The list of candidates to succeed Pascal Lamy as director-general of the World Trade Organisation (WTO) has just been finalised. Astonishingly, not one of the nine aspirants is from the world’s four big major trading entities – the US, Europe, Japan, or China – that together account for over 55 per cent of global merchandise exports. That is both a metaphor for what ails the supervisory body for global trade — and a signal of its bleak prospects.
Over time, the WTO has become an institution where smaller and poorer countries have acquired a stake and voice. This transformation may seem a welcome sign of legitimacy. But it has gone too far. For its future effectiveness, indeed survival, the WTO needs to be de-democratised, with the large countries reasserting themselves. Otherwise, trade will become more fragmented and friction-prone, undermining the very system from which the smaller countries stand to benefit and slowing global growth momentum.
The multilateral trading system faces not just a serious threat but an existential one. Increasingly, liberalisation is taking place outside the WTO, either through unilateral reform or via increasingly popular regional trade agreements. But these agreements did not jeopardise the WTO for the important reason that none of these agreements was between the large trading nations themselves.
Ominously, that now stands to change. The US has thrown its weight behind the Trans-Pacific Partnership, which could potentially include Japan. It is also seriously contemplating a transatlantic agreement with Europe. Soon, there will be a scramble among other large nations to conclude deals with each other. Multilateral trade, as we have known it, will progressively become history. So too might the WTO’s importance and relevance because it was the institution where the US, Europe, Japan, and China liberalised trade and settled disputes, especially with each other.
Leaving aside the experience of European integration, which had its unique post-World War II imperatives, it is the US that will bear history’s burden for these new developments. The US, which began the process of undermining the non-discriminatory trading system by negotiating regional agreements with Israel and Canada in the 1980s, will have effectively ensured its completion by embarking on these new agreements.
How can this be addressed? Aaditya Mattoo of the World Bank and I have argued that the effectiveness of the WTO as a forum for fostering further liberalisation has been undermined by at least two factors. The first is the Doha Round of multilateral trade negotiations. Launched in the aftermath of 9/11, the world has neither been able to conclude nor bury them successfully.
As a result, it has become impossible to move to a more relevant agenda that can expand market opportunities for the private sector and deal with the current concerns of governments. An example is food where a decade ago, subsidies and barriers to imports were the important issue. Today, high prices and barriers on exports are more important. Similarly, currency manipulation is now a pressing issue — but is not on the Doha agenda.
Emerging powers such as China and India must be more active in shaping this new agenda and constructive about liberalisation in the WTO or risk their trading partners seeking alternatives to it. There is a strategic issue here for these countries to ponder: are they, through their acts of commission and omission, facilitating the weakening of the multilateral trading system?
But interring Doha will not be enough to revitalise the WTO’s effectiveness. Unlike the International Monetary Fund (IMF), which has suffered from a democratic deficit and legitimacy problem, the WTO has suffered from too much democracy and associated blocking powers. A few small countries exercise their veto if, say, cotton subsidies – an issue of legitimate concern to them but not necessarily of systemic importance – are not addressed. And it must be remembered that the interests of the smaller countries are not always consistent with multilateral liberalisation: as beneficiaries of preferential access to global markets they are hurt by multilateral liberalisation; and as food importers they suffer from elimination of agricultural subsidies that tends to raise world food prices.
Their veto must be taken away or else future negotiations can be stymied by, even held hostage to, any of the WTO’s 157 members. This outcome can be achieved by allowing the larger countries to negotiate among themselves while offering assurances to the smaller countries that they would receive the benefits of such negotiations and spared any undue burdens.
Unless this change occurs, the WTO cannot deliver on its key mandate of being a forum for further liberalisation. And, if it cannot, it will be reduced to a body that settles trade disputes between countries based on rules that are increasingly overtaken by those negotiated under regional agreements.
Recently, the legitimacy of the IMF and the World Bank was under question because the procedure for selecting their leaders appeared rigged in favour of Europe and the US. It is perhaps ironic that, in the case of the other part of the Bretton Woods troika – the WTO – the absence of candidates from the most economically powerful countries would be seen as lamentable. But lamentable it is as it signals that the world’s largest trading nations have relinquished responsibility in making it an effective and relevant multilateral institution. That is situation that threatens to make everyone a loser. Indian policy makers and strategic thinkers should be alert to this ominously evolving global landscape.
The writer is a senior fellow at the Peterson Institute for International Economics and at the Centre for Global Development. He is the author of Eclipse: Living in the Shadow of China’s Economic Dominance. This is an elaborated version of a piece that appeared in The Financial Times on January 14