A failure to do so will be like throwing the baby out with the bathwater.
Undoubtedly, the prevalent state of global trade has its limitations and is not entirely fair to all participants. A number of issues of significance, including those needed to make international business more equitable and sustainable over time, remain inadequately addressed. In its 27 years of existence, the World Trade Organization (WTO) has added a number of nations to its ranks and has taken several notable initiatives that have grown the volume of trade. Yet, its effectiveness remains stymied by a host of structural issues including its member-countries’ lack of full commitment to multilateralism, the very bedrock of its creation. Nations, both rich and poor, continue to be swayed by short term gains and the immediate costs to them, rather than looking beyond their nose at longer term benefits that come with just terms of trade for all.
Ever since the beginning of the GATT rounds post the Second World War, and the subsequent formation of WTO more recently, there has been much talk about “fair trade”. This has centred on two key pillars—creating minimum barriers to trade, both tariff and non-tariff, and having non-discriminatory treatment in trade. Noticeable progress in tariff-reduction has been made over the years; though as has been widely documented in recent times, protectionism through raising of customs duties is once again raising its ugly head across both the industrialized and less developed world. The intensification of non-tariff based restrictions on imports has also gathered pace. China, a late entrant to WTO and a few other countries, have used a variety of ingenious ways to become prominent in this aspect, much to the ire of their trading partners.
Commonly adopted non-tariff barriers are not necessarily quantitative restrictions (which the WTO rules do not permit). In addition to prescribing unusually high standards of quality, tight delivery schedules, long service contracts and tough performance related warranties, are the more mundane form these barriers take on. Delaying the port-anchorages of ships carrying the imports and their mandatory customs checks, along with finding minor faults in the accompanying documents are common practices. As recently as last week, in their deliberations in Melbourne, the Quad Foreign Ministers opposed the coercive Chinese economic policies that ran counter to the WTO system.
The recent escalation of such actions by China is, at least in part, attributable to the high pitch actions the US had initiated against it during President Trump’s tenure (which the current administration has continued). The recent Joe Biden move to exclude China from the evolving alternate global supply chains for semi-conductors, and the US Congress’ decision to go ahead with enacting a specific competition law against it, will probably not go unretaliated by China. In all likelihood, Chinese countermeasures against the US and others who support it, would be as severe and could hit them where it matters. In pursuance of larger geo-political and strategic considerations beyond just economic ones, an unfortunate consequence of such “trade wars” would be the sidelining of WTO’s rule-based regime.
As part of the second pillar of free trade viz. non-discriminatory treatment, the move towards adopting the principle of most favoured nation (MFN) has progressed noticeably over almost two centuries. From the days of Robert Peel who served as the Premier of Britain in the mid nineteenth century till the beginning of the First World War, the MFN provision came to be included in a series of bilateral and other trade arrangements. First, it was Britain, then the leading trading nation, that unilaterally opted for it; later, even France and the US went along with in their bilateral trade and other treaties. This had a positive effect on lowering tariff barriers and multi-lateralizing international trade since bilateral deals based on MFN principles were also followed in their agreements with the third countries. Britain’s position to take the lead in the multilateral clearing of payment balances by allowing the debts of its trading partners to be set off against the credits they had earned elsewhere from countries with which Britain was in a negative balance, also imparted significant impetus to this healthy practice.
For multilateralism to have a wide base and broad acceptance, it was crucial that each country realise that its “self-interest was broader than usual (and) longer-run than usual and each state had to believe that its current sacrifices would in fact yield a long-run return, that others would not renege on their implicit commitments when they found themselves in tempting positions” (R. Jervis, 1983). A remarkable feature of the 19th century multilateralism was that it functioned without a formal organisation and only an overall normative structure circumscribed it. The move towards institutions through the 20th century—at first the League of Nations in 1919, then the setting up of the UN in 1945 and finally WTO replacing GATT in 1995—had initially created a degree of discontinuity and complexity in the evolving process of multilateralism. However, this was found to be mostly transitory.
Trading arrangements now have become applicable amongst a much larger number of countries and carry with themselves wider international legitimacy not enjoyed through other means. Coincidentally, post the war in 1945, the US administrations had also found it appropriate for the intended hegemony of the world to promote and boost the status of the new institutions as well as to influence their agendas and the desired outcomes. In the process, multilateralism and its pillars viz. tariff rationalisation and barriers reduction along with MFN universalisation, received much heft.
The re-emergence today of unilateralism and bilateralism in international trade that is driven predominantly on other-than-economic considerations, leaves us with the risk of such affirmative historic moves being nullified. A self-fulfilling crisis, this by itself, could become a further cause for intensifying the non-economic issues of disagreement and disputes. The prospects of protectionism, along with all its ailments and afflictions, becoming more pervasive also remains high. Combine this with the known limitations of WTO, including a persisting feeling of being left out of the global trade order in many developing nations, and the situation does not augur well for WTO’s future effectiveness, unless certain remedial measures are immediately set in motion.
While the procedural issues affecting its functioning can be attended to with some bold moves by the member-countries, it is the substantive ones which call for a readiness to compromise and sacrifice, especially by well-off nations. So far, the adopted outcomes of the Doha Development Agenda have yet to become the “go forward” action plan of all. Continuing to just pay lip service to the development concerns of poorer members, and concentrating only on growing trade, could further alienate many countries, particularly in the context of the agony and anguish caused by the ongoing Covid-19 pandemic.
In fact, from now on trade must get viewed from the prism of development and climate change, with the added goal of improving the health of the vulnerable wherever they might be. This would call for revisiting the intellectual property related TRIPS provisions of WTO so as to make it easier for the developing world to make the essential drugs and vaccines, get access to technologies needed to mitigate climate change consequences, as well as better enable them to produce the basic foods required to keep the body and soul together, particularly in the impoverished, least-developed countries.
In the same vein, the focus of its rule-based trading regime has to evolve to quickly cover the full range of services, the biggest asset of most developing nations. Negotiations must begin to establish the regulatory basis for open markets for biofuels including defining what constitutes a biofuel in terms of quality, composition, or other relevant classifications necessary for an international market to emerge. Such work should help the flow of global finance into biofuel production and commercialisation.
With no set of global rules laid out by the WTO on carbon emissions in the process of production or manufacture, we have all already witnessed how the cause of climate change is not getting served. In 2012, the Chinese government refused to accept the inclusion of aviation in the European Union’s cap-and trade regime (the Emissions Trading System) requiring airlines to pay for the price of CO2 emitted by all planes flying into the EU. Almost every airline other than the Chinese had agreed to comply with the new rules. China’s bullying tactics were on full display when it forbade its airlines from paying these fees or increasing ticket prices and blocked a subsidiary of Hainan Airlines from buying a substantial order of aircraft from the European Airbus. It is now imperative that member-countries of WTO agree on a variety of measures to reduce greenhouse gases that would include tariffs on high-polluting industrial goods produced outside their borders. Without this, the manufacturing hubs of China and a handful of other countries will continue to create liabilities for other countries.
At the end of the day, addressing the woes in the move to desirable free and fair trade across borders, calls for looking beyond the present moment and thinking of the future. It is evident that the capacity and luxury to do so is vastly higher in industrialised countries than in poor and emerging nations. In any case, given the vast externalities that become available to rich nations in making the less developed ones free from acute deprivation, pestilence, and social instability, this should work to their advantage. Their interest in trade cannot remain confined to obtaining energy and inputs for their industrial economies. In the prosperity of their trading partners lies the sustainability of their own well-being and security.
Now that WTO has come of age, it needs to embrace such a vision and long-term perspective in its functioning. Alongside this, much like Great Britain did in the mid 19th century, when it began to reap the benefits of the Industrial Revolution, the two economic superpowers of today—the US and China—must openly embrace multilateralism and its ingredients as a dictum of their trade behaviour. In doing so, they undoubtedly stand to gain much in the long term.
Dr Ajay Dua, a progressive economist, is a former Union Secretary, Ministry of Commerce and Industry.