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The Vanishing WTO

Author: Marc Levinson, Senior Fellow for International Business
December 4, 2009

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It was its very irrelevance that made this week's meeting of the World Trade Organization memorable. In the midst of the deepest slump in trade since the Great Depression, ministers from 153 countries convened in Geneva to discuss the state of the international trading system. It was not, as the trade ministers were at pains to make clear, a "negotiation." Aside from a bit of window smashing by a handful of anarchists, very little happened. Even worse, no one outside the confines of the meeting hall much cared.

Not too long ago, the World Trade Organization was the focus of controversy. It took blame for destroying jobs in wealthy countries, for impoverishing workers and peasants in poor ones, and for a wide array of sins lumped together under the rubric of "globalization"--all in all, a rather over-the-top assault on a sleepy bureaucracy whose main job is lawyerly crafting and interpretation of rules to govern international trade. Now, after a serious economic downturn has reminded the world of the link between trade and prosperity, the WTO seems to have exchanged its reputation as a villain for that of a talking shop. In the panoply of international institutions, it has lost stature. It is not where the action is.

Global Trade's Watch Dog

The WTO has done some things reasonably well. A year ago, economic policymakers around the world were terrified that the economic downturn would lead to trade wars as countries sought to protect their flagging manufacturing sectors. So far, the feared descent into tit-for-tat protectionism has not occurred. Yes, many countries have taken actions that may violate WTO rules, and many more are on the way. China, for example, is proposing to increase export-tax rebates for some types of high-tech equipment, and the United States provided direct subsidies to two major exporters, Chrysler and General Motors. Collectively, though, such actions have had remarkably little impact on trade flows. The WTO still matters enough that governments around the world want to avoid the stigma of being branded a trade-law violator by a WTO legal panel.

The WTO also deserves credit for dealing effectively with complaints of unfair trade practices by one country against another. Over the past fifteen years, more than four hundred such disputes have landed in Geneva. In many cases, looming legal deadlines imposed by WTO procedures have given the countries an incentive to resolve their disagreements without formal adjudication. Although the WTO legal process can be as ponderous as that in any U.S. court, there is no question that it has helped defuse problems that once would have led to diplomatic fireworks.

As a cop on the trade beat, and as a meeting place for trade negotiators, the WTO serves its purpose. Where it has fallen short is in accomplishing the more ambitious goal it was assigned when it began back in 1995: expanding trade.

[T]he WTO seems to have exchanged its reputation as a villain for that of a talking shop. In the panoply of international institutions, it has lost stature.

The WTO's predecessor, the General Agreement on Tariffs and Trade, expanded trade through eight "rounds" of negotiations involving first dozens, then more than one hundred countries. In each round, the participating countries made individual commitments to reduce tariffs, eliminate import quotas, and abolish other policies that discriminated against foreign goods. These agreements, negotiated over four decades, played a critical role in increasing international trade in manufactured products.

Since the 1950s, the value of the world's trade in manufactured goods has risen more than 7 percent per year, twice as fast as total economic output. In part, the rapid growth of trade reflects cheaper, more reliable freight transport, which made it practical to ship clothing, toys, and other low-value goods long distances. Low transport costs, in turn, encouraged formation of long supply chains, so that a given product may contain inputs from many countries, inflating the total amount of international trade. International trade negotiations helped accelerate economic integration as countries agreed to eliminate many non-tariff trade barriers and to reduce import tariffs. Not that long ago, many countries imposed very high tariffs on many products, making imports impractical. Now, average tariffs in most wealthy economies are quite low, and many countries allow a large number of products to enter duty-free.

The WTO sought to emulate this process by launching the biggest-ever round at a meeting at Doha in Qatar, in 2001. The Doha round was consecrated the "development" round, which would focus on trade barriers in agriculture rather than manufacturing. The wealthiest countries pledged to scale back agricultural subsidies and trade barriers so that the poorest countries could export more rice, sugar, and cotton. The most underdeveloped nations would prosper through trade rather than aid. No such thing has happened. Although the ministers at this week's WTO meeting in Geneva reaffirmed their commitment to the Doha round and made the requisite calls for faster progress, the reality is that the prospects of another large agreement to lower trade barriers are very slim.

An Unwieldy Bargaining Table

Why does the WTO face such paralysis? The political impossibility of curbing farm subsidies in many countries is only part of the reason the Doha talks are stalled. Sheer numbers are an equally troublesome problem. The days when the United States and the European Union could write the rules for world trade are long gone. There are now 153 countries around the bargaining table, and emerging economies such as Brazil, China, India, and Argentina are eager to flex their muscles on the world stage, making consensus all but impossible to come by.

Trade is such a low priority for the White House that after nearly a year in office, the broad strokes of the Obama administration's trade policy have yet to be announced.

Perhaps the most pressing problem facing the WTO, though, is that the world's political leaders are in no great hurry for it to move faster than it has. Nowhere is that more the case than in the United States. A new global trade agreement ranks very low on President Barack Obama's to-do list. There is almost no domestic political support for the Doha round; even the multinational corporations that once were strong supporters of trade liberalization are by and large disinterested. With neither Republicans nor Democrats in the Senate in any hurry to ratify proposed bilateral trade agreements with South Korea, Colombia, and Panama, Obama has no reason to push a bigger agreement that is likely to stir up far more opposition. Trade is such a low priority for the White House that after nearly a year in office, the broad strokes of the Obama administration's trade policy have yet to be announced.

Things are not much different elsewhere. The newly restructured European Union is far more concerned with internal integration than with global trade deals. The Japanese government is focused on the Asia-Pacific Economic Cooperation forum, APEC, of which it is this year's chair, and will seek to reach trade agreements among the APEC countries. China is trying to strike regional trade agreements to cement its ties to Southeast Asia. Russia, not a WTO member state, has all but given up efforts to join, apparently having decided that benefits are not worth the costs and complications.

Concerns Over Preferential Treatment

With the WTO paralyzed, countries have increasingly taken matters into their own hands and struck trade agreements bilaterally or in small groups, diminishing the WTO's role still further. The United States started this trend, signing the controversial North America Free Trade Agreement (NAFTA), pacts with Israel and Jordan, and several others. These deals, never popular, have become politically problematic in America, but they have become all the rage in Asia, the fastest-growing part of the world. As they proliferate, an increasing number of countries will give better treatment to exports from one another than to exports from the United States.

Trade negotiators will continue to negotiate at the WTO; that is, after all, what trade negotiators do. But hopes of a large-scale agreement that would aid the poorest countries and reverse the trend toward a fragmented world trading system will be fulfilled only if the leaders of the world's great economic powers want them to be fulfilled. Until they do, the WTO will remain largely a talking shop. This is not the WTO's fault, but it is the WTO's problem.

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