Friday, November 21, 2014

The Broken Legs of Global Trade

NEW YORK – The Doha Round, the latest phase of multilateral trade negotiations, failed in November 2011, after ten years of talks, despite official efforts by many countries, including the United Kingdom and Germany, and by nearly all eminent trade scholars today. While trade officials in the United States and the European Union blamed the G-22 developing countries’ excessive demands for the failure of earlier negotiations in Cancún in 2003, there is general agreement that this time it was the US whose unwarranted (and unyielding) demands killed the talks. So, now what?

The failure to achieve multilateral trade liberalization by concluding the Doha Round means that the world lost the gains from trade that a successful treaty would have brought. But that is hardly the end of the matter: the failure of Doha will virtually halt multilateral trade liberalization for years to come.

Of course, multilateral trade negotiations are only one of three legs on which the World Trade Organization stands. But breaking that leg adversely affects the functioning of the other two: the WTO’s rule-making authority and its dispute-settlement mechanism. The costs here may also be large.

Until now, preferential trade agreements (PTAs) among small groups of countries co-existed with multilateral, non-discriminatory trade-liberalization rounds. As a result, the rules that govern trade, such as anti-dumping duties and countervailing duties to offset illegal subsidies, were in the domain of both the WTO and the PTAs. But, when there was a conflict, WTO rules prevailed, because they conferred enforceable rights that extended to all WTO members, whereas PTA-defined rights extended only to the PTA’s few members.

So, while powerful, “hegemonic” countries like the US managed to impose their own rules on weaker partners in the PTAs that they helped to proliferate, big emerging economies like India, Brazil, China, and South Africa insisted on rejecting such demands when made as part of multilateral trade rounds like Doha.

Now, however, with the era of multilateral trade rounds and system-wide rules behind us, the PTAs are the only game in town, and the templates established by the hegemonic powers in unequal trade treaties with economically weaker countries will increasingly carry the day. In fact, such templates now extend beyond conventional trade issues (for example, agricultural protection) to vast numbers of areas unrelated to trade, including labor standards, environmental rules, policies on expropriation, and the ability to impose capital-account controls in financial crises.

The US-led public-relations blitzkrieg of euphemism has already begun, with US Assistant Trade Representative Wendy Cutler describing the latest PTA, the Trans-Pacific Partnership, as a “high standard” agreement. Other American officials have taken to calling PTA’s “trade agreements for the twenty-first century.” Who could possibly be against the twenty-first century?

What is disturbing is the way in which some trade economists in Geneva and in Washington have capitulated to such propaganda, and regard capitulation by the WTO as a way to “salvage” and reshape the organization. The WTO, like a village during the Vietnam War, must be destroyed in order to be saved.

Unfortunately, this insidious attack on the second leg of the WTO also extends to the third leg, the dispute-settlement mechanism. The DSM is the pride of the WTO: it is the only impartial and binding mechanism for adjudicating and enforcing contractual obligations defined by the WTO and accepted by its members. It gives every member, big or small, a platform and a voice.

Once PTA-based DSMs are established, however, adjudication of disputes will reflect asymmetries of power, benefiting the stronger trade partner. Moreover, third countries will have little scope for input into PTA-based DSMs, though their interests may very well be affected by how adjudication is structured.

Given that the US has abandoned any pretense of leadership on world trade, it is up to major emerging economies and like-minded developed countries to establish their own template, one that adheres to trade objectives and discards what special-interest lobbies in hegemons like the US seek to foist on PTAs. This is exactly what India has done with the EU, which is now stripping such features out of its proposed PTA.

Other countries – Brazil, South Africa, and China among the major emerging economies, and Japan and Australia among the developed countries – should back such “garbage-free” PTAs as well. That just might be an adequate rebuff to the rise of PTAs whose main objective is to serve hegemonic interests alone – perhaps even sufficient to get the multilateral approach back on track.

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    1. CommentedArnie Saiki

      Expanding upon the metaphor of a broken leg of global trade, one might want to look at that Doha leg as a hydra where you lop off the head and two others grow in its place.

      The failure of the Doha round arrived at a time when the US refocused its attentions on the Trans-Pacific Partnership Agreement and other bilateral FTAs with South Korea, Peru and Panama. At around the same time, Clinton began focusing more earnestly on Pacific resources, particularly on the Pacific Plan and other sub-regional institutions and military policies that gave definition to Obama announcing his Pacific Pivot and Clinton's op-ed in Foreign Policy last October's, "America's Pacific Century."

      The TPP was originally conceived of as an exploratory Free-trade Area of the Asia-Pacific, and I'd argue that the U.S. did not merely side step this original intent as a failure of pulling China into the US-led TPP negotiations, but rather alienated China (in a way that is reminiscent of the 1948 Economic Cooperation Act's "invitation" for Moscow to sign on, while really excluded them). This purposeful exclusion of China from the TPP by the U.S. understands that China will not liberalize state control of either its currency or open its door to a flood of US-style free-market deregulation.

      BRICS, too, adds to this divide by further removing the dollar from its dominant role as the international trade currency, by replacing trade valuation on another, arguably more equitable currency standard among emerging economies. Japan and Australia seem to be resisting any agenda of further alienating China, exposing weaknesses in U.S. foreign policy for promoting what appears to look more and more like a 21st century Marshall Plan, or new economic cooperation.

      The failure of concluding the Doha round, is not the failure of globalization in the way that is presented by Zsolt Hermann, as an understanding of interconnectedness. It is a failure of Globalization as defined by neoliberal regimes that perpetuate Nafta style investor-state agreements enforced by WTO rules. If, as you suggest, emerging economies can "establish their own template" then it must go far beyond what investment regimes can offer by including strong 21st-century environmental provisions, and as far as I can tell, the window for that opportunity may have been momentarily opened in 2008 during the last round of UN-System of National Accounts revisions, and hopefully that will be revisited soon.

    2. Commentedotto ruthenberg

      Well Professor, the world currently cannot solve its prisonners dilemma of keeping global trade open. partial interests gain the upper hand as the beneficiaries of global trade wil not share their gains adequately with the losers of globalization who now legitimize their respective small contexts to block multilateral progress. we will need to wait a generation until the pendulum swings back. meanwhile we probably do better by organizing our neighborhood for conducive trade than hope for better global trade opportunities.

    3. Commentedsrinivasan gopalan

      The learned professor Mr. Jagdiish Bhagwati has as expected pitched for reviving the moribund WTO in his fervent zeal for free trade. If the bastions of free trade, the US and the EU do not countenance WTO in its present avatar and instead opt for forging PTA or FTA for that matter, what material change the inept WTO could do to alter the global power equations of trade majors if it is allowed to survive or thrive as its protagonists hope? Today, it is indisputable that the US, EU, China and Japan continue to call the shots in matters of commerce because of their ability to foist their concerns on their trade partners even in bilateral FTA that covers goods and services or in bilateral PTA that covers exclusively merchandise goods. With more than ten years down the drain since the launch of Doha trade talks, the WTO could not marshal enough mettle among all participating members to see that the Round succeed so that the touted gains to global trade would be realized. Instead, the trade majors on their part, saw palpable virtue in letting bilateral treaties of special dispensation as a better and surefire alternative to the so-called rule-based conduct of affairs of the WTO. It is also a pity that despite its professed faith in WTO, one of the G-20 countries India too saw wisdom in lapping up FTAs as it is in the midst of one with the EU (a protracted one) and Japan and a possible one with the US or Australia in the foreseeable future. In an increasingly interdependent world, it is the individual interest of trading nations that counts uppermost than allegiance to any supra national body such as the WTO attempting to usurp for itself the policing power of international trade. It is time the WTO realized its real net worth before it is being forced to learn the hard way by trade majors who seem to have lost interest in propping up this body with any conviction or confidence at a time when the global economic prospects do not lend themselves for any such act of benevolence. G.Srinivasan, New Delhi, India

    4. CommentedDavid Prosser

      I agree with Zsolt Hermann. A new perspective is sorely needed in the world today, seemingly to solve even the smallest of crises due to global interconnection and interdependence.

      And our global economic crisis is by no means small...

      The only hope seems to be the development of new integral education: To teach us about this new interconnected world we find ourselves in.

    5. CommentedZsolt Hermann

      Basically all experts from economics, finances, politics, sociology, scientists from all fields, and even growing number of the public understands that we live in an interconnected world.
      We view these interconnections on different levels, most of us still not understanding how deep they go, nevertheless we accept the fact that we live in a physically and virtually intermingled human network.
      But we still use the interconnections in between us in a negative way, towards ourselves, each time making calculations on our own profit, benefit, only taking others into consideration regarding what we can benefit from them.
      This is the principle reason the Eurozone, and the EU is breaking down now, even when most of them accept they need the Union, they need to stay together, none of them are ready to make the concessions, and accept the deeper mutual integration necessary for the true association.
      We need to find the motivation all around the globe that could convince people to accept such compromises and start taking the united whole's well being as priority ahead of individual or national interest. The motivation has to be such that allows each individual and nation to enter new type of connections from within understanding, without any tricks or coercion.
      We gather more and more proof each day in this deepening crisis showing us that alone nobody can succeed, today there is no individual or nation that could stand on its on, can sustain itself without the whole network's support.
      But we still do not want to put the pieces together and view the whole picture that would make it very obvious for all of us.
      Thus the first step is a global, integral education system, explaining each and every human being the nature of our global, integral, interdependent human system, and how any individual or nation can only succeed, have a future if the whole system works optimally and is sustainable.