De-democratize the WTO - Is it the right step?

A lot has been written about the failure of the Doha round of multilateral negotiations. Reasons have been attributed and solutions have been offered including abandoning the single undertaking principle and concluding agreements that are low hanging fruit, including a Trade Facilitation Agreement.Developments of bilateralism and plurilateral agreements have also cast a shadow on the growth of the institution of multilateralism and the WTO.

What are the reasons for this decline of multilateral trade governance? Arvind Subramanian in this piece titled "De-democratising the WTO" in the Business Standard has argued that too much of democracy has been detrimental to the growth of the WTO. Small countries have an equal voice similar to large trading powers int he WTO. The norm is consensus and any small country can stall a big reform, even if it is in a minority. This, he feels, is undermining the effectiveness of the WTO and keeping the major trading powers (like the U.S., EU, Japan) less involved in the WTO. The lack of interest is epitomized by the growing regional trade agreements these countries are attempting to enter into as well as an absence of WTO DG contenders from these countries.

"Over time, the WTO has become an institution where smaller and poorer countries have acquired a stake. This transformation may seem a welcome sign of legitimacy. But it has gone too far. For it future effectiveness, indeed survival, the WTO needs to be de-democratized, with the large countries asserting themselves."

The solution offered is that the veto should be taken away and the consensus principle modified wherein large trading powers can negotiate themselves while "offering assurances to the smaller countries that they would receive the benefits of such negotiations and spared any undue burdens". Over the years, literature in relation to the WTO has been about how the WTO needs to be democratized and developing and least developed countries need to engage with the system more effectively. This piece reverses the debate by arguing that there is too much democracy in the WTO that is killing the institution. Should the WTO be less democratic and reflect the opinions, interests and negotiating priorities of the larger trading partners? Would it fade into oblivion if it did not? Do the realities of trading relations demand a more nuanced understanding of trade governance that recognizes inherent inequities in the system? Many developing countries argued that the conclusion of the Uruguay round of negotiations was done without their complete understanding and involvement. WIll de-democratization take us back to the "green rooms" of the WTO where mega deals were apparently struck and everyone was asked to follow? Will de-democratization lead to the beginning of the process of "de-legimization" of the WTO? On the other hand, how does one ensure that the multilateral, rule-based system is engaged with by both the major trading powers and smaller trading nations? The task is cut out for the next WTO chief to grapple with this conundrum.

A case for Protectionism? It was always there...

"Protectionism" today is a bad word. In the context of multilateral trade rules, it is forbidden and regressive. Countries publicly eschew protectionist measures, but in practice as is seen, follow them rather regularly. At times, it is argued that developing countries and emerging economies use protectionist tools more than the developed world. Actual study of policies may give a strikingly different picture. Is there a case for "protectionism"? Does history prove us different and surprising lessons?

David Todd in his "Protectionism as Internationalist Liberalism" explores this historical context from 1789-1914 where he argues that Germany, France and the United States have used "protectionist" policies as part of their official policy to counter the rise of U.K. He also puts forth the view that "protectionism" has been part of the larger liberal, internationalist, egalitarian left response to neo-liberalist philosophy since the 18th century and is not something invented in the 1930s.

"From the end of the nineteenth century, especially in Germany, protectionism has thus clearly nourished the xenophobic nationalism that ravaged Europe between 1914 and 1945. But the examples of Thiers, List and Carey show that protectionism was initially the result of intellectual exchanges among “dominated” nations, directed against the dominant power of the British Empire, rather than the expression of a thirst for nationalist domination. These examples also suggest that protectionism was often the economic aspect of an egalitarian liberalism of the left or the centre left, which put the citizen above the consumer. Contrary to the beliefs of many of their respective supporters, in our time as in the nineteenth century, the struggle between free trade and protectionism is not a conflict between good and evil. Tariff barriers do not mechanically lead to war any more than free trade guarantees peace, as is shown by the commercial treaty between France and Prussia in 1862, which did not prevent the outbreak of the Franco-Prussian War in 1870. Tariffs are no more and no less than taxes on imports, which – like all taxes – have both adverse and positive effects on wealth creation. As for their political significance and their economic consequences, these have varied considerably throughout history."

I am not a student of international economic history but this piece raises important questions - is there a good and bad in international trade theory at all or is it a matter of circumstance? Is reduced trade barriers and freer trade , ipso facto, good while "protectionist" measures bad? Do multilateral trade rules stereotype philosophical attitudes of free trade, protectionism and protection of domestic industry? Is there scope within the multilateral trade rules to be reasonably "protectionist"? Perhaps the "Free Traders" would have a far more convincing response to these queries. 

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.

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.