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What's Wrong with the WTO: Rethinking the Institutional Design

Eliza Patterson - 4th October 2010

The WTO is ineffective in addressing the needs of the current trading system as evidenced by the inability of its members to agree to the expansion of the WTO remit to cover some of the most relevant impediments to trade as well as by the diminishing faith in the fairness and legitimacy of the dispute settlement system. This paper argues that the problem lies in the underlying assumptions about state behavior and the nature of national policies limiting market access. It maintains that future impediments to trade will be in policy domains having as much if not more to do with domestic social, cultural, political and economic conditions as they do with international market access. And that even as they recognize the potential trade-impeding effects of their actions in these domains governments are not willing to sign on to and abide by international disciplines restricting their policy-making autonomy. The way forward is the creation of a new institution whose design is based on realistic assumptions about state behavior, most importantly that even in policy areas where they insist on unrestrained decision-making authority sovereign states recognize their common interest in minimizing the negative externalities of their measures. Consequently, what is needed is an institution which encourages nations to engage in informed dialogue about their respective policy measures with the aim of finding mutually acceptable balances between pursuit of a specific non-trade public policy objective and foreign market access.   

The current stalemate in the Doha Round, following the collapse of the talks in July 2008, the very limited agreement in Hong Kong in 2005, and the debacle at Cancun over the “Singapore Issues”, has raised serious questions about the ability of the WTO as currently conceived to achieve its purpose of promoting the further expansion of global trade. The noticeable decline in the attention given to the WTO in recent years by the business community and government leaders is an indication that they no longer view the WTO as effective.  Why is the WTO failing when its predecessor the GATT was hugely successful? During its life the GATT was subject to extensive criticism- many of its rules were the result of negotiations among a limited number of the larger members, dispute settlement was based on power politics and lacked a credible enforcement. However, the overwhelming consensus today is that it did effectively achieve its primary goal of reducing barriers to trade and providing a framework in which global commerce was able to significantly expand.

Much of the analysis of the WTO focuses on two aspects of the current system: The practice of consensus decision-making and the single undertaking - the agreement in the Doha Ministerial Declaration that all issues under negotiation would be treated as parts of a single undertaking where nothing is agreed until everything is agreed. The diagnosis is that combined with a diverse and quasi-global membership these two rules inevitably lead to paralysis. The most often prescribed remedy is to break the single undertaking and consensus rules and permit agreements among a willing few. This is often referred to as “variable geometry”. The Tokyo Round Codes on standards, import licensing, customs valuation, subsidies and countervailing measures and anti-dumping provide a precedent for agreements among less than the full membership. The subsequent adoption of the Single Undertaking in the Uruguay Round arguable suggests there was dissatisfaction with the approach. I would add that belief in the viability of variable geometry is based on a questionable assumption - that a significant number of WTO members, generally thought to include most of the industrialized world, would be willing to accept disciplines in additional policy areas and that resistance comes largely from the developing nations. [1] (Woolcock, 2003; Collier, 2006; Warwick Commission, 2007; Lawrence,2006).

This paper answers the question: “What’s wrong with the WTO?” differently. And offers a correspondingly different remedy. 

The WTO approach to trade liberalization is to construct via multilateral negotiations a system of enforceable disciplines on government measures. This approach is not appropriate for the remaining trade liberalization agenda which is overwhelmingly about government measures in policy areas in which governments are not willing to limit their policy-making autonomy by signing on to and abiding by international disciplines. 

The measures at issue - often referred to as “inside the border” because they target activity within national borders - are based on policy choices regarding the nature of the society and economy of the imposing country and reflect the country’s unique history, culture and level of economic development. As such they are considered by most nations as matters for unrestrained sovereign decision-making. [2] ( Collier, 2006).  Creation of a framework of rules which by their nature require nations to cede or share sovereignty in areas in which they are unwilling to do so is thus not an effective means for addressing the trade-impacting effects of such measures.  Rather, what is needed is an institutional structure which encourages states when developing and implementing government measures in these areas to do so in a way which minimizes the potential negative spillover effects on their trading partners.   

The WTO approach to the resolution of disagreements among members over the interpretation of the rules, its reputed jewel in the crown, (Warwick, 2007) is equally ill conceived. Its reliance on complex litigation and trade retaliation raises questions of fairness and legitimacy and all too often exacerbates tensions between members. Here too a new approach is needed. When disagreements arise governments should be encouraged to engage in diplomatic consultations in the hope of finding common ground rather than file complaints in the hope of wining sophisticated legalistic arguments before a panel of independent, unaccountable experts.

What each of these new approaches might look like is discussed more fully below.

One area in which the rules negotiation approach has proven to be ineffective is  labor standards. In setting its national policies regarding wages, working conditions and worker rights every nation strikes its own unique balance among competing values. Similarly, the balance a nation strikes between protection of the environment and economic growth reflects its current and desired level of industrialization and its vulnerability to climate change. For their part national competition policies reflect a society’s view of corporations and the relative weight given to the economic-efficiency benefits of economies of scale versus the benefits to consumers of competition. Another domain in which governments want to preserve their sovereign right to manage policy is safety standards related to product and production methods. Countries have different degrees of risk aversion and are not willing to compromise or accept outside dictates as to what constitutes an acceptable level of risk. In this regard note the EU’s decades-long refusal to comply with the GATT ruling in the beef hormone case, the controversies surrounding trade in GMOs, and the fact that negotiators for the Agreement on the Application of Sanitary and Phytosanitary Measures were forced to leave it to each signatory to establish its own acceptable level of risk.  Intellectual property protection is an area in which nations have dramatically different, and deeply ingrained views. In many western nations, particularly the United States, the value of intellectual property rights as spurs to innovation is unquestioned, and arguably revered. Many developing nations in contrast regard patents and copyrights as impediments to their development, hindering knowledge diffusion, and restricting access to affordable, often essential, products and medicines. Consequently the TRIPS Agreement is far more limited than sought by the US. And yet the number of alleged violations are numerous. Tensions between the US and the all-important BRICs have flared repeatedly over the issue of intellectual property rights protection. [3] (Hoekman and Vines, 2007). In all these areas WTO governments have shown little willingness in the context of multilateral negotiations and dispute settlement cases to reconsider the wisdom of their choices.   

Several analyst approach the issue of the WTO remit by proposing criteria for determining which policy issues “should” be covered by multilateral disciplines if the WTO is to accomplish what they regard as its objectives.  (Maskus,2002; Lloyd, 2005) In my view they are asking the wrong question. The issue is not whether multilateral disciplines would advance a sanctioned objective - global economic optimality, reduction of discrimination, or whatever - but rather whether governments will agree to be bound by multilateral disciplines in a policy domain. The relevant question is what is possible not what is optimal [4] (Evenett, 2007; Collier, 2006) and history shows that an extension of WTO’s coverage to additional policy domains is not possible. 

Accepting the status quo- that is the pre-Doha WTO- is, however, not satisfactory. The fact that government measures in certain policy areas are not amenable to multilaterally-agreed disciplines does not mean they are of solely domestic concern. Quite the contrary.  In today’s global, integrated economy such measures often have adverse “outside-the-border” effects, notably on the commerce of other nations.  Finding a practical means of limiting such effects is the urgent task facing WTO member governments.  

The time for a new approach is in fact over due as difficulties with the dispute settlement system illustrate. Previous extensions of the coverage of multilateral disciplines combined with adoption of an enforcement mechanism that granted legal authority to international panels to resolve disputes and authorized trade sanctions in the case of non-compliance already have undermined critical support for the system. As the GATT evolved and progressively extended its reach into new policy domains tensions between international governance and national policy autonomy increased. The result is a set of vaguely worded, imprecise rules leaving governments with considerable room for maneuver. Vagueness of course also increases the chances that honest disagreements will arise as to the WTO-consistency of particular government measures. Under the current WTO structure resolution of such disagreements is delegated to the dispute settlement mechanism in which panels of independent trade experts faced with unclear rules adopt their own interpretation - which may not coincide with that accepted by any signatory. The democratic legitimacy of the WTO has been undermined by the widespread view that as a result of this “judicial activism” or “gap-filling” the rules are in fact not negotiated and agreed to by member nations but are drafted by the unaccountable members of panels and the Appellate Body.  Polls, anti-trade rallies, letters-to-the-editor, radio call-in shows, political advertisements, all attest to the fact that citizens, particularly in the developed world, are increasingly of the view that by agreeing to and complying with WTO disciplines their governments are ceding authority over important policy to an unelected, unrepresentative foreign body. 

Because in a democracy it is not possible to rewrite the social contract without popular consent, governments have not only been unable to agree to binding international disciplines in certain areas but also are facing growing public opposition to compliance with many of the rules previously agreed. Among the most obvious examples are the EU restrictions on US beef from hormone-treated cows based on the precautionary principle and strongly supported by the EU public which worries about the safety of such beef; US subsidies for cotton which are part of a complex program aimed at ensuring the viability of  the US farm sector and strongly supported by the US public which regards the farm sector as an essential part of US society;  and US restrictions on internet gambling which the US public supports as consistent with US standards of morality. [5] (Evenett, 2007) This is not to say there are not cases in which governments have accepted adverse rulings and altered their policies. However, this is often at a high political cost. The US may have accepted the adverse ruling in the cotton case but actually bringing the program into compliance with the ruling is a politically arduous task. 

Further questions of fairness and legitimacy are raised by the fact that meaningful access to the dispute settlement system is not equally available to all members.  Small, developing nations face two major disadvantages when it comes to use of the dispute settlement system. First they lack the legal expertise to fully understand and defend their rights. Second, their capacity to meaningfully retaliate in case of noncompliance by the challenged member is limited. In addition developing nations may be reluctant to use the system for fear of reprisal from the challenged member. Such fears as noted below may even deter the powerful. [6] (Hoekman and Mavroidis, 2000; Brown, 2004; Guzmand and Simmons, 2005)

An additional and significant problem with the WTO’s enforceable-but-imprecise-disciplines model is that the nation (its government and its citizens) whose measure is the subject of a dispute settlement proceeding often views the case as without merit and as such as a hostile act rather than an effort to resolve an honest disagreement. This perception is exacerbated by the fact that complainants all too often adopt a self-righteous, condemnatory tone, stigmatizing the responding country as a scofflaw. The entire focus is on WTO consistency with no room for consideration of other, equally important, policy objectives.  Under these circumstances the responding nation’s reaction is not to use its best efforts to find a mutually acceptable solution but rather to dig in its heals, defend the challenged measure and resist changing it. [7] Other common reactions include retaliating against exporters or investors of the nation that brought the complaint or filing a dispute settlement case of its own against the complaining government. [8] Knowledge that such retaliation is likely also serves as a deterrent to pursuing claims, thereby undermining the supposed effectiveness of enforceable rules. In mid 2010 several US agriculture groups were examining whether to urge the US government to bring a WTO complaint against the Chinese over what they say are WTO-illegal subsidies. Some oppose filing a case on the grounds that while valid it likely would trigger Chinese retaliatory measures against US commodity exporters. 

Use of the dispute settlement system rather than resolving disagreements all too often exacerbates tensions between members- sometimes permanently souring relations.  There is no guarantee of rationality in these showdowns. Simple disagreements over the meaning of a rule can easily escalate into a trade fight no one can win. This is particularly so when a trade dispute is animated by a larger political rivalry such as exists between the US or the EU on the one hand and China or Brazil on the other. 

If the answer to the question “What is wrong with the WTO” is “its institutional design which relies on the negotiation and legal enforcement of rules governing sovereign state action.”, then the remedy is a different institutional design. If the failure of the current design is the result of faulty assumptions about state behavior, then the remedy must be based on reality.  Specifically, that even in policy domains in which governments insist on maintaining unfettered decision-making authority they are aware of the potential for adverse spill over effects and recognize that as members of the global economy they each have an interest in limiting such externalities. [9] (Hoekman and Vines, 2007; Patten, 2010). 

Consequently, what is needed is a new institution which encourages and facilitates informed dialogue amongst its members about each others’ government measures with a view to encouraging the adoption of measures that achieve their policy objectives with minimal adverse economic effects on the commerce of other members and the global economy. [10]

In explicit contrast to the WTO, the goal would be to find common ground through dialogue not win a legal finding of guilt or innocence.  In joining the new institution governments would commit to engage in consultations/dialogue about their government measures whenever so requested by another member claiming to be adversely affected by such measures.  In this it would resemble step one in the WTO’s dispute settlement system. In contrast to the WTO, the institution’s charter would provide that the objective of such consultations is to find common ground, not to be the first step toward a more formal “verdict”. There being no “losers” on such common ground it can be expected that public support for the outcome would exceed that for WTO dispute settlement rulings. In order to ensure that the outcome did not reflect the economic or political strength of the participants and thus was procedurally fair each discussant would undertake to respectfully consider the views of others, and to refrain from raising non-germane issues, seeking concessions or threatening countermeasures. This too would boost public support for particular agreements and for the organization under whose aegis they were achieved. National political leaders’ engagement would be bolstered in consequence. Benefiting from such support and engagement the organization’s case-by-case approach to limiting barriers to trade and foreign investment would become an effective means of achieving an expansion of trade and foreign investment.  

Given the emphasis on dialogue and the recognized success of WTO’s predecessor it  might be appropriate to embrace the criticism of the GATT and name the new institution the Governments Agreement to Talk and Talk. [11] In fact the recommended approach takes much from the GATT, particularly its heavy reliance on consultations and dialogue and its lack of a litigation based dispute resolution system. Moreover the GATT was praised for its pragmatism. 

The new institution would operate in parallel with the existing, pre-Doha WTO. The WTO disciplines which have been agreed, particularly those of the GATT, have a restraining influence on barriers to trade and investment which it would be unwise to eliminate. Moreover, eliminating an international organization is all-but impossible. Thus, the WTO would continue to operate as the regulatory framework for trade and investment among its members in those areas currently covered by its agreements. Efforts to extend its remit would be abandoned.. The dispute settlement system would remain available to those seeking to use it, but importantly, the new framework would offer its members an alternative means for resolving disagreements.    

One might legitimately ask why a new institution is necessary. Are nations not currently empowered to discuss their respective government measures, and do they not in fact do so? Yes and yes. However, these discussions tend to occur after a government measure has come into affect rather than in its formative stages; tend to be preceded by and in the context of heated, accusatory exchanges; are seen as a first step to be followed if unsuccessful by formal proceedings and “legal” rulings; and are viewed as one-off events in which there are winners and losers. In contrast, the discussions under the aegis of the proposed institution would take place in an atmosphere of good will, at an early stage in a government measure’s development when comments can be taken easily into account. And each discussion would be viewed as part of a network of meetings among members all similarly aimed at minimizing the adverse commercial effects of government measures while preserving governments’ ability to pursue objectives considered to be in their own best interest.  This latter point is critical. Discussions surrounding any particular government measure could, in isolation, be seen as an unwelcome pressure on sovereign decision-making and as such trigger resentment and resistance. In contrast, discussions in the context of an institution under whose aegis other nations’ government measures are similarly subject to debate would appropriately be seen as the self-interested action of a member of the integrated, global economy. Governments will be encouraged to give due consideration to the concerns of others by the knowledge that tomorrow they may be the one seek consultations. An additional benefit of an established long-term system is that overtime nations can be expected to unilaterally take account of the externalities of their measures without waiting for a request from those affected.

A significant weakness of the current proposal is that addressing impediments to commerce on a case-by-case basis with outcomes dependant on the good will of governments does not promote adequately the predictable business environment which is a key demand of the global business community. Clear disciplines on government measures with which compliance was assured would be preferable in this regard. However, as argued, that is not a realistic alternative. In the face of deadlocked WTO negotiations and widespread discontent with and circumvention of the existing rules regime, a system which encourages governments to limit  adverse spillover effects on their trading partners is far from without merit. 

 

Eliza Patterson is a graduate of Harvard Law School. She has worked on international trade issues, with a focus on the GATT/WTO, for the past 30 years in the public and private sectors as well as academia.  She currently teaches international trade law and policy at Sciences-Po in Paris.

NOTES

[1]

In seeking to explain the fate of the Singapore Issues Woolcock focuses on the skepticism of developing countries as to the merits of disciplines in additional policy areas, which skepticism he explains as based on their dissatisfaction with the results of the Uruguay Round and the process by which they were reached. (Woolcock, 2003)  

Collier argues that the success of the GATT is not a precedent for the WTO because the GATT was not a global institution but one whose membership was limited to “willing liberalizers” whereas the WTO includes a large and diverse membership including developing countries who are not interested in increased liberalization and the expansion of the WTO remit this would require. He also notes, however, that the US might not view an expansion of the WTO rules as in its own best interest as it would “inevitably limits its own scope of action”. In discussing the benefits of a “plurilateral approach” Collier notes two criticisms: that non-signatories will feel pressured to join and that it creates a two-class organization. His proposed solution is to link plurilateralism with transfers of non-reciprocated market access concessions .(Collier, 2006) 

Lawrence maintains that the diverse nature of WTO membership makes it unlikely that members will all be willing and able to sign on to a full range of agreements. He argues for an approach whereby the core WTO agreements would be supplemented with additional “clubs” in which only members would subscribe.(Lawrence, 2006)

The Warwick Commission  argues in favor of “critical mass decision-making” and variable geometry.” (Warwick, 2007)  

[2]

Collier notes the sovereignty-limiting nature of WTO disciplines in explaining the resistance to an expansion of WTO’s remit. (Collier, 2006)  

[3]

Hoekman and Vines point out that WTO disciplines on inside-the- border policy areas such as intellectual property involve a significant element of policy harmonization which is unlikely to be an optimal outcome for all signatories. (Hoekman and Vines, 2007)

[4]

Evenett usefully notes this distinction between what should be and what can be but seems nevertheless to argue that the important question is the normative one. (Evenett, 2007)

[5]

Evenett describes the conflicting views of the US and African countries over US cotton subsidies. He notes that African countries viewed the subsidies as unfair, complaining that they depressed world prices and adversely affected their livelihood. The US response was to encourage the complainers to diversify their economies rather than offering to cut subsidies which they view as essential for an important sector of the US economy.(Evenett, 2007)

[6]

Hoekman and Mavroidis point out that developing countries have limited expertise to bring and defend cases and may have to rely on expensive outside expertise.(Hoekman, Mavroidis, 2000)

Brown argues that the decision on whether or not to file a DSU complaint is determined by a country’s legal expertise, its ability meaningfully  to retaliate and its relationship to the responding nation. (Brown, 2004)

Guzmand and Simmons discuss the  difficulties faced by developing countries in detecting infringements and developing a compelling legal case.(Guzman, Simmons, 2005)

[7]

See note 5 discussion of the US response in the cotton case.

[8]

A recent example of such tit-for-tat is the EU case against Boeing filed in reaction to the US complaint against EADS.  

[9]

Hoekman and Vines suggest that one way forward on behind-the-border policies may be “softer forms of cooperation” outside the WTO. (Hoekmann and Vines, 2007)

The European Unions approach to the financial crisis bears this out. As Lord Patten noted in a recent op-ed in the Financial Times the attitude of France, Germany and the UK to industrial policy, public finance, inflation, and parliamentary sovereignty are a result of their respective histories and social culture and that consequently there will not be a single economic government for Europe.(Patten, 2010) Yet, these nations have been able to support a plan requiring them to discuss their budgets and their policy objectives with each other.

[10] 

Following the model of the Agreement on Technical Barriers to Trade members would undertake to distribute to other members sufficient information as to permit an evaluation of the possible effects of such measures on the commerce of other members. And, any member which considered that it would be, or had been, adversely impacted would have the right to a meeting with the member preparing or applying the government measure.

[11] 

For much of its life the GATT was derided as “the gentlemen’s agreement to talk and talk” 

REFERENCES

Brown, C.P.  (2004)“On the Economic Success of GATT/WTO Dispute Settlement.”  Review of Economics and Statistics 86(3) pp. 811-823

Collier, Paul, (2006) “Why the WTO is Deadlocked: And What Can be Done About It”. The World Economy, vol. 29, issue 10, pp.1423-1449

Evenett, Simon (2007) “Five Hypotheses concerning the fate of the Singapore Issues”, 4 August 2007, accessed at www.evenett.com/articles/Fate_SIs.pdf. Abridged version published at Oxford Review of Economic Policy,  23: pp.392-414

Guzman, A.T. and B.A. Simmons,(2005) “Power Plays and Capacity Constraints: The Selection of Defendants in World Trade Organization Disputes’ Journal of Legal Studies 34(2), pp. 557-598

Hoekman, Bernard and P.C. Mavroidis (2000), “WTO Dispute Settlement, Transparency and Surveillance,” World Economy 23(4),  pp. 527-542

Hoekman, Bernard and David Vines,(2007) “Multilaterl trade cooperation: whats next?” Oxford Review of Economic Policy, Vol 23, No.2, pp. 311-334.

Lawrence, Robert Z. (2006) “Rulemaking Amidst Growing Diversity: A club-of Clubs approach to WTO Reform and New Issue Selection.” Journal of International Economic Law, vol. 9 No.4 pp. 823-835

Lloyd, Peter (2005) “When should new areas be added to the WTO?” World Trade Review, 4 (2) pp. 273-293

Maskus, Keith (2002).”Regulatory standards in the WTO: Comparing intellectual property rights with competition policy, environmental protection, and core labor standards.” World Trade Review, 1(2), 135-152

Patton, Lord Chris, “Europe must focus on what works”, The Financial Times, June 3, 2010)

The Warwick Commission,”The Multilateral Trade Regime: Which Way Forward?” The University of Warwick, 2007

Woolcock, Steve (2003) “The Singapore Issues in Cancun: a failed negotiation ply or a litmus test for global governance?” Review of European Economic Policy/Intereconomics. pp. 249-255 Sept/Oct 2003.)  

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