1. The World Trade Organization and the Future of Multilateralism by
Baldwin
When the general agreement on tariffs and trade was signed by 23 nations in 1947, the goal was to
establish a rules-based world trading system and to facilitate mutually advantageous trade
liberalization.
Despite its manifest success, the WTO is widely regarded as suffering from a deep malaise. The main
reason is that the latest WTO negotiation, the Doha Round, has staggered between failures, flops,
and false dawns since it was launched in 2001. However, barriers to trade were massively lowered
and 20 nations, including China and Russia, have joined since 2001.
The last round of GATT negotiations, the Uruguay Round, sought to generate additional momentum
for free trade through broadening its focus, both in terms of more countries joining and in terms of
additional areas that would be covered by the agreement. However, these steps toward broadening
also required altering some of the historical rules and principles that had generated momentum
toward free trade. The changes altered and may even have ended the political economy momentum
of the WTO. Second, the rules and procedures of the WTO were designed for a global economy in
which made-here-sold-there goods moved across national borders. But the rapid rising of offshoring
from high-technology nations to low-wage nations has created a new type of international
commerce. The trade rules that matter for this offshoring are less about tariffs and more about
protection of investments and intellectual property, along with legal and regulatory steps to assure
that the two-way flows of good, services, investment, and people will not be impeded.
The most likely outcome for the future governance of international trade is a two-pillar structure in
which the WTO continues to govern with its 1994-era rules while the new rules for international
production networks, or "global value chains", are set by a decentralized process of sometimes
overlapping and inconsistent megaregional agreements.
The historical context for the principles of GATT
It were unusual times the tariffs were high and the US was becoming the global leader.
One general and five specific principles
The general principle is that the world trade system should be rules-based, not results-based. This
overreaching constitutional principle is implemented with five specific principles:
Nondiscrimination
This rule has two aspects: nondiscrimination at the border (most favored nation treatment"
and nondiscrimination behind the border "national treatment".
Transparency
Reciprocity
Flexibility, or "safety valves"
Consensus decision-making
A Tariff-Cutting Juggernaut
A cruder measure called the "effective tariff rate" - that is, tariff revenue divided by the value of
imports- has been collected back to the beginning of GATT. An obvious problem with the effective
tariff rate measure is that really high tariffs result in very low imports and so tent to get little weight
in the average. In addition, the effective tariff rates for individual nations can be very noisy over
periods of only a few years because they reflect both changes in tariff rates and changes in patterns
of imports. Despite these well-known problems, effective rates give a reasonable general idea of
tariff-cutting patterns under the GATT.
,Low income nations have always had higher tariffs and developed nations reduced their tariffs
steadily while poor nations only started doing so in the 1980s.
Four phases of trade liberalization under the GATT: 1950-1994
The first phase of GATT rounds, up until 1960, began with a substantial wave of tariff cutting in the
1947 inaugural Geneva round. However, the other early rounds were not focused on tariff cutting.
Tariffs were not the main trade hindrance to international trade in the 1950s. Instead, restrictions
remaining from wartime, along with state trading and inconvertible currencies, were the binding
constraints.
The second phase from 1960 up to 1972 was triggered by European regional trade liberalization. In
this phase, regionalism and multilateralism advanced hand-in-hand.
The third phase of trade liberalization started around 1973, and again multilateralism and
regionalism advanced together. The effective tariff measure can be deceiving because developed
nations had low or zero tariffs on imported oil.
The fourth wave of multilateral and regional trade talks arose in the mid-1980s. The really original
element in this fourth phase was the rapid tariff cutting by developing nations- but they did this
outside the GATT and for reasons driven by changes in their attitudes towards high tariffs on
industrial goods.
The Juggernaut Dynamics of Tariff Cutting
The two-level game approach of Putnam (1988) argues that governments negotiate both with special
interest groups within their nation and other governments internationally. Under the GATT
reciprocity principle, foreign tariff levels became linked to domestic tariff levels.
In the juggernaut story, the first round of tariff cuts creates political economy momentum. As tariffs
drop, pro-tariff import-competing firms face additional international competition. Many of them
shrink, become less profitable, and even go out of business. Conversely, foreign tariff cutting boosts
exporters. They expand and become more profitable. Since the anti-liberalization camp is
systematically weaker and the pro-liberalization camp is systematically stronger than during the last
round, all the governments placing reciprocally find it politically optimal to cut tariffs again. As these
fresh tariff cuts are phases in, the exit of import-competing firms and entry of exporters again
reshapes the political landscape inside each participating nation, and the cycle restarts. The
juggernaut rolls forward.
Avoiding backsliding: Binding plus allowing retaliation
The "juggernaut" process of political economy momentum can work in reverse. One rule was the
principle that a nation's past tariff cuts were "bound" in the sense that previously agreed tariff levels
were not open to further negotiation. Notice that this design element did not depend on the nation's
own government: instead, it was enforced by the risk that foreign governments would retaliate by
raising tariffs.
Three escape hatches
Some escape hatches were historically allowed, which made it easier for members to agree to the
tariff cuts in the first place. One escape was the variety of GATT practices on "Special and Differential
Treatment.
A second kind of escape hatch emerged in the 1960s and 1970s during the Tokyo Rounds, in which
negotiations on trade rules were undertaken by the so-called "codes" approach. In this approach,
,each set of rules agreed upon was adopted in the form of a code that would be binding only for
those members that voluntarily signed them. However, the principle of nondiscrimination meant that
countries that did agree to these codes were (mostly) obliged to extend the rules to all GAT
members, even those that did not sign the codes.
A third escape hatch arose because the GATT dispute settlement system wasn't strong enough to
enforce compliance. According to the consensus principle, the Panel ruling was only accepted if all
parties agreed.
Causality
Two types of tariffs were not subject to the juggernaut "treatment"- all developing-nation tariffs, and
agricultural tariffs of all GATT members neither set of tariffs fell during the GATT days. This suggests
that no third factor was causing tariff-cutting pressures across the board; instead the juggernaut
treatment only worked on the tariffs to which it was applied.
Refueling the Juggernaut, but closing the escape hatches
With the Uruguay Round starting in 1986, new areas of interest to exporters in developed nations
were put on the negotiating table, notably intellectual property issues, restrictions on foreign
investment, and exported services issues. These areas came to be known as TRIPs (Trade-Related
Intellectual Property), TRIMs (Trade-related Investment Measures), and services respectively.
It was hoped that constellation of new issues would refuel the juggernaut by rebalancing interests
along North and South lines. Northern exporters were to gain from new rules and new market access
in TRIPs, TRIMs and services, while Southern exporters were to gain from freer trade in food and
clothing. However, the dynamics of the negotiations and the increasing importance of emerging
market economies meant that as the agenda was broadened, some of the earlier escape hatches
were closed up.
The Uruguay Round ended up including a feature called the Single Undertaking. All members,
developed, and developing alike- even those that had not participated actively in the negotiations-
were obliged to accept all the Uruguay Round agreements as one package. The Uruguay agreement
eliminated the possibility of blocking the initiation of a dispute resolution or adoption of a panel
ruling, and applied this to all the areas in the Single Undertaking. The new adjudication procedure
welded shut the earlier escape hatch.
Win-Win Multilateral cooperation
GATT promoted win-win multilateral cooperation by setting up what North would call an
"institution"- constraints that guide political and economic interactions consisting of formal rules and
informal restraints.
The Woes of the WTO
Of the WTO's functions, only the dispute settlement mechanism would receive a high performance
score.
External sources
The most commonly cited causes of the WTO's difficulties involve the lost dominance of the
advanced economies. GATT started with big economies, but also developing countries became big.
Second, the sheer number of developing country members has shifted power in the organization and
made talks more difficult.
, In theory, more member nations does not necessarily hinder tariff cutting: after all, more nations
could mean more demand and more supply for better market access. In practice, however,
developing countries became active in more defensive coalitions than in new offensive coalitions.
Deep provisions are defined as beyond tariff cutting.
The rise of regionalism probably made it harder to conclude the Uruguay Round.
GATT agreements are not legally binding.
The boom in the investment treaties and deep provisions did not create a direct competitor to the
WTO. But they provide revealed preference evidence that many WTO members were looking for
disciplines that went far beyond the "shallow" disciplines included in WTO talks.
The new offshoring-led path involved joining an international production network to become
competitive, and then industrializing by expanding the quantity and range of tasks performed. In this
new development model, tariffs hinder rather than help industrialization, so developing-nation tariffs
started to fall rapidly independently of WTO talks.
Internal sources
The "don't obey don't object" option that developing nations had under the GATT was cancelled
under the WTO. Not surprisingly, they have been far more vocal in the Doha Round than they were in
GATT rounds, objecting to provisions that threatened their domestic interests.
Implications for multilateral trade talks
The external and internal challenges had three momentous implications for the WTO multilateral
negotiations.
First, multilateral negotiations under the WTO are more difficult. Second, business interest in the
Doha Round is much less forceful. Business interest was dampened by the fact that tariffs in the
Quad nations were already low, and those in the major developing nations had been lowered
unilaterally. For many WTO members, actual applied rates are so much lower than the bound rates
that the proposed Doha cuts would only reduce the distance between bound and applied tariffs,
without actually lowering the applied rates. Similarly, in agriculture, the biggest protectionists
unilaterally lowered distortions for purely domestic reasons. Third, the rise of offshoring has created
a political economy demand and supply for disciplines that underpin international production
networks.
The political economy switched from "my market for yours" to "my factories for your reform", that is,
developing-nation trade liberalization and pro-business reforms in exchange for production facilities
from developed nations.
The future of multilateralism, regionalism, and the WTO
In the main, the WTO can claim "mission accomplished." It oversees a set of near-universal norms for
rule-based trade, and it runs a dispute settlement mechanism that routinely arbitrates disputes and
issues rulings that are universally followed even though it has no direct enforcement power.
For 20 years, new rule-writing and trade liberalization has proceeded apace along three axes—all of
them outside the ambit of the WTO. First, a great deal of tariff cutting has been done unilaterally by
WTO members, especially developing-nation members. Second, new disciplines on international
investment—flows that are now intimately entwined with trade in goods and services—have been
established by a network of over 3,000 bilateral investment treaties. Third, the new rules and deep
