World Trade Organisation at 20

[hafiz mubashar]

Composed of 160 members, which include nearly all economies and trading nations of note, the World Trade Organisation (WTO) completed 20 years on January 1 this year. The WTO represents arguably the greatest ever attempt at multilateral economic integration as well as that of putting in place a rule-based international trading system.

The objectives conceived at the time of the WTO’s birth included trade and output expansion, rise in living standards, and full employment. How does the balance sheet of the organisation look over the past two decades?

The WTO is the successor to the General Agreement on Tariffs and Trade (GATT), which together with the World Bank and the International Monetary Fund (IMF) – collectively known as the Bretton Woods institutions – formed part of the post-World War II international economic order. The intellectual basis of the Bretton Woods institutions is summed up in what is known as the Washington Consensus.

The consensus provides for liberalisation of trade and investment regimes, privatisation and deregulation of the economy, downsizing of the government machinery to achieve fiscal austerity, scaling down of fiscal deficit, and currency depreciation – the components of neo-liberalism.

Trade liberalisation or free trade lies at the heart of the WTO. It is claimed that the benefits of free trade go beyond expanding growth and alleviating poverty to promoting democracy and human rights. Closed economies, by contrast, the narrative goes, are characterised by absence of democracy and denial of political and civil rights. Thus, in a nutshell, free trade enhances the quality of life.

According to WTO Secretariat’s data, global trade has quadrupled over the last two decades registering an annual average growth of 7.6 percent. During the same period, average applied tariffs worldwide have come down by 15 percent. This is touted to be a great achievement of the WTO.

The opponents of free trade take issues with such reasoning. While liberalisation, they argue, may drive up the volume of trade and thus increase the size of the cake, the benefits are not evened out. As a rule, the higher the level of development of an economy or the bigger its size, the greater are the benefits that it draws from free trade.

By the same token, liberalisation hits hard the vulnerable sections of society by throwing them out of jobs in a bid to cut costs. The result is what is known as jobless growth in which job expansion lags far behind output. So while free trade may raise the overall standard of living, the beneficiaries for the most part are groups or nations that already enjoy a relatively high quality of life.

The relationship between free trade and social and political democracy is also open to question. Generally political democracy and free trade, both being instruments of liberalism, go hand in hand. But it is possible for a government to pursue free trade policies without committing itself to democratic values.

The intense inter-firm price competition prompted by trade liberalisation has pushed down the wages for blue-collar workers while at the same time making for exorbitant salaries for those holding executive positions. The huge wage differential makes a mockery of the claims of liberalisation promoting social democracy.

As for the growth of world trade and tariff cuts under the auspices of the WTO, the counter-argument is that, with a few exceptions, all countries continue to maintain tariff peaks in ‘sensitive’ sectors thus shielding them from competition. In particular, products of export interest to developing countries have relatively high tariffs.

Developed countries, for instance, have a highly protected and heavily subsidised agricultural sector. In Switzerland, tariffs on some agricultural products exceed 1,000 percent. Japan applies 1,000 percent tariffs on import of rice, while those on dairy products are as high as 600 percent.

The EU countries apply tariffs of more than 200 percent on several agricultural products. In case of the US, tariffs on a number of farm products are close to 100 percent.

Not to be left behind, developing countries by and large have highly protected industrial sub-sectors. India, for example, applies more than 250 percent tariffs on some textiles products.

Then there is the issue of non-tariff measures (NTMs), which mostly take the form of product standards and technical regulations. At times, the NTMs serve a legitimate policy objective, such as consumer health and safety but at times they impede trade and thus offset any increased market access promised by tariff cuts. The reluctance of WTO members to withdraw the umbrella of protection from sensitive sectors lies at the bottom of the stalemate in the Doha round.

It is also alleged that the WTO and such other institutions undermine state sovereignty. For instance, it is argued that the dispute settlement body of the WTO may declare a national piece of legislation or an executive act incompatible with the country’s international obligations under the WTO and it has to be scrapped or amended.

The defenders of the WTO argue in response that the acceptance of any international treaty involves transfer of decision-making power from a national government to some international institution. This transfer of power is based on the assumption that matters of common interest can better be safeguarded or promoted if they are handled by the international institution rather than by individual states.

While abiding by WTO agreements or rulings, member states exercise their sovereign power in a way that is compatible with their obligations under the organisation’s charter. Moreover, national governments still have a lot of discretion in deciding the manner in which they fulfil their commitments to the WTO. And if members lose some policy space at the domestic level, they reclaim it at the international level.

There is no gainsaying the fact that globalisation in general and trade liberalisation in particular have rendered the concept of national sovereignty obsolete. The greater a country’s level of integration into the international economic or trade order, the more policy space it loses at the national level.

However, a country’s ability to reclaim policy space at the multilateral or international level is a function of its economic or trade power. Economic giants like the US, the EU, Japan or China can without much hassle reclaim at the multilateral level more than they lose at the national level. However, for lesser economic powers, the trade-off is generally to their disadvantage.

It is true that at present the opinion of developing countries on the international trade scene carries far greater weight than it did at the time of the WTO’s birth. Like developed countries in the past, developing economies are capable of scuttling any multilateral trade deal. But this is typically true of only the bigger countries in the group, such as China, India, or Brazil. Smaller developing countries are more likely to toe the line of these bigger nations than take an independent position.

Trade without discrimination (the MFN clause) is the fundamental principle of the WTO. However, in the wake of the mushroom growth of bilateral and regional preferential trading arrangements during the last 10 years, the MFN is no longer the rule; rather it is almost an exception. With the Doha round in the doldrums for years, multilateralism will continue to make way for bilateral, regional, and cross-regional trading arrangements. It is ominous that even if the WTO survives another decade, it is likely to become largely irrelevant.

The author is a graduate from a western European university.
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