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.

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.