A rule-based system may have increased trade volume, but it hasn’t been just for all.
The growing and diversified trade that has been taking place across borders under the aegis of the World Trade Organisation (WTO) since it came into existence in 1995, has been widely deemed as desirable. Strict adherence to its basic principle of promoting free trade through the lowering of tariffs and removal of barriers is cited, almost as a panacea, for achieving fairness and universality in international trade. Such commercial business is believed to be in the interest of both the exporting as well as the importing nations. Since the acceptance of this rule-based system, the fact that global trade has grown, both in volume and value, outstripping the secular growth rate in world GDP, has been hailed as the hallmark of WTO’s success in administering and enforcing elaborate regulations.
With 25 years of results on WTO’s functioning now available, there is ample data to make an objective assessment of its track-record, including going deeper into some of the under-the-breath comments made about its inadequacies. The latter includes allegations that it has benefitted developed nations who usually have better bargaining power and are usually the producers of most goods and raw materials for industries at the cost of poorer countries. Also, worth diving deeper into is whether the new rule-based trade system has been meaningfully looked at from a viewpoint of environmental sustainability, public health freedom, and the safety of workers and interests of labour, including broader human rights.
Adopted in 2001, the Doha Development Agenda of WTO had placed development concerns at the heart of the Organisation’s working. However, achieving these has remained a challenge. There is an almost unbridgeable chasm in the interpretation of what constitutes “free and fair” trade between the rich and powerful OECD nations and the more numerous, heavily populated, and often helpless lot of developing countries. A persisting problem that also remains is that despite the WTO’s elaborate set of rules being in position, a plethora of bilateral and regional trade pacts continue to be negotiated and agreed upon year after year.
Another grumbling pertains to WTO’s inability to regulate the vast global trade in commodities, particularly hydrocarbon-based fuels. Instead, it is the powerful Organisation of Oil Producing & Exporting Countries (OPEC) which calls the shots on the quantities and all other major terms of trade for crude oil and natural gas. No attempt whatsoever has been ever made by WTO or the earlier trade mechanisms to bring it under their regime. In fact, that seems to have encouraged the emergence of similar cartels in trading of other commodities as well.
It is also worth noting WTO’s slow decision-making process which is based on building consensus among all the participants in all UN institutions. This path necessarily requires the painful building up of a full agreement amongst all its member-nations i.e., a cent per cent unanimity amongst its 157 member-countries on issues, big or small. While in some matters, this might be a useful practice to adopt, particularly for ensuring the sustainability of the agreements entered into, the inordinate delays caused in commercial matters frequently impacts their efficacy. Perhaps, an equally relevant issue to ponder over is why there isn’t a machinery at WTO’s disposal to enforce its own arbitral awards in the numerous trade related disputes amongst members. This also applies to the country trade policy reviews conducted regularly by it as per its Charter.
BACKGROUND OF RULEMAKING IN TRADE
To enable an objective evaluation, it might be worthwhile to briefly recall the background to WTO’s evolution of its policy-framework. Soon after the Great Depression of 1929, it was President Franklin Roosevelt (FDR) who piloted in the US Congress, the Reciprocal Trade Agreement Act, 1934. Perhaps for the first time in history, this pioneering legislation had sought to prescribe a set of rules for international trade. It laid down for the executive wing that henceforth, all tariffs must be negotiated with the foreign governments and explicit trade deals entered into with trading partners to reflect the arrangements. Overall tariffs, however, generally remained high since these were determined largely through horse trading amongst the involved special interests. The exercise also did not necessarily make for higher volumes of trade or enable a significant move towards free trade.
In earnest, that began to happen only after the end of the Second World War, when a serious endeavour was made to look for ways and means to avoid bloody and prolonged conflicts of the kind the world had to go through twice in the three previous decades. Economic cooperation and integration amongst nations, was rightly thought to be a way to usher in the much-needed global peace. In fact, a precursor to this was the Atlantic Charter of 1941 negotiated at the height of the war by FDR and Winston Churchill, the then British Premier. The two leaders had demonstrated exceptional foresight and equanimity in proposing a global trade order which would treat all nations fairly irrespective of whether they had belonged to the winning or losing side in the ongoing world war. To them such an approach would be a meaningful measure to ensure that countries did not go to war again.
Though the 1934 US legislation was based on simple mercantilism principles that exports are good, and imports are bad, it had sown the foundation of building a structure based on the belief that all international trade needed to be rule-based. Towards that end, the first major step came to be taken in 1947 when a General Agreement on Tariffs and Trade (GATT) was signed between the US and its trading partners. It was a multilateral version of the earlier disparate bilateral trade deals entered by it. This provided for putting in place the mechanisms for gradually lowering tariffs to make the trade freer. It also put in place provisions to prevent backsliding from commitments made, except in defined exceptional circumstances.
Broadly, these uncertain events could fall into four buckets—unfair trade practices like imposing tariffs to counter subsidised exports; national security considerations to ensure there was no dependence on an enemy-nation for critical goods; market disruption caused by surges of excessive sudden imports which gave too little time to domestic producers to adjust and fourthly, the dumping of goods by exporters below their cost of production on importing countries.
Over the next 45 years, a host of trade related rules and procedures evolved under the aegis of GATT which helped grow trade across national boundaries. This growth spanned both developed and developing nations, and there was a perceptible diversification in products traded. Intra-country trade within the emerging world also became significant and meaningful. Several new nations became members of GATT, which promised to provide the protection of the evolving rules of trade. War-hit countries, as well as the newly independent countries of Asia and Africa, relied upon these to improve the lot of their citizens and set their economies on the path of development and poverty amelioration. The prosperity of the Asian Tigers viz. Japan, South Korea, Hong Kong and Taiwan was born out of such regulations coming into effect.
EVOLUTION OF WTO
With a degree of robustness in trading across borders and fewer restrictions on the flow of international capital, many nations could grow their GDP and effect progress in reducing widespread and palpable deprivation. Making trade a lasting pillar was the goal of the next endeavour initiated in the mid Eighties. Innumerable rounds of deliberations, spread over a decade, had resulted in the setting up of the WTO. Except for those countries who did not believe in free markets or open trade, the clear focus was on making all nations of the world members of the new body. With few countries failing to meet this primary qualifying criterion, almost all nations—big and small, old and new—proceeded to join the WTO. Amongst the prominent exclusions were China and Russia. It was a few years later in 2001 that China was admitted, but only upon giving firm commitments to fair trade and providing a road map to fully opening up.
Broader membership now necessarily meant dealing with a vast diversity of countries at different stages of economic and social development. Understandably, each one had a different concern and priority. The developed countries’ role, while remaining intact in promoting free trade, came to be circumscribed by such new considerations. These considerations included food security, employment-creation, bridging the growing income and wealth disparities, and shielding special groups and regions. Investment flows from developed countries to the Third World, as well as intellectual property related concerns, also had to be reckoned with. These concerns were meaningfully and inextricably correlated with trade.
Almost invariably, such considerations permitted the occasional protectionism through the imposing of tariffs and other barriers in prescribed circumstances. Such measures, combined with the never-before-considered “development” issues now on the table and the varying interests of member nations, affected the evolution of free trade. As would be expected since the majority of WTO member belong to the category of developing nations, most deliberations focus on issues of development rather than purely trade promotion. Alongside this, there remains the problem that with no machinery for enforcing final verdicts in disputes amongst members, offending nations are often tempted to be unmindful, and continue to take stances that harm the interest of others, especially the poorer nations.
Dr Ajay Dua, a progressive economist, is a former Secretary in Union Ministry of Commerce and Industry.
Part 2 of this article dealing with overcoming the perceived deficiencies in WTO’s functioning will appear next week.