In fact, as per classical trade theory, the gains from trade accrue to any country that lowers trade barriers irrespective of what other countries do, thereby suggesting that the rational actor may be expected to pursue unilateral trade liberalization. Indeed, as Paul Krugman puts it: “If economists ruled the world, there would be no need for a WTO.”
A quick peek into the real world suggests that despite the promise of free trade, countries have historically been reluctant to reduce trade barriers and quick to raise them.
While it is unambiguously in the interest of the small country to liberalize trade, economic theory tells us that the situation is different for large countries. The optimal tariff argument tells us that it may be in the interest of a large country to restrict trade at a certain “optimal” level, as it will be able to change the terms of trade in its favor by so doing.
This problem can be interpreted in terms of the classic Prisoners’ Dilemma game: “It is in each country’s interest to impose restrictions, but the result of such individually rational policies is inefficient.”
Trade liberalization may improve overall national welfare, but it also entails disruptive distributive consequences within societies by producing losers and gainers. Political economists have pointed out that the greatest losses from liberalization accrue to import-competing industries, whereas the biggest gains accrue to consumers. One might expect the consumer interests gaining from the liberalization to balance out against the protectionist producer interests that stand to lose. But the problem with such a distribution is that producer interests tend to be far more concentrated, organized, and vocal than consumer interests.
Weak states seek rules-based, authoritative international regimes. Such regimes introduce a greater measure of certainty in international relations and thereby help mitigate a rampant abuse of power by stronger states. This certainty is a valuable resource for developing countries, which have limited resources and can put them to better use if the rules of the game are established. The regulation of international trade through a multilateral trade organization further provides developing countries one of the few safeguards that they have against arbitrary arm-twisting by the powerful. Unlike in a bilateral context, developed countries cannot easily renege on their commitments in a multilateral institution; if they do, they must face the penalties that follow from breaking international rules. And finally, the existence of a multilateral trade organization provides developing countries with an important institutional context within which they can build coalitions and thereby improve their bargaining position.
Related to marginalization is the phenomenon called “Third World schizophrenia.” As the intruder majority in a system of states that was not built to suit their advantage, developing countries have sought to bring about systemic change. But as a result of their vulnerabilities, they also have an incentive to preserve the existing system of rules that provides legitimacy to their statehood and ensures their very survival.
The failures of the ITO negotiation process struck deep. The ITO had collapsed under the weight of its own ambitions. It taught trade negotiators and their political masters some important lessons about the reach that a multilateral trade organization could politically achieve at the time. It illustrated that any multilateral process risks derailment if it does not take into account the views of affected constituencies, whether they are domestic interests or smaller countries at the negotiating table.
Given these minimal costs of participation, particularly for developed countries, it is not surprising that the GATT survived for as long as it did. But the weakness of the institution also meant that it did little to address the power asymmetries that severely disadvantaged developing countries in their trade relations. The onus of negotiating and implementing agreements fell on the members themselves, with little help from the Secretariat.
In part, this longevity, especially remarkable given the difficult history of its unborn predecessor, derived from its ability to suit the needs of the major traders of the Western world. It covered the commercial interests of the developed countries, without making any intrusions into their domestic jurisdictions. Its weak institutional structure in terms of negotiation processes, decision-making procedures, and dispute se settlement mechanism meant that developed countries would not resent its gentle bindings. In other words, the weaknesses of the GATT were critical in ensuring the commitment and participation of the major traders.
The Uruguay Round (1886-94) brought the so-called new issues within the mandate of the GATT: services, Trade-Related IP Rights, and Trade Related Investment Measures. In return for agreeing to these inclusions, developing countries were promised concessions on agriculture, textiles, and industrial goods.
Countries showed a greater willingness to commit to a treaty than have their hands tightly bound by a much more intrusive organization with a powerful dispute settlement mechanism.
The formation of the WTO has enhanced the transparency requirement and enforceability provisions of the agreements. Not only are members required to publish their trade regulations and notify changes, but their policies are subject to surveillances by the Secretariat through the Trade Policy Review Mechanism. Should a country renege on its commitments, the stronger dispute settlement of the WTO can authorize punitive measures.
The GATT was applied only on a provisional basis; the Protocol of Provisional Application (“Grandfather Clause”) exempted contracting parties from applying some important GATT articles if they were inconsistent with existence legislation. The WTO, in contrast, was created as an organization in its own right rather than as a provisional measure. As a result, even though the US managed to preserve one grandfather right, the general principle of grandfather rights no longer exists. This means that member countries can no longer appeal to pre-existing domestic legislation to avoid adherence to the agreements of the WTO. They will have to do whatever it takes, even if this involves amending domestic laws, to abide the rules of the WTO or risk retaliation.
The WTO, and all the agreements within its umbrella, came as a single package, which countries would have to accept on an all-or-nothing basis.
All in all, if a particular interest group wishes to influence WTO rules, it can do so only through its government. Of course, WTO officials and negotiators recognize that their decisions affect domestic constituencies within countries. But given the member-driven character of the organization, the onus of dealing with the distributive consequences of WTO regulations falls on the member governments rather than the WTO as an international organization.
First, and deriving directly from GATT practice, the WTO is a one-member-one-vote organization, in striking contrast to the IMF and the World Bank which have systems of weighed voting. For instance, in the case of the IMF, the voting power of countries depends on the size of their respective quotas, which in turn are supposed to reflect their weights in the international economy.
The WTO presents a contrast to the IMF and the WB, where most decisions require an 85% majority. This gives effective veto power to the US, which commands about 17.5% of the votes. The requirement of a simple majority for a decision to be accepted in the WTO is important in that it imparts considerable voting power to developing countries, which form well over two-thirds of the entire membership. Interestingly, however, developing countries have never actually sought recourse to their overwhelming strength in numbers, in contrast to the UN General Assembly, which has often been ridden with the tyranny of the majority. The reason for this can be found in the second tenet of WTO decision-making: the norm of consensus.
Often developing countries find that they are not well-equipped to even identify their interests in some of the highly technical areas to claim their right to participation in a small-group meeting.
Multilateral trade negotiations depend critically on issue linkage for their success. Issue linkage facilitates reciprocal exchange. This exchange also increases the potential gains from trade liberalization according to the respective preferences of negotiating countries.
However, their apparently technocratic and abstruse content notwithstanding, rule-making in the WTO is fundamentally a political process. The choice of what gets included in the agreements and what gets excluded is influenced critically by the interests of the powerful. The impact of these agreements has also often proven to be asymmetric, with many of the promised benefits for developing countries remaining unrealized.
As tariff barriers were prohibited, countries began to resort to non-tariff forms of protectionism.
Tariffs represent a frequently used form of protectionism. Most economists regard tariffs as a preferable form of trade restriction to quotas. This is because quotas tend to be arbitrary, sever the link between domestic and foreign prices, and increase rent-seeking and corruption in the domestic economy.
Averages of lower tariffs on industrial goods conceal the very high “tariff peaks” that developed countries continue to maintain on select products, many of which constitute the key export interests of developing countries, such as leather, rubber, and footwear. Textiles and agriculture, in which several developing countries enjoy an export advantage, had been effectively excluded from general GATT rules through exceptions and waivers; one of the main achievements of the Uruguay Round was the inclusion of these issues into the WTO.
Even if their economies might benefit from the infrastructural reform that these agreements require in the long run, developing countries resent the costs that they incur in their implementation.
Even if their systems might have been working effectively and efficiently in the past, developing countries end up investing very large sums of money into modifying their own standards to bring them in line with those of the developed countries. For instance, Argentina spent over $80M to establish greater levels of animal and plant sanitation.
Dumping is said to occur if “a company exports a product at a price lower than the price it normally charges in its own home market.” Governments in the WTO are allowed to act against such dumping, but they must be able to show that dumping is causing or threatening to cause “material injury” to the competing domestic industry.
By 1981, services had come to comprise about 66% of the GDP of developed countries and 67% of their employment.
While the inclusion of services within the GATT agenda may have been a contested process initially, several developing countries have now begun to realize their potential as exporters of services. The relocation of call centers from Western Europe to developing countries like India is an example; the emergence of India as a major exporter of software is another.
At least some developing country negotiators have revealed in subsequent interviews that the technicalities of TRIPs had evaded them at the time when the agreement was being negotiated. Rather, they had believed that the TRIPs agreement would be limited to counterfeit goods.
The marginalization of developing countries from the dispute settlement process has several explanations. First, the costs of access to the dispute settlement mechanism are extremely high. Given the extreme technicalities of each case and the tomes of jurisprudence that have accumulated over the years, specialized knowledge is essential for effective participation. However, indigenous legal expertise on the WTO is scarce, and the costs of hiring private lawyers are prohibitively high.
Second, when developing countries do get involved in certain cases that are of critical and unavoidable importance to them, they enter the dispute settlement process as “one-off” players rather than “repeat” players. These one-off initiatives tend to be financed by industry or developed countries and usually address the particular cases rather than the long-term, systemic interests of the country. Herein also lies a vicious cycle: lack of participation on a sustained basis and without an eye on systemic concerns renders the cost of one-off participation even higher, increasing thereby the reluctance of developing countries to bring their grievances to the DSB.
Third, given the member-driven character of the WTO, the onus of presenting a case lies on the members themselves. This is difficulty, not only in terms of the costs involved and locking in of resources until a ruling is made, but also the risk that the stronger party might decide to retaliate against the weaker complainant through unilateral punitive actions outside the WTO. Few developing countries can afford to take on such a risk.
Fourth, in those instances wherein developing countries decide to launch a complaint and win, enforcement of the rulings of the WTO relies on trade retaliation rather than monetary compensation. Small, developing economies seldom have the means to enforce compliance through trade sanctions due to their smaller shares in world trade.
Knowledge of the costs of retaliation would make Country A reluctant to file a dispute in the WTO, even if it would be very likely to win; rather, it would prefer to settle the matter outside the institution. This reluctance of the weaker countries is borne out empirically: no LDC has been involved as either a complainant or a defendant in a dispute to date.
Many of the coalitions of developing countries broke ranks in the endgame at Doha as their member countries were bought off through various bilateral deals.
Developing countries from both sets of interests came together under the leadership of Brazil and India when they realized that the EU and the US had joined forces to produce a highly unsatisfactory text. Herein lays the origins of the most interesting coalitions of developing countries in recent times — the G20 — which had at its core membership such emerging powers as Brazil, China, India, South Africa, and Argentina.
The closure of the conference occurred on an acerbic note of finger-pointing and name-calling. US Trade Representative assigned blame to the “won’t do” countries at Cancun, and announced that the US would not wait for these countries and instead seek bilateral agreements outside of the WTO.
In the past, coalitions of developing countries had adopted some extremely intransigent positions through the greater part of the negotiation, and then fragmented in the endgame in response to bilateral deals. This record led developed countries to assume that the same pattern would be repeated in Cancun, and hence that no concessions made collectively to the counter-coalitions would be necessary.
Commenting on the inefficient and arduous decision-making procedures at Seattle and Cancun, some governments and individuals advanced the view that the WTO sets itself up for failure by requiring that all decisions be arrived at through consensus among its 148 members. Previously, in the days of the GATT and the first few years of the WTO, only a few members would be present in the Green Room meetings, allowing consensus to emerge.
There are 3 practical reasons as to why a consultative body, created along any of the variations suggested above, would be deeply problematic. First, given the binding nature and intrusive potential of WTO rules, it is unlikely that individual countries would accept the advisory recommendations of any inter-state consultative body. Most members of the WTO have come to recognize from harsh experience that the consultative phase of the negotiations is also the agenda-setting one, and entry into the final decision-making phase is no substitute for participation in the initial consultative phase. Second, non-permanent seats based on regional representation are especially unlikely to work given the vast differences that exist even within regions when it comes to specific issue areas. Third, as one group of developing countries has noted, “Creation of an advisory board would formalize the exclusion of a large number of Members from the process of consultations.” ***
Diplomatic flexibility vs rules-based certainty
Their search for greater certainty, and hence more formalized and tighter rules, derives from their comparatively limited capabilities to understand and negotiate the increasing technicality of an expanding set of issues that fall within the mandate of the WTO. Countries with well-identified proactive interests in the WTO and an ability to pursue the, in contrast, stress the virtues of flexibility and attach considerable importance to the diplomacy that has traditionally provided the groundwork for GATT and WTO negotiations.
Many developing countries find it difficult to keep pace even with the existing negotiating agenda and implement current agreements, let alone have the expertise to identify their interests in newer areas. Given these logistical difficulties, the default position of developing countries has been to “just say no” to the entry of absolutely any new issue into the WTO and reiterate the importance of resolving some of the older problems.
The obvious answer seems to be that a greater involvement of elected politicians would reduce the chain of delegation and bring governance of international trade closer to the electorate. In practice, however, developing country delegations — even some from the larger developing countries — frequently complain that the highly technical nature of WTO negotiations means that their politicians are ill equipped to engage positively in the negotiation process. They lack the research backing and armies of assisting officials that their counterparts from developed countries enjoy. As politicians, they are also more susceptible to bilateral arm-twisting and linkages with non-trade issues than their bureaucrats.
Perhaps the bigger risk of opening the doors to greater institutionalized NGO participation in the WTO is that it is unclear in some instances who these organizations actually represent and to whom they might be accountable.
If the WTO process continues to stop-start in the self-destructive manner in which it has proceeded in recent years, the developed countries might turn entirely to bilateral and regional options. The consequences would be expensive for both sides. For developed countries they would entail heightened transactional costs — an unnecessary inconvenience — and the possibility of debilitating bilateral trade wars even among themselves. But for developing countries the consequences would be devastating. It has taken them a long time to learn to operate within the multilateral forum of the GATT/WTO, and they are now finally beginning to do so with some panache through the newfound strength of their coalitions. They would find themselves exposed to unprecedented bilateral pressures from the developed countries against which they would have no institutional protection. The WTO is all that they have against the use of unmitigated power, and it is in their own interests to ensure its strength and survival.