by omission. With the Doha Round dead, international trade policy makers now have to pave the way for a post Doha WTO.
It is important to note that the death of Doha has nothing to do with any particular country. To the contrary, the still birth of the round is reflective of the changed global geopolitical architecture in which there is no pure hegemony. The Doha Round was conceived when the US was totally and willingly in charge of global economic affairs. However, since then, the world has entered into a vortex with power shifting from the US towards China. The ambivalence resulting from being in transition has led to the delay and consequent death of the Doha Development Agenda. Losers of this round are definitely developing countries that had hoped to extract development outcomes from the negotiations. However, the whole idea of development within an international trade realm remains contested.
Dearth of Global Leadership
Different potential scenarios remain for the future if the multilateral trading system is to remain viable. These range from a business as usual approach in which traditionally key WTO members such as Canada, the European Union, Japan and the United States pursue the alternative paths of Mega Regionals that they are already undertaking. Another possibility is for the United States and possibly China to take a leadership role and exercise that leadership at the WTO. This could be done in two ways. Firstly, they could do so by rallying their respective constituencies to return the primacy of the WTO on multilateral trade issues. Secondly, considering that most of the key players in the multilateral trading system had already started negotiating mega regionals due to frustration with the lack of progress in the Doha Round, another way of keeping the multilateral trading system relevant could be by ensuring that those mega agreements are brought back to the WTO so that they can become a package of future trade rules.
Single Undertaking and Consensus Rulemaking
Thirdly and maybe importantly is to implement a strategy that is informed by the lessons drawn from the failure of the Doha Development Agenda. One of the main lessons to be drawn is that the single undertaking rule (‘nothing being agreed until everything is agreed) is unviable in a world which is in a vortex, moving from one hegemony to another. This rule worked quite well when the WTO membership was composed of fewer member states which had a generally similar economic value system. Intertwined with the single undertaking rule is the consensus principle. The Doha Development Agenda has exposed serious structural flaws of the consensus rule. However, the failure of these rules should offer new opportunities in strengthening the multilateral trading system.
The way forward would be for the WTO membership probably led by the US and China to make the WTO regain its position as the epicenter for multilateral trade. This could be done by bringing all the mega regionals to the WTO as plurilaterals. As this approach might face resistance, member states could find a way of using the WTO dispute settlement understanding. The DSU has proven to be one of the enduring pockets of excellence in the multilateral trading system. Member states can therefore link their mega regionals such as the Trans-Atlantic Partnership and the Trans Pacific Partnership to the WTO dispute settlement mechanism. Such a linkage would therefore assist in regulatory harmonization. It will avoid or remedy the fragmentary effect that mega regionals have had on the multilateral trading system.
Furthermore, WTO member states should consider unpacking the Doha Development Round issues and negotiate them as plurilaterals. Such a sectoral approach would enable members to focus on issues that are most relevant to them. Already there are some success stories in this regard such as the International Technology Agreement. Member states will therefore negotiate a plurilateral with a view that those that want to join can do so at a later stage. The plurilateral approach would go a long way in moving forward the new issues such as investment within the WTO.
African countries together with other developing countries have been the main demanders in the Doha Development Agenda. These countries had hoped that they will benefit more from the conclusion of this particular trade round. They had hoped this would happen through getting more market access concessions especially in agriculture. However, due to developing countries having been emboldened by changing geopolitical shifts and being more familiar with the WTO, the round took too long. What also emerged from the Nairobi Ministerial was that the division among member states is no longer based on the traditional North South divide. Instead, countries’ interests have become complex. For instance, the perennially thorny issue of agricultural subsidies and domestic support are no longer confined to the US and the EU; instead China, Brazil and India have become some of the biggest culprits. This means that there is a need for reconfiguration within developing countries to reflect and deal with the new reality. Countries such as South Africa need to change their approach to the WTO by beginning to embrace and push for plurilaterals that have a bearing on developing countries.
The overall picture is that the multilateral trading system will survive post Nairobi with the Doha Round having been presumed dead. It is up to the US and China to exercise leadership by rejuvenating one of the most important institutions of the 20th century. Maybe it is time to reflect on the connection between trade and global security. Countries should not forget that the WTO in many ways helps to maintain peace and security in the world as trade issues are dealt with in a less politicized setting.
That the World Trade Organization (WTO) has been in the grip of a systemic crisis since 2008 is well known. Notwithstanding relatively minor successes at the Bali Ministerial in December 2013, the WTO’s negotiating function remains effectively stalled. The Nairobi Ministerial, set to take place in December 2015, is not likely to yield systemic solutions, notably to break the Doha Round impasse. The longer this negotiating stalemate endures, the more the WTO’s foundations will crumble, particularly the much-prized jewel in its crown: the Dispute Settlement System. Why? Because an institution that is not able to modernize and continuously update its rules will be, and is being, bypassed. In its 20th year, the WTO faces an intensifying existential crisis.
There are many reasons for this. But at the heart of the problem lies a competing vision for the WTO. One vision is content with “WTO 1.0”; an organization that gives priority to the bulk of its developing country membership with focus on restraining negotiating ambition for fear of the consequences of over-stretching the policy and institutional capacities of those members. A different vision offers “WTO 2.0”, in which the rules are continuously updated and expanded to reflect the realities of modern trade and investment, particularly the global value chains (GVCs) that drive them.
Two broad constituencies, inter alia, advocate “WTO 1.0”: least developed countries (LDCs) and other poor or small country groupings such as small island developing states (SIDS) and small, vulnerable economies (SVEs); and large emerging markets such as India, Brazil, and South Africa, plus a range of middle-power developing economies. These countries, for the most part, share a view that the WTO should not impose undue obligations on its members, and that differential obligations, or special and differential treatment (SDT), should permeate the system. Many are also sceptical that GVCs will confer the benefits proffered by WTO 2.0 advocates, arguing instead that the gains from GVCs are unevenly spread, with the benefits concentrated in developed world multinational corporations while the costs are concentrated on their developing country hosts.
Again, two broad constituencies advocate “WTO 2.0”: developed countries represented, inter alia, by the OECD; and developing countries wishing to integrate better into GVCs, such as those comprising the Pacific Alliance. These countries share the view that the WTO rules need to be extended and updated, and reciprocal market access too. Hence they advocate for incorporation of new issues such as competition and investment into the WTO rules architecture.
As usual, this polar spectrum view conceals important realities. Advocates of WTO 2.0 seem unable to deal with the power of agricultural lobbies in some countries. Agricultural lobbies are quintessentially products of the WTO 1.0 world. This chronic failure fuels the sceptics in that WTO 1.0 paradigm who argue, justifiably, that double standards undermine trust and the legitimacy of the WTO. For this reason the agriculture problem has to be fixed, but almost certainly won’t be. Similarly, there are growing lobbies in certain WTO 1.0 countries that want their governments to sign up to WTO 2.0 rules or market access commitments, but their concerns are routinely sacrificed to the dominant WTO 1.0 paradigm. South African services exporters targeting African markets come to mind.
Shift in balance of power
These “low politics” of trade are now merging with the “high politics” of global affairs. The ongoing rise of emerging markets in world trade and investment, particularly represented by China, is slowly but surely tilting the balance of global power away from the North and West, towards the East and South. This poses serious challenges to the western architects of the WTO, and the broader global trade and investment order in which it resides. These tensions are reflected particularly in the US and play out in various internecine political battles, tying the Executive’s hands in its attempts to exercise leadership of the trading system, particularly in the WTO.
Consequently the US is looking elsewhere, to the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These “mega-regional” trade negotiations represent, at once, an attempt to pioneer new rules among like-minded countries consonant with the WTO 2.0 vision, and an attempt to restore US primacy over the global trading system. The overt intention is to extend US, and US-EU, regulatory preferences to the WTO down the line, through a process of competitive liberalization.
This high stakes poker game has unpredictable consequences. Of most importance is that no one can predict whether mega-regionals will ultimately succeed. While the TPP’s conclusion does appear to be in sight, its final adoption is hostage to a complex political cycle incorporating, not least, the 2016 US elections. The TTIP’s future is less certain, since negotiating power is much more diffuse between the parties, and EU regulatory preferences diverge in significant respects from those in the US.
So how might this all end? In the concluding chapter of our World Economic Forum report on the high and low politics of trade, Robert Lawrence and I set out three scenarios:
- Building blocks: The TPP and TTIP conclude smoothly, taking account of “outsider” concerns, and a virtuous cycle of trade and investment liberalization ensues. The regulatory agenda is incorporated into the WTO through inclusive plurilateral arrangements, modelled along the lines of the Trade Facilitation Agreement’s “ladder” of SDT provisions. WTO 2.0 is built incrementally, by providing consensual pathways between it and WTO 1.0. Almost certainly this scenario would require a lasting fix of the agriculture problem.
- Stumbling blocks: In this, more likely, scenario the hurly-burly of trade negotiations gives rise to many compromises in the TPP and TTIP, including on regulations. So US and EU primacy in the global trading system is not decisively restored, leaving behind leadership ambiguity. But enough is done to convince key developing countries, notably China, to converge with mega-regional outcomes, so that the critical mass shifts towards WTO 2.0. But in the absence of decisive leadership, and competing visions for WTO 2.0, progress towards that vision is by no means assured. In short, the outcome is one of continued ambiguity in which Chinese and Indian preferences, with their own domestic reform imperatives in mind, loom ever larger.
- Crumbling blocks: There remains a substantial possibility that the TTIP, especially, could rumble on for years without reaching a decisive conclusion. Therefore, US and EU primacy in the trading system would be hamstrung, hastening the advance of potential Chinese and emerging market leadership. However, since those countries will not be in a position to exercise decisive leadership for years to come, the outcome is likely to be stasis, and continued exercise of influence through regional formations – such as RCEP in the Chinese case. Thus the centrifugal forces unleashed by continued stasis in the WTO would acquire full force and with unpredictable consequences.
Clearly it is not possible to say where the WTO system will end up until we are clear how mega-regionals, especially the TPP and TTIP, shape up. Nonetheless, a world of stumbling blocks seems most likely, with the WTO poised nervously in-between while the great trading powers position themselves for leadership and influence. This scenario may turn out well, especially if China’s regulatory preferences converge towards US and EU norms, but that outcome is far from certain.
The World Economic Forum report, The High and Low Politics of Trade, is available here.