Rebuilding the WTO

In the midst of the current financial crisis, a worrying return of trade protectionism is emerging. States are responding to protectionist pressures by favoring domestic producers over importers. Yet the World Trade Organization (WTO) seems unable to respond and reverse this trend. Is the WTO too weak to matter, particularly when economic conditions are most severe?

The financial crisis has undoubtedly worsened the political climate for free trade. Yet the WTO’s troubles began long before the financial crisis erupted. The Doha round of trade negotiations, commenced in 2001, has repeatedly stalled as states have failed to reach consensus on key issues such as agricultural subsidies and liberalization of trade in services. These difficulties have undermined efforts to multilaterally reduce remaining trade barriers, and shifted the momentum of trade liberalization towards bilateral and regional trade agreements.

Three primary reasons explain why multilateral trade deals have been so difficult to conclude in recent years. First, a fundamental shift in the balance of economic power has complicated the negotiations. The emerging economies, most notably China and India, have repeatedly shown their willingness to veto WTO deals that are inconsistent with their interests. Second, the insistence that all WTO agreements must bind all member states in accordance with the principle of “single undertaking” has proved unworkable within a 153-member institution that operates on consensus. Third, in order to seek this consensus, the prospective agreements have been stripped of any meaningful content. As a result, watered-down agreements have ceased to offer any net gains that would justify long, complex and costly negotiations.

The WTO cannot regain its relevance without undergoing significant institutional reforms or adopting changes in the ways trade deals are negotiated. The old model, in which the US and the EU determined the direction of the trade talks, is no longer sustainable. If the US and the EU cannot find ways to engage China and India, there is little hope for multilateralism and effective leadership in the WTO.

We may also need to accept that the era of big trade rounds is over. Future “grand bargains” like the one reached in 1995 at the end of the Uruguay round seem increasingly unlikely, given the WTO’s large and increasingly heterogeneous membership. Requiring that all states subscribe to all agreements is no longer feasible. Complex multi-issue negotiations across the diverse WTO membership lead to overly-compromised agreements that accomplish little in terms of furthering world trade.

A better strategy would be to pursue plurilateral agreements and sector-specific deals among a smaller group of like-minded trading nations within the WTO. This would mean that all WTO members are invited to participate in negotiations but remain free to decline to join a particular agreement in the end. The WTO members could further require that a plurilateral agreement enters into force only when a critical mass of the WTO membership has joined the agreement. For instance, an agreement could become effective when it covers 80 percent of world trade within the relevant sector. Reaching a meaningful agreement among a critical number of WTO members seems more promising than the decade-long efforts to reach all-inclusive, yet weak and fragile compromises.

Finally, the only way to restore confidence in the WTO is to greatly increase the economic stakes of the negotiations. The current, much diluted Doha round offers modest welfare gains after a series of compromises across the complex agenda and diverse membership. Its successful conclusion would offer little beyond the symbolic value of showing that the multilateral process is still alive and that the states have not surrendered to protectionism. Still, the current Doha round must be completed, even if only to preserve the multilateral framework for more spirited and effective negotiations in the future.