Why we need the WTO

The World Trade Organization is an odd institution. Its mandate is to govern and expand the global trading system, but it relies on an inherently mercantilist logic to do so. During negotiating rounds, countries essentially barter over ‘concessions’; that is, access to their domestic markets. By the same token, if the WTO rules that one country has neglected its trade obligations to another country, the WTO can grant the offended country scope to apply retaliatory sanctions, which essentially amount to the revocation of the concessions discussed above. If you think about it, negotiating over market concessions and threatening to revoke them to enforce compliance only make sense if you view exports as good and imports as bad.

In truth, unilateral liberalization is probably the best economic policy decision a government can make, in terms of aggregate gain. But it is also an unlikely policy outcome for many governments: the short-term dislocation is too severe, and the political pressure or even civil unrest risks from well-organized domestic interests are too large. While perhaps less economically palatable, multilateral liberalization is far more politically feasible, precisely because many people do view trade as competition. This is why the WTO must use mercantilist logic to advance free trade, and it is also why the world needs the WTO. By binding our trade liberalizing commitments in international treaties, they become much more difficult to backtrack on. This is especially critical in countries with weaker governance structures. I was reminded of this simple but powerful fact today when I read a new study on voxeu.org, which finds that rigorous accession commitments matter when determining a country’s benefits from joining the WTO.

This is an important way to understand the WTO, and it gets to the heart of arguments about why the WTO’s legitimacy is more important than ever. In a sense, the WTO is a painstakingly-constructed barrier against protectionism. But if it loses its legitimacy as the arbiter of international trade, this 60+ year old barrier would weaken significantly.

With that in mind, what happens to the WTO’s authority if the Doha Round ever completely collapses? It’s worth remembering that Doha has ceased to be only about the deal that’s on the table. In a broader sense, it’s now also about whether the WTO can “deliver” on trade. If it can’t, then it’s hard to imagine a scenario where the organization doesn’t lose a good deal of legitimacy.

The WTO saves governments from their worst and most short-sighted impulses. In these turbulent times, I would argue that we need it to be as strong and vigorous a force as possible.

UPDATE: see this post from last summer on why the Doha Round matters. What I wrote then has gained an even greater sense of urgency since.

Bhagwati on Obama on trade

*This post on trade represents my personal opinions.

Sometimes, it feels like Mr. Obama’s honeymoon period is ending before he even takes office. In an op-ed published earlier this week, Jagdish Bhagwati absolutely savages Barack Obama on trade issues. I am a huge fan of Dr. Bhagwati. He is one of the greatest trade economists and one of the most unrepentant defenders of free, multilateral trade. His work has shaped my own views on trade more than any other single thinker.

Dr. Bhagwati chides Mr. Obama for his “eloquent silence on trade issues” and his tepid support of the Doha Round. He also criticizes the auto industry bailout (no disagreement here), which he believes will be WTO-incompatible, and dismisses Obama’s trade team as a pack of under-qualified, semi-protectionists.

His most interesting argument is against America’s bilateral/regional trade strategy. In Dr. Bhagwati’s eyes, powerful union lobbies and other political forces have produced a trade agenda in which the US negotiates standard-laden agreements with small, poor and comparatively weak countries. The standards, in areas such as environment and labor issues, effectively undermine the smaller partner’s areas of comparative advantage. He characterizes this “free but fair trade” and “an exercise in insidious protectionism that few recognise as such.” Ouch.

As an aside, I wonder how Dr. Bhagwati reconciles this novel argument with the fact that every single one of these bilateral agreements was negotiated by a Republican administration and narrowly passed in Congress by Republican legislators, over the vigorous opposition of Democrats and organized labor?

In any case, the economic logic of Dr. Bhagwati’s arguments cannot be ignored. The US, and the world, would best be served by the successful conclusion of the Doha Round. In terms of regional agreements, negotiating bilateral deals with small trade partners is an exercise in economic futility: any positive gain is a drop in the vast ocean that is the US GDP.

Trade, however, is as much a political issue as it is an economic one. This is unfortunate, but it isn’t very useful to assess trade issues without considering the political ramifications. Dr. Bhagwati acknowledges this: “history shows that the freeing of trade is nearly impossible to achieve in times of macroeconomic crisis.” In assessing where Mr. Obama will fall on trade, we need to examine the political/economic climate he inherits: an American public that is increasingly sceptical of the benefits of trade, an outdated suite of government programs to assist displaced workers, and one of the most vicious recessions in the postwar era. Paradoxically, if Mr. Obama pushes too hard on trade without recognizing these other challenges, he may risk further damaging the 70-year political consensus in the US that freer trade is a good thing. I was thinking out loud about this very issue earlier this week.

As is such, Dr. Bhagwati’s argument is strongest when he calls for more vocal leadership on the issue of trade. I do think that President Obama will need to work hard to resell trade to the American people, so I am bothered by his “eloquent silence.” I wish we had seen a stronger push for Doha last month from the Obama camp. Still, given the current political realities that affect trade, we need to give Mr. Obama more time before sounding the warning on his trade agenda.

Trade counterfactuals

*This post on trade represents only my own opinions.

For the sake of argument, I want to present an alternate viewpoint about President-elect Obama and trade. I’ve been thinking about it a lot about, and specifically whether or not he’s ‘bad’ for trade. He distances himself from protectionist rhetoric all the time, and he likes to reiterate that he both understands the fundamentals of trade and considers himself a free trader. And yet, the conventional wisdom among many trade watchers seems to be that he won’t pursue new agreements and that he won’t try to bring a successful conclusion to the DDA. How do you reconcile these two points of view? Is one of them wrong?

For what it’s worth, I don’t think the two positions are incompatible. I agree that is unlikely that Mr. Obama will do much on trade for the first year or two of his presidency. But this only in part because of the financial/economic crisis over which he will preside – part of it is purposeful as well. Free traders tend to look at the big picture: the aggregate benefits of freer trade outweigh the concentrated losses, and society as a whole gains. Mr. Obama recognizes this, but he is also much more in tune with the distribution of these gains. In other words, his departure point is different.

I think that in Mr. Obama’s mind, the postwar consensus on trade has unraveled. And the public has grown much more skeptical about the benefits of globalization and much more wary of the downsides. In this climate, it is possible that simply continuing the current trade policy is no longer sustainable. To make people more accepting of future trade deals, it might mean that you need better unemployment assistance, better infrastructure investment, better retraining schemes and better health care that is less tied to employment. And Mr. Obama is very eager to do all of these things.

So while trade watchers may be wary of Mr. Obama’s short term stance toward trade, his intended investments in an enhanced social safety net may actually make it more feasible to conduct ambitious trade deals in the future. The remaining question (aside from whether or not this is accurate!) is whether or not the US can afford to take a trade pause while other nations are racing forward.

Any thoughts? This is just a hypothetical counterfactual. Feel free to tear it apart in the comments section.

Zeitlinks

As I ponder my dissertation's depressing word count, here are some interesting comings and goings in the world of punditry/journalism aside from z'geist:

- The Economist's Free Exchange discusses the results of presidential prediction models, all of which featured so far have Mr. Obama winning with a probability of 50% - 99%. There's still time to take an Obama position in the prediction markets, like I mentioned earlier...

- In Thursday's FT, Warren Maruyama, general counsel to the Office of the US Trade Representative (USTR), says it would be crazy to walk away from the WTO and Doha because there is no alternative. I'm fairly sure that when Bob Zoellick was USTR during this same administration, he couldn't stop gushing about the very glaring alternative: regional trade agreements. There's a valuable lesson to be learned here: the words of officials in controversial public positions (like trade negotiation) aren't even worth the paper the Doha draft agreement was written on

- Commodities are taking a killing, as oil's continued fall has initiated a broad sell off. Soaring commodity prices, particularly those related to food and energy, have been at the center of recent inflation concerns. Related: the top 20 mining stocks are collectively down $667 billion from recent highs; the top 20 oil stocks are down about $943 billion.

- If you've got time, read this analysis of the facts behind some of the energy policy options du jour.

Dr. No (or, the future of multilateral trade)

As I mentioned a couple days ago (and gave updates on all last week), the "make or break" talks to save the Doha Round collapsed this week. There is a lot of doom and gloom about the WTO's future here and here and here and here and here and here... and, uh, about 3,000 other places. Without being overly repetitive, I have a few thoughts to add.

First, this is not doomsaying, this really is a big deal: in the entire history of post-war multilateral trade negotiations, we've never had a negotiating round collapse. Perhaps more notably, this was the first time that a round was negotiated under the new organizational structure of the WTO, not the more fluid and less-institutionalized structure of the GATT. Doha's collapse will fuel criticisms that the WTO's structure makes it very hard to do deals.

Second, as much as I respect China and India for playing hardball in trade negotiations, this collapse strikes me as a short-sighted and quite likely Pyrrhic victory for both of them. At the end of the day, both of these countries have relatively open economies and need the certainty of market access that the WTO and its dispute settlement procedure provide. Furthermore, despite the obvious legalistic and economic undertones, trade negotiations are still fundamentally diplomatic negotiations. I don't think this sort of behavior positions either country well in future trade talks, be they regional or otherwise, and I suspect that the perception of recalcitrance will not disappear quickly. Side note: I do still think that India's trade minister Kamal Nath has the coolest nickname of any trade diplomat ever: Dr. No, because, well, he liked to say 'no' a lot.

Third, I am rather pessimistic about the WTO's future. Failure to perform is one thing, but failure to perform when there is a perceived viable alternative in the shape of regional trade agreements (RTAs) is quite another. I have said before that RTAs (or FTAs or PTAs) are a dangerous substitute for multilateral free trade, a bit like taking infomercial diet pills instead of going to the gym every day. I understand the political economy arguments for RTAs very well, but I do not think they pass muster. This is a subject I hope to explore this weekend.

To continue with the WTO, however, I agree with Clive Crook that the most likely outcome of Doha's failure is a gradual marginalization of multilateral trade over the next 10 - 15 years. As I'm arguing in the dissertation that I hope to have done by next week, the WTO's institutional legitimacy in the next few years now hinges on litigation through Dispute Settlement Understanding (DSU). If, and this is a big if, the DSU continues to deliver quality and sophisticated resolution for trade disputes, it provides a good reason for the WTO's continued relevance and might buy negotiators enough time to reconvene in a few years and find a new way forward.

This is unlikely to be enough, however. And speaking of Dr. No, one of Mr. Bond's most famous lines from that movie probably applies to the WTO in its current state: "That's a Smith and Wesson. And you've had your six."

Doha talks have collapsed

The Doha talks collapsed today because the US, China, and India could not reach an agreement on agriculture.

Die another day

The Doha talks are doing their best James Bond and simply refuse to die. Word is coming out of Geneva that after another marathon session, the G-7 (the major Doha players: Australia, Brazil, China, EU, India, Japan, United States) have come to some consensus over a general plan advanced by WTO Director General Pascal Lamy. It must be stressed, of course, that this remains a vague framework with the specifics yet to be determined, but it is a way forward and talks are going into overtime. Of the G-7, only India is expressing serious reservations about Lamy's framework, and Brazilian foreign minister Celso Amorim has raised his predictions of success from "50-50 to 65-35." You gotta love his precision - let's hope he's right.

Bridges has the deal's specifics if you want to get into the nitty gritty.

Doha mini update

From Bridges (emphasis mine): 

"The next 24 hours will determine whether governments can rescue WTO talks from the brink of collapse, officials said Thursday evening.

A crucial day lies ahead for the ongoing attempt to strike framework deals on liberalising agricultural and industrial trade. Discussions have been largely stalemated since they started Monday, and negotiators are under increasing pressure to find common ground -- and soon -- or potentially face the breakdown of the troubled Doha Round. 

'Tomorrow is the day in which we will know if it's possible or not,' Brazilian Foreign Minister Celso Amorim told reporters Thursday night. "We're doing our best. It's not easy, but we're trying.'"

Do read the whole analysis: for trade reporting, Bridges is peerless. But the talks have predictably come down to the wire and today's the day we see whether they can cut a deal. Stay tuned.

Mini-ministerial day two

There's not a lot of major news coming out of Geneva after two days of trade talks. This is not uncommon for these sorts of negotiations, though: Bridges notes that Monday's discussions were little more than political positioning and grandstanding. The real wheeling and dealing will likely come towards the end of the week.

However, the FT reports that the United States offered on Tuesday to lower its farm subsidy ceiling to $15 billion/year, with some conditions attached. This is still comfortably higher than what the US actually spends on farm subsidies each year, which is about half that. Developing countries say the move is not enough. The US retorts that the offer is a genuine concession. We'll keep you posted on how things shake out as more information becomes available.

Side note: as these talks are ongoing, I am currently very busy writing a dissertation for my Master's Degree about the WTO. Ironically, if the talks fail, my dissertation topic will become extremely relevant, timely, and a good deal more interesting than it is presently. I stand by what I wrote yesterday, though - let's hope a deal gets done.

Why Doha matters

Trade ministers from about three dozen WTO member-nations are meeting in Geneva this week to try and break a stalemate in negotiations to conclude the Doha Round, which was launched in 2001 after the 9/11 attacks. The so-called mini-ministerial conference is being hailed as a "make or break" moment in the Doha negotiations. If you follow international trade relations, these sorts of doomsday phrases get thrown around a lot, but there is good reason to believe that it really is now or never for Doha this time. Nothing gets done in the WTO without the United States, which is heading into a hotly-contested presidential election amid rising protectionist sentiment. As the FT notes, a global free trade deal is unlikely to be a priority for either candidate, and a general election in India and changes on the European Commission further complicate things.

So where exactly is the impasse in negotiations? On the one hand, developing countries want increased market access for agricultural products, which means tariff and farm subsidy reductions, largely from the EU and the US. On the other hand, developed nations are demanding increased access for manufactured goods in the form of lower industrial tariffs. Oh, and the negotiators also need to resolve disagreements about trade in services, address LDC and LLDC (less-developed and least-developed countries) concerns about preference erosion, and sort out disagreements over "banana trade, location-based food names, and biodiversity-related patent rules." (Bridges)

Some advances have been made, but there's still a whole lot of negotiating to do. It also probably doesn't help that India's Trade Minister won't be there for the first two days as he's participating in a vote of confidence in the Indian Parliament. India has been a critical player in the Doha Round. Still, the WTO's Director-General, Pascal Lamy (pictured above right), put the odds of success "above 50%" in late June and has since indicated that they have marginally improved.

Why does all of this matter? One, freer trade is a positive-sum game in that all participants benefit to some extent. Second, reduced agricultural market distortions will help improve long term price stability and food supply, which is particularly salient given the recent global food crisis. Additionally, improved agricultural market access and tariff reductions are also beneficial for farmers in developing countries who simply cannot compete with first-world farmers at present. There are other significant benefits as well: for a quick summary, I recommend this Reuters FACTBOX.

One of the more sophisticated critiques of the drive to complete this round is something I like to term the "small-potatoes argument." It goes something like this: "tariffs are already low, and the gains to be had are relatively small, so why is Doha so important?" It's a valid point and actually speaks to the success of previous GATT/WTO rounds in lowering tariffs and improving market access. But Doha will bind tariffs at a lower rate and lock-in gains.

I also believe that the institutional legitimacy of the WTO is on the line here, especially given the rapid acceleration of economic regionalism as an alternative. If Doha doesn't deliver, it's not difficult to imagine the WTO's gradual decline and the marginalization as an international institution. (I hope to return to this theme  of regionalism vs. multilateralism in a future post, but for now, I would encourage anyone who's curious about it to read this brief article.) Others, such as the nonpareil Dani Rodrik, have argued that globalization (including multilateral trade) proponents need to pursue a broad public "legitimacy-enhancing strategy" instead of pushing through further trade deals aimed at improving market access. I would agree that further public buy-in is essential to sustaining economic globalization in the long run, but at this particular moment, I'm more focused on and rooting for a successful conclusion of Doha. 

And I hope you are, too.

Why don't more people like to trade?

International trade is an issue that is near and dear to my heart. Relentless economics instruction at both the undergraduate and graduate levels have made me into a committed free trader, and I'm still convinced that it's one of the best ways to save the world.

Others disagree: 

With the Doha Round at (yet another) make-or-break stage, and Election 2008 heating up, this sort of "trade backlash" is something that needs to be understood. There are several reasons why people in developed countries are so angry about trade:

1. Comparative advantage, the underlying principle of free trade, is counterintuitive and difficult to understand at first glance, even for reasonably intelligent people.

2. Any free trader worth his salt will tell you that trade is not Pareto efficient (making someone better off without making another person worse off) but rather Kaldor-Hicks efficient (making someone better off while making someone else worse off, but with the aggregate gains being higher than the aggregate losses.) In other words: although the gains outweigh the losses, there are clear winners and losers from trade. 

3. The gains are disperse and the losses are usually heavily concentrated. We all gain when we buy cheap imported goods at WalMart, but we may not notice it or get overly excited about it. However, if your job gets outsourced, you can bet that you're going to be furious.

4. There is a clear preference towards consuming goods produced by (and, for that matter, trading with) our countrymen. For example, several economic studies have demonstrated that even after NAFTA liberalized trade borders between the US and Canada, volumes of trade between Canadian states is still much higher than cross-border flows.

I'm sure the list could go on, but I think these are some of the most important reasons. Feel free to add in the comments below. This all begs some questions: if you think free trade is the way to go, what do you make of these objections? Is this an issue worth trying to build broad public consensus on when the general public is so reflexively skeptical? And if you think that you need a public remit for free trade, how do you get it?