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Termites in the Basement - To free up trade, fix the WTO’s foundations
Prepared by Andrew Stoeckel, Centre for International Economics
March 2004
The institutional arrangements of the multilateral trading system are full of inconsistencies, loopholes and flawed rules. On top of that, the mercantilistic ‘exports good, imports bad’ philosophy underlying successive ‘rounds’ of multilateral negotiations to reduce trade barriers is economic nonsense, in spite of its political appeal and past effectiveness. Additionally, certain sectors of importance to developing countries and low-cost producers in developed countries, such as agriculture and textiles, have been excluded from the trade-liberalising process. Yet developing countries now account for the bulk of membership of the World Trade Organization (WTO).
The WTO is the body that administers the agreements on trade between nations that forms the basis of the multilateral trading system. It was established in 1995, and replaced the secretariat to the General Agreement on Tariffs and Trade (GATT) established after World War II.
The WTO system provides a framework of internationally agreed principles and rules. Member countries adhere to these principles and rules because they deem them to be in their long term interests. In that sense, the WTO system is a voluntary club. If countries lose confidence in those principles and rules, which are administered by the WTO’s own membership through its ministerial conference and a number of councils and committees, their adherence to them will weaken over time. The whole system will then deteriorate. This happened in the 1970s and 1980s under the GATT system.
The breakdown of the GATT system then was largely due to the major developed countries exploiting ‘exceptions’ to the rules to treat agriculture and textiles as special cases, placing them outside the trade-liberalising process. The Uruguay Round negotiations of 1986–94 were a major step forward in correcting that situation. But time and patience ran out before trade barriers for agricultural products could be reduced as for industrial products. Following half a century of neglect, the WTO system can only fall into disrepute with the bulk of its membership unless agriculture and textiles are fully integrated into the multilateral tradeliberalising process. Developing countries, as well as smaller developed states, will gradually cease to adhere to the spirit and letter of international trade rules.
The mixed messages conveyed by mercantilist, discriminatory and protectionist ideas have led to confusion and muddled thinking about the framework of principles, rules and procedures — the ‘rules of the road’ — governing the conduct of trade policy. Without coherent principles and a set of conforming rules to guide ‘due process’, the way forward in liberalising international trade will be tortuous.
The inconsistencies, loopholes and flawed rules plus mercantilist thinking are, like termites in the basement, gnawing away at the foundations of the WTO system.
Unless fixed, at best we could witness the slow demise of the WTO system. At worst would be the disintegration of the system into a chaotic plethora of discriminatory trade arrangements, bilateral and regional, with trade conflicts breaking out all over –– the very thing the multilateral trading system was formed to prevent. In such a world, the transaction costs of conducting trade would rise, the growth of world trade would slow and the world economy would be less competitive, vibrant and innovative as a result. Further, if the past is any guide, it would not take long for trade conflicts to politicise into something much worse.
To prevent all this, the WTO system should be aimed solely at achieving and maintaining open, multilateral and nondiscriminatory trade where goods and services from any part of the world can be freely exchanged. It should be based on free-trade principles, private enterprise and open competition. Any departures from this course should not be allowed without prior open and independent economywide analysis of the benefits and costs of government intervention in the market process.
Getting to that point is difficult, but possible. The key element is to build on the WTO’s Trade Policy Review Mechanism (TPRM) introduced during the Uruguay Round, and make two changes to it. These two changes to the TPRM are a natural progression towards better public policy. The first is to include economy-wide analysis of the costs and benefits of the trade policy measures of the country under review. The second is to change the review process along the lines outlined in this study. The main element of this process is an open, independent and transparent analysis, repeated systematically on a regular basis in each of the capitals of members countries. Economy-wide analysis combined with due process changes the politics of protection. It makes sense — it is basic good governance — and it has been shown to work in securing trade liberalisation in other countries.
One drawback with independent economy-wide analysis in an open transparent process is the time it takes to work. It takes time both to educate the public and policymakers on the benefits of trade liberalisation, and to form coalitions for reform from among those bearing the burden of protection.
These coalitions are needed to lobby for change.
Meanwhile, there are nine useful steps that can be advanced, consistent with the above, that will enhance the prospects of a successful outcome of the Doha Round negotiations. First is to convince the public that the WTO system is in trouble, threatening the health of economies worldwide. Without progress on agriculture and the other repair work outlined in this study, there will simply not be enough benefits for the members of a voluntary club to willingly continue to adhere to the rules.
Second, agricultural market access must be the priority for reform. Eight reasons why greater market access should be a higher priority than either export subsidies or domestic support are identified in the final chapter. These reasons are all grounded in economic theory and make political sense as well.
Third, an international study of structural adjustment as a consequence of trade liberalisation is required. Although farmers fear adjustment, evidence from limited reforms in agriculture shows adjustment costs are over-exaggerated and industry efficiency rises as a result of liberalisation.
Fourth, the spirit of the second part of the United States’ original proposal in the Doha Round negotiations on agriculture should be acted on. The proposal, loosely paraphrased, was for countries to nominate the date by which they were prepared to eliminate all trade-distorting policies in agriculture. This will make it apparent who the ‘slowest ships in the convoy’ are. There may be enough wanting to go to free trade that could do so now on a multilateral most-favoured nation basis. And the forwardlooking goal by which progress could be monitored would be clearer. The current method of measuring progress by where we have come from may make for great headlines, but it has given little real progress in agriculture.
The fifth short-term imperative is to demonstrate that preferential access to markets is not helping developing countries. Rather, in many cases it is harming their interests.
Preferential access also sets up a perverse incentive: countries argue against global liberalisation to preserve their preferences in the false belief they provide net benefits to their country.
The sixth step requires economics to be put into antidumping assessments of injury by including an appraisal of the benefits accruing to consumers through ‘dumping’.
Current ‘injury tests’ do not adhere to world best practice in public governance as there is no balanced assessment of the costs and benefits of dumping. Anti-dumping duties are basically protectionism.
The seventh step is to focus on the rules of the world trading system first rather than any shortcomings in the organisation administering the rules, the WTO. There are shortcomings in the WTO, but having the best people in the world with as many resources as required will come to nought if they are administering rules that are wrong or flawed. Indeed, there is a danger that attention is deflected away from the needed reforms if the focus is on the organisation rather than the institutional rules.
The final two steps are needed to implement the previous seven. An expert group is required to think through these issues and develop a ‘game plan’ for action. Besides the issues above, the other problems identified in this study governing dispute settlement, safeguards, free trade agreements, the use of reciprocity and ‘concessions’ to secure liberalisation and the potential for ‘new areas’ to make matters worse, all need to be worked through. In the past, such expert groups have helped to restore the world trading system The problem is that too few previous recommendations have been acted on. There has not been enough ownership of the recommendations. So the final step is to build ownership of the findings of the expert group and create a groundswell of support for change. The best way to do this is through a series of informal meetings of key ministers, officials and trade experts. Again, there is a successful precedent here — the series of meetings that led to the launch of the Uruguay Round negotiations.
While the nine steps above will progress trade liberalisation in a reasonable timeframe, ultimately the two overriding mistakes in the WTO system’s failure to liberalise trade are, like other areas of bad economic policy, first to ignore the secondary or economy-wide effects of trade policy, and second to ignore ‘due process’. Only when the economywide effects of trade policy are systematically and routinely reviewed through open, transparent and independent processes will free trade be secured. Such a process does two things. It changes the mindset of policymakers and the public, and it identifies the stakeholders bearing the burden of protection. As these stakeholders become aware of who they are and what they are losing, incentives arise to form coalitions and tip the political balance in favour of reform within the country. The process has been shown to work in the few countries that have tried it. Clear thinking changes the politics of liberalisation and it will put the WTO system onto a more secure and durable foundation. Trade liberalisation is the likely result. On World Bank figures, some 320 million people will be lifted out of poverty and world output will expand by US$2.8 trillion — not a bad payoff from a bit of institutional repair.
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