Global Policy Forum

Members Need to Focus on Trade Liberalisation,
Re-haul Decision Making and Moderate Expectations

By Razeen Sally

In Irish poet WB Yeats' words, when things fall apart, the centre cannot hold. The Doha round has fallen apart. What, if anything, can hold the WTO and the multilateral trading system together?

More trouble lies ahead. The WTO seems to be inexorably drifting—away from the hard politics of trade liberalisation and the rules that underpin it. Serious players will switch further to preferential agreements (PTAs); and will be tempted to flout multilateral rules. The WTO suffers from severely diminishing returns. Unlike the Gatt, it has a bigger, more controversial agenda, shot through with contradictory objectives. Decision-making is crippled with near-universal membership. These are symptoms of its ‘UN-isation.'

To get it out of its post-Doha rut, members need to: restore focus on a core trade-liberalisation agenda; revive effective decision making; and scale back expectations. Workable decision-making depends mostly on intergovernmental political will, not on procedural changes. This demands recognition of hard-boiled realities outside Geneva. About 50 countries—the OECD plus 20-25 globalising developing countries—account for almost 90% of international trade and FDI. They must do the deals. An inner core of ‘big beasts'—the US, EU, India, China and Brazil—must lead.

The other two-thirds of the membership (about 100 countries) have marginal involvement in the world economy, bad-to-terrible governance and scarce negotiating resources. They can't play more than a secondary, reactive role. Providing they do not block negotiations, they should be given a free ride through generous Special and Differential Treatment. Last, the WTO needs to adapt to a modest future. Market-access and rule-making negotiations should be incremental; trade rounds should perhaps be done away with. There should be more emphasis on policy transparency and administering current rules better. Dispute settlement should not degenerate into backdoor lawmaking.

These are the preconditions for the WTO to serve its core purpose: to be a helpful auxiliary to governments, particularly in the developing world, that have strategically chosen markets, competition and global integration. The alternative is a permanent state of UN-style infantilism.

Are PTAs preferable? Not really. Most are quick fix sectoral deals bedeviled by mind-boggling and restrictive rules-of-origin. They are driven by symbolic copycatting of other PTAs and otherwise empty gesture politics. And they deflect attention from sensible unilateral reforms and the WTO. Hence PTAs too, indeed trade negotiations generally, have severe limitations. They may not tear down the remaining protectionist barriers that matter.

The remedy lies primarily with unilateral liberalisation and regulatory reform. This is the Nike strategy: governments ‘just do it'; they liberalise independently. Bottom-up unilateral liberalisation is patchy, not a full substitute for multilateral rules. But it is the best engine on offer. The World Bank estimates that since the 1980s, 65% of developing-country tariff liberalisation has been unilateral. This is especially true of east Asia; it is Chinese liberalisation that will probably spur a pickup in trade-and-FDI liberalisation in Asia and beyond.

The policy implications? First, about 50 capable and willing WTO members should explore ways of reviving negotiations on core market access and rules (such as anti-dumping and subsidies) in a restricted plurilateral setting and not as part of another ‘round.' Negotiated concessions can be given to the rest of the membership via the MFN clause. Talks on newer regulatory issues, such as the Singapore issues, could proceed among smaller groups.

This calls for cooperation among the Big Beasts, and US leadership. Barring a global economic crisis, that will not happen soon. A John McCain presidency might be its best prospect. There is also need for insulation from old-style protectionist interests and new-style NGOs.

Second, new PTA initiatives should be launched with a sense of economic strategy. One could be a transatlantic free trade area. This should aim to abolish all tariff and non-tariff barriers at the border, make serious progress on eliminating other regulatory trade barriers, and have liberal and harmonised rules of origin. Gordon Brown should think of this as a major foreign-policy initiative when he assumes the British premiership. Another could be an EU FTA strategy for Asia, starting with southeast Asia. This should avoid the temptation of quick, dirty FTAs and aim for genuine, least-restrictive liberalisation. Are such serious initiatives likely? The wish is father to the thought. Sadly, Doha round failure will probably accelerate the Gadarene rush to do more ‘trade-light' FTAs.

Most important, the Asian, particularly Chinese, engine of unilateral liberalisation must not stall. That depends on internal conditions in China and increasingly in India, but also on a clement external macro and trade environment. The US and EU must strengthen ‘constructive engagement' with the rising Asian powers. This is more a matter of unilateral example-setting and bilateral cooperation than of trade negotiations.

Where does this leave India? It has been defensive and obstructionist in the Doha round, though less so than in previous rounds. It needs to exercise true leadership in an inner core of five members to set the WTO on its legs again. For that it must become more pragmatic, in line with its unilateral reforms post-1991, and more like China in the WTO. At the same time, India should clean up its PTAs and refrain from negotiating new dirty PTAs. Above all, it should revive unilateral liberalisation and regulatory reforms to boost competition. That is vital to keep up with China. Whether the severe constraints of domestic politics will allow any of this to happen is another matter.

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