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Fixing, not Sinking, the WTO

Few people question the benefits of international trade. And since global markets require international institutions capable of sustaining them, the World Trade Organization (WTO) is a valuable, indeed, in many ways, the most fully developed international institution. It has been successful not only at creating international law, but at adjudicating disputes and enforcing its decisions.

But the economic dislocations of the last decade, coupled with the lack of adequate social safety nets in less developed countries, have generated tremendous resentment against globalization. As member states prepare to meet in Qatar this Friday, the WTO is a prime target of globalization’s opponents. Their goal to “shrink or sink the WTO” is misguided.

The WTO, like all other institutions, has its shortcomings. But the main objections cannot be addressed by the WTO itself. The task of the WTO is to lay down ground rules for international trade; it is not designed to pursue other social goals. So the trouble is thus not really with the WTO, but with the lack of similarly powerful and effective institutions devoted to these other social goals. Indeed, the most fundamental problem of the present global order is that the production of private goods has taken precedence over social development – i.e. the provision of public goods.

Not only is the WTO not designed to deal with environmental protection, food safety, human rights and labor rights, but its modus operandi is unsuitable for the provision of public goods. The strength of the WTO lies in its enforcement mechanism which states are willing to accept because they want the benefits of trade. They will not, however, accept it in other areas. Is it conceivable that China (soon to be a member) would agree to the inclusion of human rights? Would the United States be any more amenable on the environment?

Enforcement of agreed upon rules is also not appropriate for achieving social goals because many countries lack the resources to meet international standards. Instead of imposing requirements, it would be much better to provide resources to enable poor countries to comply on a voluntary basis. Take child labor. Instead of introducing a WTO rule prohibiting child labor, we ought to provide resources for universal primary education. We could then demand that the recipients of support eliminate child labor over time. This approach would be more effective than trying to force individual states to comply.

Still, significant changes in WTO rules should be made to take care of valid objections. In a way, the WTO is the victim of its own success. It is practically the only international institution to which countries willingly subordinate themselves. This makes it arguably too powerful, because WTO rules concerned with trade liberalization trump domestic regulations aimed at other important social values.

A change in the WTO’s regal status is thus in order. First, if we are to avoid a race to the bottom, the order of precedence between WTO and national laws should be reversed. As things stand now, no country can use trade sanctions to impose its own standards on another country when an imported product is physically the same as the nationally produced one. Banning imported hormone-treated beef, for example, is not allowed, unless there is evidence that hormone-treated beef is different from domestically produced beef. The only exception is when an international agreement exists to which both countries have subscribed. But such agreements are hard to reach.

I propose to reverse this order of preference: countries should be allowed to enforce their higher national standards on imported as well as domestic goods, unless a WTO sponsored panel of experts finds that such domestic standards should be prohibited or simply are unnecessary. Unlike under the present system, in which countries with low labor or environmental standards have no incentives to negotiate international agreements imposing higher standards, the new rule would redress the imbalance between trade and other values by providing inducements to reach appropriate international agreements.

Second, the WTO may have overreached itself when it became involved in intellectual property rights. Intellectual property rights have helped turn science into business activity, and business is of course motivated by profit. It can be argued that this process has gone too far, posing an obstacle to research that is of great importance for the developing world. Far more money, for example, is spent today on developing cosmetics than on curing tropical diseases.

A full solution for this problem, which requires new incentives to foster research into drugs needed by less developed countries, is beyond the capacity of the WTO. But the WTO should also reconsider its involvement. Patent and copyright protection are needed, but such protection constitutes a restraint of trade. How much restraint is justified? The calculus is quite different for technologically advanced countries that profit from innovations (and press for their protection at and by the WTO) and less-developed countries that have to pay for them. Less-developed countries have reason to be resentful about the present WTO position on Trade-Related Aspects of Intellectual Property Rights (TRIPs).

Third, the agreement on Trade Related Investment Measures (TRIMs) should be renegotiated to allow some support for home grown small and medium enterprises. TRIMs are designed to provide a level playing field between foreign and domestic enterprises. But in a world in which capital is free to move around, the playing field is heavily tilted in favor of international investors and multinational corporations. TRIMs institutionalize and reinforce this bias.

Countries often offer tax incentives and other subsidies to transnational corporations because they have to compete to attract foreign investment. Concessions are also often bought by bribery. The WTO has made no attempt to address these issues and there are no WTO rules against activities of transnational corporations that are harmful to the countries in which they operate.

Nor do the rules of TRIMs recognize that there is a case to be made for encouraging home grown small and medium enterprises. Although incentives for such local businesses (microcredit and better financing) should be provided outside the WTO, trade rules should be modified to give room for such support.

The protesters who want to “sink or shrink” the WTO would destroy the goose that lays the golden eggs. While we should firmly reject these calls, we must heed the critics’ legitimate and deeply felt concerns about how those eggs are used and distributed.