Feb 21, 2011

Contours of multilateralism

The challenges WTO has to overcome on the completion of sixteen years of its existence

By Hussain H. Zaidi

On January 1 this year, the World Trade Organisation (WTO) completed its sixteen years. Created in 1995, it represents the greatest ever attempt at setting up a rule-based multilateral trading system. With the passage of time, the WTO’s membership has increased and at present it comprises 153 members, including all the world’s major economies and trading nations with the exception of the Russian Federation, which of course is in the accession process.

While the WTO may have already much to its credit and certainly the growth of its membership signifies the importance that the world at large attaches to it, the organisation has many challenges to overcome. The immediate challenge obviously is successful completion of the stalled Doha Round, which was launched in November 2001 and was originally supposed to complete by 2004. Even after the passage of nine years, there are no imminent signs that the round will complete soon. In the long-run, the success of the WTO will depend on how well it promotes the globe’s overall socio-economic prosperity.

Free trade or trade liberalisation is the very watchword of the WTO. The advocates of free trade maintain that far from being a threat to human rights or welfare, free trade promotes them. Closed economies, it is argued, are characterised by absence of democracy and denial of political and civil rights. On the other hand if governments and their people are exposed to free trade, its effect will extend well beyond commerce to other spheres of life. Thus free trade is supposed to make for democracy and social and political rights, which enhance the quality of life.

This argument, however, is not conclusive. Free trade does increase the volume of trade and thus increases the size of the cake. But the cake is remarkable for its uneven distribution. And as its size increases, the cake becomes more unevenly distributed. The higher the level of development of an economy, the greater the benefits that it draws from free trade. Likewise, the stronger economically is a group in a country, the greater are the advantages of free trade from it. Thus while free trade may increase the quality of life, the beneficiaries for most part may be those groups or nations who already enjoy a relatively high quality of life.

The relation between free trade and social and political democracy is also open to question. Generally, democracy and free trade go hand in hand. But it is possible for a government to pursue free trade policies without committing itself to democratic values. For instance, governments in many Southeast Asian countries are committed to free trade policies but pay only a lip service to democracy.

Does free trade hamper efforts to root out poverty? Or is free trade an instrument of poverty alleviation? This is a never-ending debate. The exponents of free trade subscribe to the view that by promoting growth free trade reduces poverty. Again, this is not an impregnable argument. While free trade may promote growth, the same may not be pro-poor. As already mentioned, free trade does increase the size of the pie; but for those who already have a large share of it.

Rise of Preferential Trading Arrangements (PTA) ranging from free trade areas (FTAs) to custom unions poses a most potent challenge to multilateralism for several reasons: In the first place, as argued by eminent economist Jacob Viner, a PTA can cause trade diversion by replacing a lower cost-efficient supplier from a non-member country with a higher cost less efficient supplier from a member country.

In the second place, because of their fast growth, PTAs have caused confusion the global trading system. In numerous instances, a country is member of more than one FTA, with each at different stage of implementation and having a different level of tariffs. In the third place, PTAs may block increased market access at multilateral level. Members of PTAs tend to be concerned more about preferential trade benefits than about MFN trade benefits. Finally, PTAs inject what have been called non-trade objectives into trade agreements. These include significant labour and environment standards and at times capital control.

PTAs make for reciprocal preferential treatment. The WTO also allows non-reciprocal preferential treatment, especially for developing and Least Developed Countries (LDCs) under the enabling clause of GATT. For instance, under the Generalised System of Preferences (GSP), developed countries give preferential or discriminatory treatment to exports from developing countries and LDCs. Under United States GSP scheme, for example, the eligible products from these countries enter the US duty free. The purpose of such discriminatory treatment is to encourage developing countries and LDCs to follow export-oriented rather than import substitution trade strategies as engine of development.

The non-reciprocal preferential treatment has been criticised for various reasons: One, the preferences are not really non-reciprocal. In return, the developing countries have to fulfill certain conditions imposed by developed countries. Two, benefits given under the GSP are not binding, and the same can be withdrawn on grounds that are not always strong. Three, donor rather than beneficiary country’s interest determine the products to be extended preferential treatment under the GSP. Four, non-reciprocal preferential treatment has not yielded much real benefits to developing countries. Rather it has had only a marginal effect on the country’s performance. Five, unilateral preferences make it difficult for developing countries to shed off protectionism and liberalise the economy.

A study of developing countries that benefited from the US GSP scheme between 1976 and 2000 shows that those who dropped from the scheme opened their markets more significantly than those which continued to benefit from the scheme. Finally, the GSP beneficiary countries develop a tendency to rely too much on preferences to the neglect of industrial and agricultural diversification.

The greater the gap between MFN tariffs and preferential tariffs, the more pronounced the effect of regional or preferential trading arrangements on multilateralism. Ideally if MFN tariffs are brought down to zero, the whole world will become a free trade area and there will be no need for discriminatory tariff treatment. But given the recent roadblocks to multilateral negotiations caused by the reluctance of developed countries to pursue market-based policies in agriculture and that of developing countries in case of the industrial sector, it is really a long way to go before MFN tariffs become zero.

There is an interesting debate whether globalisation in general and free trade in particular are undermining state sovereignty -- the most characteristic feature of the modern nation-state. For instance, it is argued that the dispute settlement body of the WTO may declare a national piece of legislation or an executive act incompatible with the country’s international obligations under the WTO and the same has to be scrapped or amended.

One view is that the acceptance of any international treaty involves transfer of decision-making power from a national government to some international institution. This transfer of power is based on the assumption that matters of common interest can better be safeguarded or promoted if the same are handled by the international institution rather than by individual states. The same holds true in case of the WTO.

While abiding by WTO agreements or rulings, member states exercise their sovereign power in a way that is compatible with their obligations under the organisation’s charter. Moreover, national governments still have a lot of discretion in deciding the manner in which they fulfil their commitments to the WTO charter. And importantly, if on one hand member states loss some “policy space” at the domestic level, they reclaim the same at the international level.

No doubt, globalisation or trade liberalisation has rendered the concept of national sovereignty obsolete. The greater a country’s level of integration into the international economic or trade order, the more policy space it loses at the national level. However, its ability to reclaim the policy space at the multilateral or international level is a function of its economic or trade power.

Economic giants like the US, the EU, Japan or China can without much hassle reclaim at the multilateral level more than they lose at the national level. However, for lesser economic powers, the trade off is generally to their disadvantage. If multilateralism is to safeguard the interests of all, or at least the majority of members, it must redress such imbalances. But can it?

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