Adapting International Trade Institutions to New Realities

The Challenge

The institutional order governing world trade is going through a critical period. Debate over its future form and design will be a dominant theme on the global agenda for the coming years. The Donald J. Trump administration has questioned the benefits of the multilateral trading order and is pulling the United States back from its traditional leadership role. In December 2017, the Eleventh Ministerial Conference (MC11) of the World Trade Organization (WTO) ended in disappointment with no substantive multilateral achievements. The shift in economic power from the West to the East and the growth of nonstate actors further complicate the search for consensus on international trade rules, leading to a so-called multiplex world. In a multiplex world, actors with different cultural values and relative power inequalities—such as nation-states, international and regional institutions, corporations, and nongovernmental organizations—compete against each other. To ensure a resilient trading system, multilateral trading rules and institutions need to be adapted to these new realities of trade, investment, and the distribution of global power.

Unlike the international system as it functioned after World War II, today’s trading system does not reflect the interests of a single power or an alliance of powers with sufficient clout to impose their will on others in a sustained way. This is not a Group of Twenty (G20) or Group of Seven–led world: it is a G-Zero world, with no established lineup of who should be invited to the table where decisions are made. In this vacuum of global leadership it is increasingly difficult to identify who will create the new rules of international competition. Actors pursue their own self-interest, which results in less certainty for the international trade system.

A Growing Opposition to Global Trade

The most recent multilateral forums and summits—including the 2017 G20 Summit in Hamburg and the 2017 MC11 in Buenos Aires—have been held against the backdrop of senior U.S. officials questioning the rules-based multilateral trading system, namely the General Agreement on Tariffs and Trade (GATT) and the WTO. Such questioning is based on changes in U.S. politics, the growing public skepticism of globalization and free trade, and the realization that the current multilateral system was created under different global economic realities and that many of its mechanisms and rules are obsolete.

However, it is not only the Trump administration that has expressed dissatisfaction with the multilateral trading system. Objections to some multilateral trade rules have existed since their inception, coming mainly from developing countries. The link between trade and development was at the heart of many Latin American countries’ arguments against the GATT and later the WTO. They often demanded more favorable rules for countries in the early stages of industrial development and more flexible nondiscrimination policies to facilitate preferential agreements aimed at promoting economic development. Many developing countries also opposed the elitist vision of negotiating mechanisms reflected in the so-called quadrilateral of great powers (the United States, Canada, Japan, and the European Union) and the lack of transparency of some of its procedures.

Both developing and developed countries have criticized the limited effectiveness of retaliatory trade measures against dumping practices, perceived flaws in the WTO dispute settlement system, and the conflict between mandating the nondiscrimination principle for all WTO members and the increasing number of regional trade agreements. Moreover, the demise of the WTO’s Doha Development Round in 2015 shows that neither developing nor developed countries are willing to make new fundamental trade concessions on issues such as agriculture subsidies and market access. Therefore, many countries view the international trading system as paralyzed.

However, although the WTO’s legislative functions may seem useless, its judicial functions, particularly in dispute settlement, are still considered to be the jewel in the organization’s crown.

From a Latin American perspective, the most important priority is finding a new consensus on how multilateral trade rules and institutions can better reflect national and regional priorities that are also politically feasible in the current environment of public skepticism of free trade and globalization. However, negotiations on such a grand bargain have been stalled since the Doha Development Round. Rather than continue these negotiations in vain, efforts could be channeled more productively into mitigating disruptive tendencies, such as protectionism and inequality, that fuel economic and political disorder. Taking such a path requires a gradual approach of building consensus and popular support for the multilateral trading system, rather than setting out to solve all the world’s current problems.

Recommendations

Even though the MC11 did little to promote the multilateral trade agenda, progress can still be made to adapt the multilateral trading system to new geo-economic and political realities and help build public support for the rule-oriented multilateral trading system if the following recommendations are pursued.

Make international trade negotiations more open. A failure to disclose negotiating offers in real time—or revealing their true scope and details only when negotiations are at an advanced stage—should be avoided. Such practices contribute to negative popular opinions of trade negotiations, which can be observed today in many countries. Creating a broad-based “WTO of the people” should also be a priority for institutional reformers. One way to advance this goal would be to create an ombudsman role within the organization. This institutional figure could advocate on behalf of member country citizens and ensure that their doubts, criticisms, complaints, expectations, and new initiatives are considered. Another way to go about this is to find ways to involve all social sectors in the trade policy decision-making process, both at national and international levels, thereby enabling a broader swath of people to have their voices heard in negotiations. Incorporating more diverse voices in trade negotiations could also help expand the benefits of international trade to more the world’s population, creating sustainable jobs and social well-being, which would increase international support for the multilateral trading system.

Balance and better converge global and regional trade rules. Uncoordinated and regionally fragmented rules governing trade increase transaction costs for firms and negotiation costs for governments. Coordination and convergence between global rules and institutions—such as the GATT and WTO—and intra- and interregional preferential agreements—such as Mercosur and the EU-Canada Comprehensive Economic and Trade Agreement—is necessary to halt the ongoing fragmentation of the international trading system. If this trend continues, the rules and norms governing international trade will be diluted by a multitude of different bilateral, regional, and mega-regional trade agreements. One of the main themes that should be addressed in discussions following MC11 is how to achieve a balance between the need for flexible rules and institutions operating in complex regional contexts—which could increase the capacity, effectiveness, and legitimacy of the multilateral rules—and the need for a stable global framework that generates sustainable trade and employment. If balance isn’t found and global and regional trade rules continue to diverge instead of converge, incentives will grow for more regional preferential agreements outside of the multilateral system.

Facilitate global growth in micro-, small, and medium-sized enterprises (MSMEs). The image of an international trading system that only benefits large firms from developed countries will not gain political support. On the contrary, what is needed is a WTO that promotes rules and institutions that facilitate and encourage the growing internationalization of MSMEs, particularly from developing countries.

MSMEs play an important role in developing economies, the world trading system, and international supply chains. Policies that promote MSMEs and help shield them from unfair international competition would not only aid regional and local development, as MSMEs are the largest employers in most countries, but could also increase popular support for the world trading system by making the benefits of global trade more visible at the local level. Furthermore, increasing the participation of MSMEs in international trade makes those firms more productive, which is crucial for social inclusion and poverty reduction alongside other domestic policies (such as taxation) that should be used to distribute the gains from trade.

However, MSMEs are particularly vulnerable in an increasingly globalized economy, partly due to the comparative ease with which transnational companies following economic incentives can shift production among countries. At MC11, over fifty WTO members rightly highlighted the importance of promoting the participation of MSMEs in international trade. They pledged to create a new working group at the WTO to promote rules that better integrate MSMEs into transnational supply chains. One policy the working group should focus on is protecting MSMEs from international competition within their local markets while they are at an early stage of development. This could include a mix of free trade and state intervention, depending on the country’s stage of development.

Increase coordination among international institutions. Such coordination could favor the promotion of different smaller-scale sectoral agreements. As the results of MC11 show, it is extremely difficult for all 164 WTO member states to reach unanimous consent even on issues where there is already broad agreement, such as fisheries subsidies. Smaller-scale plurilateral negotiations could take place outside the WTO on topics where like-minded states can agree, such as encouraging the development of productive networks among MSMEs in different countries. Making progress on sectoral agreements can help adapt important parts of the multilateral trading system, thus increasing public support for a rules-oriented system. Institutions that should increase cooperation include the International Trade Commission, UN Food and Agriculture Organization, International Labor Organization, UN Conference on Trade and Development, and global and regional development financing institutions. Implementing this proposal depends partly on the willingness of states to collaborate across various UN organizations and to provide adequate resources and financing to these bodies.

Conclusion

Even though the eleventh WTO ministerial conference did not result in any major outcomes or agreements on how to redesign some of its rules and processes, almost all members recognized the need to strengthen the rules-oriented multilateral trading system. Even U.S. Trade Representative Robert Lightizer said the eleventh ministerial “will be remembered as the moment when the impasse at the WTO was broken,” as like-minded states plan to continue to work together to improve the functioning of the WTO and the multilateral trading system. While a grand bargain may be out of reach at the moment due to new geo-economic and political realities, informal and formal discussions should continue, and emphasis should be put on outcomes that will increase support for the trading system. If these discussions are successful, they will help build momentum and support for other forums such as the WTO, G20, and eventually the Group of Seventy-seven to have deeper debates on how to adapt the rules and institutions of the global trading system to new global realities, in such a way that could bolster global economic governance.

By Felix Pena, Council of Foreign Relations