How deep is globalisation?

Pankaj Ghemawat and Steven A Altman have come out with this exhaustive report on globalisation titled "Depth Index of Globalisation 2013" which "provides up-to-date data and analysis on the depth or intensity of globalization and relates it to what we call the big shift: the rising proportion of many types of activity occurring in emerging economies. It points out that overall, globalization’s post-crisis recovery stalled last year, as a result of which the world is still less deeply interconnected today than it was in 2007. It also shows that while growth in emerging economies has slowed somewhat, the big shift continues."

The 10 take-aways from the report are:

1. Globalization’s post-crisis recovery stalled last year, leaving the world still less deeply interconnected in 2012 than it was in 2007. Macroeconomic weakness was the main culprit, but there is also evidence of increasing protectionism.

2. Foreign direct investment depth plummeted 21% in 2012 and the share of the world’s economic output traded across national borders declined modestly, but growth on the information and people pillars continued. The number of international tourist arrivals crossed the 1 billion mark for the first time.

3. Internet fragmentation has become a growing concern even as international bandwidth continues expanding. Interactions on social media, like other information flows, mostly remain domestic and regulatory impediments may curtail the potential of technological advances (e.g., cloud computing) to expand them. 

4. The big shift in the share of world output from advanced to emerging economies continued, with the latter driving most of the growth of international flows even as the largest among them, China, significantly reduced its reliance on exports and foreign investment. 

5. Emerging economies are only about one-quarter as deeply integrated into international capital and people flows and one-ninth as globalized in terms of information flows as advanced economies, but are roughly at parity with respect to international trade.

6. The big shift has already driven profound changes in the pattern of globalization, e.g., declining regionalization of merchandise exports after increases for most of the post-war era. If emerging economies tend toward advanced economies’ levels of globalization as they grow wealthier, the big shift beyond trade has only just begun.

7. Multinational firms are struggling to keep up with the big shift. While multinationals from emerging economies remain few and far between, firms from advanced economies are falling behind their new competitors. Their people, in particular, have not globalized as fast as their operations and sales targets.

8. At the regional level, Europe is still the most deeply globalized region despite recent setbacks. Sub-Saharan Africa and South & Central Asia lag the farthest behind—although South & Central Asia did experience the second biggest increase in depth of globalization in 2012, behind North America. 

9.Strengthening international flows could bolster macroeconomic recovery, with every country (and region) possessing untapped possibilities to increase its depth of globalization through domestic as well as international policies.

10. Looking ahead, the largest threat to globalization comes from policy fumbles rather than macroeconomic fundamentals, since the world economy is still projected to grow faster from 2012-2018 than over any of the past three decades.

I have earlier blogged about Pankaj Ghemawat's works here.

Of governments and their role

An interesting piece titled "Don't give up on the power of governments" on globalisation and role of governments in challenging times is found here. While governments are often compared, at times unfairly, with well performing corporates, the enormity of the challenges are often under estimated.

"But, on another level, the attempt to rate government alongside business and the media is fundamentally misguided: no sector operates at the scale of responsibility, accountability, and expectation that governments do. 

Business decides for itself where to invest and grow. Media indulge themselves in a fast-moving news cycle. Government enjoys neither luxury. It cannot simply pack up and move on when it faces a loss or is bored with a story. Government must stay put – and must often clean up the messes left behind by those who do not. On a good day, it may even get to make improvements. 

The problem for governments, more often than not, is that in attempting to respond to and reconcile often conflicting individual, family, and national needs, their ability to deliver results efficiently and effectively has declined. As a result, trust in government has plummeted."

Often n the debate on globalisation, the issue is of the State versus the market. The debate is ideological at times and is fuelled by prejudice rather than rationale. May be there is a middle path of recognizing the limitations of both unbridled State power as well as inescapable market failure, of recognizing their respective roles and of working together to make lives better.

Role of the State and trade agreements

The role of the State and government in a globalised world is a subject matter of great debate especially depending on which side of the spectrum you come from. Is the role of the State incompatible with free trade and globalisation? Can they co-exist? Does free trade and globalisation necessarily mean reduction of the role of the State in economic activity and governance?

I had written about this a long time ago in this blog piece that I "searched out" here - on State Capitalism and globalisation. A more recent piece is the rather critical one wherein Martin Khor alleges that regional trade agreements are reducing the role of the State, especially State Owned Enterprises with provisions relating to them found in these agreements.

Titled "The Role of the State in Developing Countries under Attack from New FTAs", he argues:

"Naturally, there are pros and cons to any agreement, including the FTAs. Any potential gain for a country in exports or investments should be weighed against potential losses to domestic producers and consumers, and especially the loss to the government in policy space and potential pay-outs to companies claiming compensation under the FTAs' investment rules. 

But if developing countries have to come under new international rules that curb the role of the state and that re-shape the structure of their economy, then the prospects for future development will be adversely affected."

The role of the State, State owned enterprises and government are a source of constant challenge in discussions on liberlaisation and globalisation. How do international trade agreements address this question? Does GATT/WTO distinguish between a State led economy and a liberalised economy? Does it prefer one over the other? Is there place for a mixed economy in this discourse? Can we build a model for a mixed discourse?

Dani Rodrik, national sovereignty and globalization

The issue of domestic policy space in the context of globalization and international trade rules has often been a subject matter of this blog. Does the international legal framework severely restrict national decision making abilities? Does it infringe upon democratic politics? I had blogged about this issue here.

Dani Rodrik has argued that hyper globalization, national autonomy and democracy cannot go together. Calling it a political trilemma, he is of the opinion that increased economic integration leads to a loss of national sovereignty and democracy. Increased globalization leads to a loss of democratic policy space.

Writing in the Project Syndicate and citing the example of the Eurozone, he argues:

"The conflict between democracy and globalization becomes acute when globalization restricts the domestic articulation of policy preferences without a compensating expansion of democratic space at the regional/global level. Europe is already on the wrong side of this boundary, as the political unrest in Spain and Greece indicates. 

CommentsThat is where my political trilemma begins to bite: We cannot have globalization, democracy, and national sovereignty simultaneously. We must choose two among the three.Comments 

If European leaders want to maintain democracy, they must make a choice between political union and economic disintegration. They must either explicitly renounce economic sovereignty or actively put it to use for the benefit of their citizens. The first would entail coming clean with their own electorates and building democratic space above the level of the nation-state. The second would mean giving up on monetary union in order to be able to deploy national monetary and fiscal policies in the service of longer-term recovery.

Comments 

The longer this choice is postponed, the greater the economic and political cost that ultimately will have to be paid."

While "globalization" or economic integration in the context of the Eurozone may have different connotations of domestic sovereignty, Joel Trachtman has argued that global trade rules do not severely curtail national will. By consenting to international agreements, countries do exercise their democratic choice. Further, the trade agreements themselves have tremendous scope for interpretation. Hence, even though a country is a part of an international legal system, the fine print of the agreements must be carefully engaged with to protect legitimate domestic space and national choice. While it is nobody's case that globalization does not have an impact on sovereignty, the extent and severity is the critical question. In times of crisis, the impact is played upon. However, global supply chains and interdependence on imports downplays the negative impact of globalization. Is it ever possible for countries to shun international mulitlateralism and become "protectionist" again? Will democratic will prevail on international economic realities? Are they irreconcilable? What do we make of examples of China which have actively participated in the globalized world after its entry into the WTO but at the same time maintained its national goals and commitments? Is there a middle path which carefully guards national democratic will but at the same time engages with the global framework?

Asian economies and WTO

The Asian Development Bank recently brought out a report titled "Asian Economic Integrator Monitor" which analyses, inter alia, regional co-operation and integration in the Asian context. Business Beyond the Reef has commented on the report recently.

Two aspects dealt in the report caught my attention:

1. The trade/GDP ratio in Asian countries has gradually increased over the years. This signifies integration into an interconnected world economy as well as increased reliance on the external, globalised world as compared to a domestic, inward looking policy.

                                   Table 5: Trade/GDP Ratio by Region and Subregion (%)

                                                                                            1990     2000     2010       2011

Asia                                                                                      30.1       40.4     54.1        57.3

East Asia                                                                               26.7       34.1     51.1       52.8

People's Republic of China                                                    29.9       39.6     50.2       49.9

Southeast Asia                                                                       89.4      130.8   107.2     116.1

ASEAN-4                                                                                62.9      103.7      78.1     86.0

BCLMV                                                                                   75.3       84.4    110.1    130.8

Singapore                                                                              293.1    289.3     292.3    299.4

Central Asia                                                                             -          62.8       52.4      59.7

South Asia                                                                              16.0      23.0     36.7       44.0

India                                                                                       12.9      19.5     35.9       44.2

The Pacific and Oceania                                                          28.3      37.3     36.3       37.8

European Union                                                                         –         57.6      62.5      67.2

North America                                                                          18.4     25.6      27.4      29.9

World                                                                                       31.1     40.2      48.0       51.9

2. Role of Asian countries in the dispute settlement process of the WTO

"Some 31 economies in Asia have acceded to the WTO. Asia has also been an active participant in WTO processes. For example, the region has been active in pursuing cases involving anti-dumping and countervailing duties (Table 18). But multilateral cooperation goes beyond the design and use of existing measures. International law often progresses through adjudication, particularly since the Doha Round has stalled. Middle- and high-income Asian economies have been active participants in dispute settlement since the WTO was established in 1995 (Table 19). In addition, Asian nationals have served as panelists to disputes, and several Asian representatives sit on the Appellate Body,which hears appeals from panel cases and cannot be overridden."

Is the increased participation of Asian countries in the WTO DSU a sign of a strategic engagement in the WTO or an ad hoc response to disputes that have an impact on economic interests? Do Asian countries have a development agenda that they consciously pursue at the adjudication body of the WTO? It would be interesting to study the comparative journeys of Asian countries in their pursuit at the WTO DSM in order to achieve their domestic interests. Are there lessons they can learn from each other that can be a ground for developing country co-operation? While national interests ultimately should guide WTO engagement, is there scope for a wider partnership in the WTO of the Asian economies? Do trade realities and converging interests mandate such an eventuality or are the interests too diverse and conflicting to achieve such a partnership? 

Joel Trachtman on development policy space and the WTO

The debate of development policy space within WTO rules has often been a constant subject of this blog. I have blogged about it here, here and here. How much regulatory space do countries, especially LDCs and developing countries, have in terms of crafting and implementing development policies which are not WTO inconsistent? Can countries, even after the advent of the multilateral trading system, pursue independent development policies? Is there scope within the WTO rules to pursue one's own economic and political developmental agenda? 

Joel Trachtman offers some analysis and answers to some of these questions in his 2006 paper titled "The WTO and Development Policy in China and India" wherein he analyses the policy choices that developing economies like China and India have within the WTO system. Obligations arising out of different WTO Agreements are analysed and policy space within each of the categories is suggested. He has listed out 5 categories of broad obligations that a country would have to follow in the rule based multilateral system:

1. Category 1: goods and services liberalization - embodied in the GATT Agreements

2. Category 2: standards liberalization in the TBT and SPS Agreements

3. Category 3: intellectual property rights under the TRIPS

4. Category 4: investment measures under the TRIMs

5. Category 5: export subsidies and import substitution subsidies categorised under the Agreement on Subsidies and Countervailing Measures

After a detailed analysis of these categories and the options developing countries have in terms of pursuing their development agenda, the author concludes:

"This paper has shown ambivalence regarding restrictions on the “right to regulate” for industrial policy under WTO law. Some restrictions may be desirable, and may be favorable, as Hudec suggested, and as Indian and Chinese policy confirm. Other restrictions may be undesirable. As Amsden and Hikino have argued, “[a]t close examination . . . the new rules of the World Trade Organization, a symbol of neoliberalism, are flexible and allow countries to continue to promote their industries under the banner of promoting science and technology. The success formula of late industrialization—allocating subsidies in exchange for monitorable, result-oriented performance standards—is still condoned." It would seem useful to institute a development policy review mechanism that could provide exceptions to developing countries for appropriate development-motivated policies."

The issue of development policy space within the WTO is a complex question. A blanket rejection of WTO rules as infringement of policy space is a naive and unreasonable stand to take. It is counterproductive and deprives a country of the advantages that a multilateral system has to offer. The challenge is to judiciously manouevre within the WTO rules to further one's national interest. To what extent WTO rules permit such manoeuvering is debatable. There are many exceptions within the WTO rules that permit individual policy choices. However, they need to be exercised in a non-discriminatory and justifiable manner. Exceptions, contingencies and interpretation of rules does allow a little leeway for developing countries to pursue their domestic development agenda. Further, an approach in industrial policy might be strategically very different from the agricultural sector while engaging with multilateral rules. A countries strengths and weaknesses would have to be analysed sectorally to effectively use the rule based system.

This would require a painstaking analysis of what is the right development policy and its analysis with respect to different obligations. It would require a specific, sector wise analysis, weighing of different options and making a comparison of its WTO consistency. At times, WTO inconsistency may have to be implicitly allowed if the cost of compliance is not too high. This takes us back to the fundamental issue - enhancing domestic capacity to engage with the multilateral system. Developing countries must enhance their capacity, not only legal capacity, in a multi-stakeholder mode (involving trade policy experts, economists, legal experts, industrial policy experts, agricultural economists, political leadership, special interest groups as well as the bureaucracy) to address this issue. It is too complex an issue to be left to the domain of a single stakeholder.

Security interests, WTO and domestic policy space

The question of the balance between domestic policy space and following multlilateral treaty obligations has often been a topic in my blog. An article titled "The Self-Judging WTO Security Exception" by Roger Paul Alford in the Utah Law Review on the use of the 'Security exception" under GATT which explores this debate in the context of Artice XXI of GATT in great detail provides a brilliant overview of the issue. To what extent does Article XXI give a country the freedom to impose restrictions that hinder free trade? Is it an unrestricted right? Is it "self-judging" or based on objective criteria? Who decides (the member country or the Dispute Settlement Body) as to the necessity and desirability of the measure? Is the exception open to abuse? What has been the practice of countries in this regard? Can the threat of a "national security" issue be misused as a protectionist tool? Can it be used to pursue an ideological agenda in international relations?

Article XXI of the GATT states:

"Security Exceptions 

          Nothing in this Agreement shall be construed

(a)      to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or

(b)      to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

(i)       relating to fissionable materials or the materials from which they are derived;

(ii)      relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii)     taken in time of war or other emergency in international relations; or

(c)      to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security."

The provision itself provides wide latitude to a member to take measures inconsistent with WTO obligations "which it considers" necessary for the protection of its essential security interests. The article makes a detailed analysis of the use of this provision and its challenge at the DSM of the WTO. Contrary to fears of its possible abuse and extensive use, State practice indicates that it has not been invoked too often. Further it has never been a subject of a WTO dispute though many countries could have justified some of their measures under this exception. The author asks some pertinent questions regarding the lack of abuse of this provision:

"The general and consistent practice of complying with a self-judging rule raises larger issues beyond the WTO. While the self-judging nature of Article XXI remains contested, it is undeniable that it has been invoked at the sole discretion of the Member States. As such, it provides a useful prism through which to consider theories of international law compliance. Unlike almost every other aspect of the WTO, there is no obvious sanction for ignoring its textual limits. So why does a State typically invoke Article XXI(b)(ii) to restrict military and dual-use goods, but not purely civilian products? Why does a State not declare virtually every crisis—economic, political, social, or military—an “emergency in international relations” under Article XXI(b)(iii)? Why does a State not consider virtually any national policy an “essential security interest”? With billions of dollars at stake in WTO litigation,350 why not invoke the security exception in bad faith? In short, what is to prevent Article XXI from becoming the exception that swallows the rule?"

Explaining the various theories of compliance to international law and its juxtaposition to the limited use of the security exception the article tends to view that the exception to be not abused in good faith. 

" The WTO security exception carries forward Adam Smith’s great insight: defense is more important than free trade. The security exception is an anomaly, a unique provision in international trade law that grants the Member States freedom to avoid trade rules to protect national security. In the long history of GATT and the short history of the WTO, that freedom has never been challenged seriously. Member States understand the exception to be self-judging, and presume that it will be exercised with wisdom and in good faith.

Thus far, the record has been impressive. While no doubt there have been departures, the self-judging security exception has worked reasonably well. It certainly has not undermined the effective functioning of the WTO. The overwhelming majority of security measures are unregulated by international trade law, and those few that have been challenged were never reviewed. International trade law, viewed by many as the most effective and intrusive branch of international law, has preserved one enclave of complete national sovereignty. There are many possible explanations for its success. Its ambit is sufficiently broad to cover most security concerns, and it is reinforced by other WTO provisions that facilitate compliance.

A self-judging rule that Member States honor provides helpful insights into broader questions regarding nations obeying other international laws. Any number of theories, including traditional normative theories of compliance, and more controversial rational choice theories that focus on national self-interest, can explain the strong compliance record. The one theory that has little explanatory power is a pure coercion theory. Whatever may be motivating Member States to respect the limits of the security exception, it is not fear of sanction."

A recent example of a ban on exports due to a possible security exception was seen in the case of the EU ban on exports of luxury items to Syria about which I have blogged here. Is the fact that the security exception has not been misused so far by any country to advance protectionist measures is in itself a guarantee for the future? With the trend of increased protectionist measures, is there a danger that this provision will be open to "innovative" interpretation to justify countries' measures? Does "essential security interests" include "economic interests" ? Who defines what the contours of this "economic interest' is? Are there objective criteria to do so? Is the exception "self judging" or subject to DSM judicial review? To what extent can the judicial review question the rationale of a domestic policy choice? Would an over authoritative judicial body undermine compliance? Would it be reasonable to argue that it is in a countries economic interest to protect its domestic industry? Only time will tell if this exception becomes the rule?

Globalisation and traditional hierarchies - Some thoughts

The Becker-Posner Blog has a brilliant piece on capitalism, globalisation and its impact on social structures like class, gender and race. Titled "Profits, Competition, and Social Welfare" it argues that capitalism does help in reducing the the barriers of social inequality.

"My second example deals with the interaction between capitalism and discrimination against groups based on their race, gender, religion, or other characteristics. Capitalism and the profit motive help to erode discrimination because companies in their quest for greater profits try to hire minority group members who are getting paid less than their productivity. In addition, the successful growth in incomes and productivity induced by private enterprise raises the standard of living of minorities even when they continue to suffer from substantial discrimination.

A prime example is South Africa under apartheid that was maintained by government laws but was opposed by many private companies. South African blacks suffered immensely under apartheid, and its overthrow is one of the great events of the past several decades. Nevertheless, one main problem during the apartheid period was not to prevent many blacks from leaving South Africa, but rather to control the in migration of blacks from other parts of Africa. The explanation is obviously not that the incoming blacks liked apartheid, but rather that the private enterprise system in South Africa had raised substantially the incomes of blacks there -despite the widespread government-orchestrated discrimination against them-and blacks from other countries in Africa wanted to benefit from the higher incomes available to them in South Africa.

Something similar happened in the United States. African-Americans suffered greatly from discrimination until recent decades. Nevertheless, black incomes continued to grow along with white incomes as the US experienced sizeable and continuing economic growth after the end of the Civil War in 1865 (see my book The Economics of Discrimination, 1971)."

Does globalisation and capitalism have an impact on eroding traditional structures of inequality? Does it help in reducing gender, race and caste discrimination? Is the market "neutral" to these prejudices? Are traditional hierarchies severely challenged by the "efficiency" driven, anonymous market? I have often thought about this issue in the context of caste hierarchy in India. Is globalisation and open market more beneficial to the marginalised communities in terms of anonymizing their identity? Does it give them more opportunity to participate and rise the social and economic ladder than in a State led model of development? Will international trade provide more opportunities to members of these communities to participate and have a stake in development? Will it help reduce barriers, not of trade and tariff, but of social stigma and intolerance? Does it offer more opportunities for participation in an unhierarchical relationship thus acting as a leveller?

Chandra Bhan Prasad suggests that capitalism is more favourable to the eradication of social inequality. In his paper titled "Markets and Manu : Economic Reforms and its impact on Caste in India" he argues that capitalism does help in being emancipatory but it needs to be more egalitarian and participatory.

Can the rules of a market economy of efficiency, competition, entrepreneurship and innovation combat traditional hierarchies of caste inequality? Is it easier for people from the disadvantaged communities to rise up the social ladder in a capitalist led model as compared to a state led model? This report titled "The rise of Dalit Entrepreneurship" explains how Dalit entrepreneurs have risen in a market led economy.

"Explaining that economic standing is the only way Dalits can redefine themselves, RGICS’ Babu likens the trend to the wave of Black Capitalism in the US in the 1970s and 1980s. “There are strong similarities. Like the black capitalists of America, most of the Dalit entrepreneurs are first-generation entrepreneurs, people who were never into businesses but mostly relying on agricultural labour. To get into serious business from agriculture is a paradigm shift. And, in both cases, here as in the United States, even though there have been state interventions to promote entrepreneurship, individual motivation and community help have come first,” Babu says."

A study titled 'Caste and Entrepreneurship in India" by Harvard Business School, to the contrary, posits that representation of dalits in capitalist led entrepreneurship is still low. Explaining that the lack of  "network effects" could be one of the reasons, it concludes:

"The evidence we have presented shows that the OBCs have made progress in entrepreneurship , but SCs and STs are considerably under-represented in the entrepreneurial sphere.  That is, for SCs and STs, political gains have not manifested themselves in greater entrepreneurial prowess.   The rise of Dalit millionaires, driven in part by newer economic freedoms, does not appear representative of the broader swathes of the SC/ST population, at least until 2005.  Such under-representation appears to persist even in states with very progressive policies towards SCs and STs, in states where OBCs have made considerable progress in enterprise ownership, and in urban areas where outright discrimination is lower than in rural India."

Thus, questions remain as to to what extent globalisation and capitalism help addressing traditional hierarchies. Are these forms of development also appropriated by powerful communities? Also, is representational participation  good enough? For example, if a few entrepreneurs from a particular community do well and integrate, does it signify that the whole community has benefitted? Will small entrepreneurs and business men have more likelihood of upward mobility in a globalised world? Are markets, globalisation and international trade immune from traditional prejudices of gender, caste and race or  will it be subsumed in these traditional structures? This is an area that definitely requires more research since as developing countries integrate and questions are raised about the benefit it would have on large populations comprising of hitherto disadvantaged sections, the answers to the question of the relationship between traditional discrimination and new markets will have to be addressed.

Protectionism - Fact or Fiction?

In yesterday's post I had depicted the level of protectionist measures in G 20 countries. The focus of the G-20 Summit which recently concluded in Mexico was on a plethora of pressing issues  concerning the global economy I found the declarations on trade, protectionism and WTO, not entirely surprising, but interesting.

The Los Cabos Growth and Jobs Action Plan reaffirmed its resolve against protectionism in a brief reference:

We reaffirm our commitment to resist protectionism in all forms and promote open trade, and will take active measures to reduce the number of WTO inconsistent trade restrictive measures and resist financial protectionism.

The more detailed analysis of the issue of trade, protectionism and multilateral trade was found in G 20 Leaders Declaration after the Summit:

"Trade

26. We are firmly committed to open trade and investment, expanding markets and resisting protectionism in all its forms, which are necessary conditions for sustained global economic recovery, jobs and development. We underline the importance of an open, predictable, rules based, transparent multilateral trading system and are committed to ensure the centrality of the World Trade Organization (WTO).

...

28. We are deeply concerned about rising instances of protectionism around the world. Following up our commitment made in Cannes, we reaffirm our standstill commitment until the end of  2014 with regard to measures affecting trade and investment, and our pledge to roll back any new protectionist measure that may have arisen, including new export restrictions and WTO inconsistent measures to stimulate exports. We also undertake to notify in a timely manner trade and investment restrictive measures....

...

30. In line with the Cannes Communiqué, we stand by the Doha Development Agenda mandate and reaffirm our commitment to pursue fresh, credible approaches to furthering trade negotiations across the board. We will continue to work towards concluding the Doha Round negotiations, including outcomes in specific areas where progress is possible, such as trade facilitation, and other issues of concern for least developed countries. We urge progress  in streamlining WTO accession procedures for the world’s poorest countries.

31. We support strengthening the WTO through improving the way it conducts its regular business, and its dispute settlement system. We also direct our representatives to further discussions on challenges and opportunities for the multilateral trading system in a globalized economy."

The many "positives" from this Declaration:

1. The recognition that rising protectionism is an issue and it needs to be tackled within the multilateral trading system.

2. The reaffirmation of the principles of multilateralism and a rule based, open transparent system which promotes growth and jobs. The fear of reversion to "trade wars" and "tariff wars" seem to be allayed if the declaration is any indication. The severe economic crisis being faced by the major economies has not led to a formal recognition to raise protectionist walls and this was reflected in the tenor of this declaration.

3. A glimmer of hope for the Doha Round and an indication that the "single undertaking" approach may be replaced by a more pragmatic, outcome based approach in areas where progress is possible. The views on the WTO website of Joost Pauwelyn on a five point formula to revive multilateralism which included reconsidering the "single package rule" echoes similar views.

4. Recognition of the importance of transparency and notifications in the WTO. This would enhance the detection of WTO inconsistent measures considerably. Today, there are countries that are extremely transparent in depicting their laws, rules and notification even in terms of access on the internet while others are not so open. A standard of transparency that enhances compliance has to be brought in.

5. The resolve of strengthening of the WTO in the midst of protectionism is encouraging. The G 20 does not see the WTO as a threat to domestic, sovereign decision making even in the face of increasing pressures to turn protectionist. They see the WTO as an ally in an open, multilateral system.The mandate here seems to be to find ways to strengthen the  WTO including the way it would meet challenges of a globalised economy.

However, there are a few concerns in this context. Are these declarations translated into action? We heard similar proclamations after the 8th Ministerial Conference of the WTO but protectionist tendencies did not subside thereafter. Is it easier to proclaim one's allegiance to free trade, reduction of barriers and multilateralism but in actuality practice protectionism? Is it just "politically" correct to stand by multilateral trade rules, reduction in barriers and transparency but extremely difficult to implement? This is compounded by the fact that the interpretation of what constitutes protectionism is highly contested. Countries justify their measures as being non-protectionist and in conformity with WTO rules. It enters into the quagmire of complex judicial interpretation of the labyrinth of WTO rules and dispute settlement. This is often time consuming and ineffective. As disputes proceed, countries continue to have these measures in force. Then, there is the issue of compliance and what constitutes compliance to a decision of the Appellate Body which has decided against a measure. Hence, at times, countries do get away with protectionist measures which are antithetical to WTO obligations.

One would have to wait to see if the spirit of this Declaration translates into credible action.

Is Protectionism rising?

The fears of rising protectionism (of rising barriers, both tariff and non-tariff barriers) loom large across the world. The failure of the Doha Development Agenda has created an impasse to further liberalise trade rules. The trend of a drift towards protectionism is often reported. This is despite public commitments of opening up of trade and resisting protectionism. The 8th Ministerial Conference of the WTO had unequivocally advocated the commitment to multilateral rules in its statement of political guidance:

"1. Ministers emphasize the value of the rules-based multilateral trading system and agree to strengthen it and make it more responsive to the needs of Members, especially in the current challenging global economic environment, in order to stimulate economic growth, employment and development.

2. Ministers underscore that the WTO’s role in keeping markets open is particularly critical in light of the challenging global economic environment. The WTO has a vital role to play in the fight against all forms of protectionism and in promoting economic growth and development. Ministers also acknowledge that experience has shown that protectionism tends to deepen global economic downturns. Ministers fully recognize WTO rights and obligations of Members and affirm their commitment to firmly resist protectionism in all its forms."

Perhaps statements of political guidance often do not translate into sovereign, national actions of countries across the developmental divide. Moreover, countries often justify their measures as being consistent with multilateral obligations and not being protectionist in letter and spirit.

Pascal Lamy, Director General of WTO recently addressed this issue:

"For the first time since the beginning of the crisis in 2008, this report is alarming.  The implementation of new measures restricting or potentially restricting trade has remained unabated over the past seven months, which is aggravated by the slow pace of rollback of existing measures. 

The accumulation of these trade restrictions is now a matter of serious concern.  Trade coverage of the restrictive measures put in place since October 2008, excluding those that were terminated, is estimated to be almost 3% of world merchandise trade, and almost 4% of G-20 trade. The discrepancy between the commitments taken and the actions on the ground add to credibility concerns.

This situation is adding to the downside risks to the global economy and what is now a volatile global context.

In such a situation, it is important that we collectively and urgently redouble our efforts to strengthen multilateral co-operation to find global solutions to the current economic difficulties and risks and avoid situations that would cause further trade and investment tensions."

What ultimately causes countries to adopt protectionist measures? Does an economic depression or the need to protect a local industry fuel it? Do democratic, political compulsions promote it? Do domestic business interests play a dominant role in policy making to ensure that barriers are raised? Is it politically more expedient to justify a protectionist measure to one's constituency? Does it signify a nation's control over it's own sovereign destiny? Is it a reaffirmation of one's national sovereignty? Are the reasons economic, political or both?

A study titled "Protectionism isn't countercyclical (anymore)" by Andrew K Rose in Vox analyses the relationship between economic depression, unemployment, growth and protectionism in terms of tariff barriers. He comes to the conclusion that protectionism is anything but cyclical - that is a wave of depression does not necessarily lead to the rise in protectionist measures.

"The goal of my recent work has been to show that, at least since World War II, protectionism has not been countercyclic. While this runs counter to conventional wisdom, the evidence is reasonably strong; no obvious measure of protectionism seems to be consistently or strongly countercyclic."

Taking the example of initiation of disputes at the WTO as a sign of protectionist measures, he has analysed the disputes initiated with growth patterns.

"Accordingly, Figure 3 provides a time-series plot of annual global GDP growth and the number of commercial disputes initiated under the GATT/WTO dispute settlement system. This is by no means a perfect measure of protectionism. Complaints are not formally initiated against all protectionism, are not equally important, and are not randomly initiated across countries. The inadequacies of the GATT system led to considerable reform under the WTO in 1995. Still, this measure covers both the world and NTBs.¹ The message from Figure 3 is that, for the world as a whole, global growth is essentially uncorrelated with the initiation of disputes under the multilateral mechanism set up precisely to handle protectionism.

This paper is an interesting economic analysis of protectionism. However, as the author himself indicates, all disputes initiated at the WTO may not signify issues of protectionism. May be a better analysis would be to plot the disputes in which the Appellate Body declared a measure contrary to WTO rules instead of the initiation per se. Another issue is of what constitutes protectionism? Is raising tariffs, even if it is within the bound rates of a country, per se a protectionist measure? Certain measures that raise the barriers of free trade are permitted by the WTO rules. Do they constitute protectionism? Is there a difference between economic protectionism and legal protectionism whereby the former is a much broader concept than the latter? In other words, a measure may be protectionist in the economic sense of restricting competition and not taking advantage of optimum allocation of resources but might be perfectly legal as per international trade law since the exceptions in the WTO rules allow for such a legitimate use of policy space. When we speak of protectionism rising, what form of protectionism are we talking about? Further, a whole host of non tariff barriers like technical barriers and standards are in play now denoting new forms and classes of protectionism. Is protectionism a relative term?

Joost Pauwelyn on the future of the WTO

The WTO website has a Public Forum on "Is Multilateralism in Crisis" which has renowned experts in the field predicting the future of the world trading system. It has a piece on Jagdish Bhagwati's bleak future in the context of PTAs about which I have already blogged here.

Joost Pauwelyn in his submission at this Forum titled the "The WTO in Crisis: Five Fundamentals Reconsidered" has providing thought provoking insights with respect to some of the key underpinnings of the multilateral trading system. I have tried to summarise the five main points:

1. Consensus: A need for a relook on the definition of consensus which should strive to be conciliatory and inclusive yet not "single country" vetoes.

2. Member-driven organisations: Broadening the scope of involvement of stakeholders within countries to include affected interests and not just trade diplomats. Involvement of non-state actors.

3.WTO as "hard law": Emphasis on "soft law" rather than the formal dispute settlement mechanisms

4.Single package:Replacing the single package requirement with diversity of rights and obligations depending on the country's requirements and commitments

5.Special and differential treatment for "developing countries": Recognising that developing countries are not a homogeneous unit with identical interests and are in need of differential treatment.

The submission on the "hard law" aspect of the WTO and its importance is relevant in the context of the high reliance on dispute resolution as a mechanism of sorting out trade disputes. To elaborate on his point on the subject:

"3. The WTO as “hard law” subject to compulsory dispute settlement

The WTO was created at the highpoint of legalization of world politics (mid-1990s), on the (mistaken) assumption that “hard” law, enforced by binding dispute settlement, is necessarily “better” law.  To facilitate agreement and, in some cases, because it is simply the optimal way of addressing an issue (e.g. because the problem is merely one of coordination or enhanced flexibility and adaptation is needed¹⁰), the WTO should consider creating some agreements that are not subject to WTO dispute settlement or even mere guidelines with flexibility for domestic implementation and future adaptation subject to peer review and less adversarial monitoring mechanisms.¹¹  In many cases, the incentive structure to comply with soft or informal law may be greater and more effective than those to comply with hard law.  Many problems in today’s networked knowledge society, where technologies change rapidly and uncertainty prevails, are increasingly difficult to address through the rigidity of traditional treaties and formal dispute settlement.  WTO members have already engaged in this direction, adopting ministerial declarations or guidelines in specialized committees (such as the TBT Committee Principles for the Development of International Standards) or non-binding paragraphs in Accession Working Party Reports.  Although violations of these norms are not enforceable in WTO dispute settlement, WTO panels and the Appellate Body can and have referred to them in the interpretation of the WTO treaty.  They could also be backed-up with Trade Policy Review Mechanism style monitoring with the possible inclusion of non-state actors discussed above."

Would the WTO consider some agreements not subject to the WTO dispute settlement mechanism? The dispute settlement mechanism is considered the jewel crowns of the WTO system. It signifies the rule based system's primacy over a "power based" system. A Burkina Faso is as "powerful" in this system as the United States and can enforce a WTO commitment by a decision in its favour. Trading relations or power equations do not play a role in judicial decision making though it may have an impact on compliance issues. The message conveyed is that how so ever powerful you are in terms of your trading might in the globalised world, all countries are bound by a set of clear, rules that are interpreted in a judicial manner bereft of political considerations or pressures. It also acts as a safety valve in times of extreme tensions as well as assuaging domestic concerns of injustice. Should this system be replaced or supplemented by a "softer system?" Would the softer system of peer review, ministerial declaration, trade policy reviews or guidelines be as effective? Would it re-enforce trading power hierarchies? The Ministerial Declaration at the 8th Ministerial Conference at Doha announced a battle against protectionism. However, countries are increasingly adopting protectionist barriers. The only remedy for an aggrieved country against such measures is the dispute settlement mechanism rather than the reliance on a "soft" Ministerial declaration. Does the real world of trade politics and economics require "hard law" rather than "soft law"? Is a combination of the two desirable?