Last year was another banner year for the world economy, especially for developing countries. But Goldilocks conditions breed complacency. Panglossian optimists do not worry about the breakdown of the World Trade Organization’s (WTO’s) Doha Round or other protectionist threats; business will flourish regardless. This outlook is dangerously myopic. Goldilocks did not live forever; and, as Voltaire told us, Pangloss got it wrong. The sustainable health of the world economy depends on updated, reinvigorated market-based rules. Otherwise government intervention will cramp global commerce, and with it the life chances of the bulk of the world’s population.
Trade policy is no exception. It is stuck in anachronistic 20th century mindsets, institutions and regulations. It is disconnected from 21st century globalization.
Start with WTO. Its much expanded agenda goes deeper into politically sensitive domestic regulations. It is riven internally with intergovernmental divisions and buffeted externally by protectionist interests and anti-market NGOs. A bigger and more active developing country membership also makes it more difficult to find common ground. The traditional reciprocal bargaining model—exchanging concessions over relatively simple border tariffs and quotas—does not work with complex regulatory issues. Consequently, WTO has broken down as a negotiating mechanism. “UN-ization”—flatulent rhetoric, petty point-scoring and political grandstanding—has replaced serious decision making. All these structural problems have played into the failure of the Doha Round.
What can be done to get WTO out of its rut? First, a post-Doha agenda should shift emphasis from liberalization to rules. Substantial multilateral liberalization is highly unlikely. More important is safeguarding and updating vital multilateral rules for stable and open global commerce.
Second, the Organisation for Economic Co-operation and Development and about 20 advanced developing countries, gathered in self-selecting “coalitions of the willing”, should make the major decisions. Together they account for more than 80% of world trade and foreign direct investment (FDI). There is also an inner core of Big Beasts: the US, the EU, and now China, India and Brazil. Without their leadership, nothing will move.
Third, WTO should adapt to a more modest, politically realistic future. That means an end to big trade rounds with high ambitions.
Given the parlous state of WTO, it is no surprise that preferential (i.e., discriminatory) trade agreements (PTAs) are spreading like wildfire. Almost 200 are in force. About 80 are on the books or in the negotiating pipeline in East and South Asia.
Governments argue that PTAs take liberalization faster, wider and deeper than WTO. But nearly all PTAs are “trade light”, the deformed offspring of foreign policy-driven, gimmicky initiatives bereft of economic strategy. They carve out politically sensitive sectors as well as crucial rules (e.g., on anti-dumping duties and agricultural subsidies). They barely advance on weak WTO disciplines on domestic regulatory barriers. They deliver little, if any, net liberalization. Finally, PTAs get tied up in knots of overlapping, contradictory and restrictive regulations on rules of origin, tariff schedules, services and investment—the “spaghetti-bowl” phenomenon.
Hence PTAs will not tear down the protectionist barriers that matter. On the contrary, a bewildering array of discriminatory regulations only adds to red tape and increases business costs. This makes no sense in a 21st century world of spliced-up cross-border production and trade networks brought together in complex global supply chains. Companies plugged into global supply chains need simple, transparent, non-discriminatory rules, not spaghetti-bowl complications. PTAs thus make “more sound than sense”, and many are “pure wind”, to use Michel de Montaigne’s description of philosopher Seneca’s writing. Governments should be far more cautious with PTAs. They should also contain the damage to global commerce by simplifying and harmonizing rules of origin and other discriminatory provisions.
Both WTO and PTAs, therefore, have severe limitations. Indeed, trade negotiations overall are subject to diminishing returns. Also overlooked is that most recent trade and FDI liberalization has come from a different source: Governments have taken down barriers unilaterally, outside trade negotiations. This accounts for two-thirds of developing country tariff liberalization since the early 1980s.
Nowhere has this been stronger than in East Asia. That is how countries in the region inserted themselves into global supply chains. China followed from the early 1990s—well before it joined WTO. Indeed, China today is what Britain was in the second half of the 19th century: the unilateral engine of freer trade.
This has had a powerful spillover effect elsewhere in Asia. It has prevented liberalization reversal post-Asian crisis, and spurred liberalization elsewhere in East and South Asia—including India.
It is imperative that unilateral liberalization does not stall in dynamic Asia, and especially in China. Future global market reforms depend on it.
The paramount challenge is to stimulate unilateral reforms of “second-generation” trade measures. These are “behind-the-border” regulatory barriers to trade, FDI and the cross-border movement of workers. They lie deep in domestic policies and institutions. They are administratively complex and politically very sensitive—hence much more difficult to liberalize than manufacturing tariffs. But bottom-up unilateral reforms are still a better bet than trying to remove barriers top-down through remote, lumbering international institutions.
It is time to make trade policy less of a foreign policy plaything in far-away international institutions. Instead, it should be hitched to domestic economic policy and institutional frameworks. It has to be grounded in bread and butter domestic reforms to unfetter people and markets.
(Razeen Sally is director of the European Centre for International Political Economy, a policy think tank in Brussels. He also directs the trade policy in India programme at the Observer Research Foundation. His new book, Trade Policy, New Century: The WTO, FTAs and Asia Rising, will be published later this year . Comments are welcome at email@example.com)