Wednesday, February 23, 2011

Is the WTO Obsolete?

Daniel Altman has a thought-provoking piece in Newsweek, in which he argues that the WTO is "obsolete."  The whole piece is worth reading, but his thesis can (I think) be summarized as follows:
The WTO's consensus principle (i.e., the firmly-enshrined rule that all decisions must be based on unanimous agreement among Members) dooms future multilateral trade negotiations like the Doha Round because of a few "obstructionist" nations.  Thus, the future of global trade will be defined by a few large trading blocs (i.e., coalitions of the willing), and the WTO will eventually die.
Altman elaborates on this idea in a short interview here.  There, he adds that the WTO's eventual demise is also due to an increased and emboldened membership that has prevented a few rich countries from dominating the negotiations and completing them.  Although Altman provides additional nuance in the interview, he sticks to his general thesis about the WTO's increasing and inevitable obsolescence.

And while I admire his willingness to provoke debate and his unequivocal acceptance of the value of free trade for developed and developing nations alike, I find Altman's overall argument to be pretty lacking.'s Simon Lester lays out several good reasons for this conclusion here:
First off, it's no doubt true that it's easier to reach agreement among just a couple countries than it is among 153. I don't know if that justifies calling smaller deals "pragmatic" and global deals "utopian," though. We are currently operating under a complex and detailed set of global rules that all the major trading countries agreed to not very long ago. So, it can be done, and has been done in the recent past.

Second, he seems to want to draw a distinction between "regional" and "global" trade deals. But just to be clear, what's going on now is, for the most part, not regional economic integration agreement, such as the EU, NAFTA and MERCOSUR. Rather, it is a spaghetti bowl/noodle bowl involving a massive web of agreements between and among hundreds of countries. It is not clear how this will result in trade "blocs" that could negotiate with each other in the future. More likely, it will just lead to preferential treatment for some countries at the expense of others, and lots of confusion in customs administration.

And speaking of "preferential treatment," it is important to recognize that just because an agreement has "free trade" in the title, that doesn't necessarily mean this is what it achieves. There's a pretty good argument that what these bilateral and regional trade agreements accomplish is preferential and discriminatory trade, not free trade, with more trade diversion than trade creation. So while it's easier to get them signed, they may not be anywhere near as valuable as a global deal would be in terms of economic welfare benefits.

Along the same lines, Altman suggests that one of the hold-ups with a global deal is certain countries resisting trade liberalization, for example France and agriculture subsidies. It is true that bilateral and regional deals avoid these issues, but these are important issues, and perhaps they shouldn't be avoided. If you go with bilateral and regional agreements that don't address subsidies and other hard issues (e.g., anti-dumping) that must be dealt with multilaterally, you create a system where international trade rules allow these kinds of measures to undermine trade liberalization. There's no question that some of these issues are difficult. But sticking to the easier issues seems a bit like "free trade lite."

Turning back to his suggestion of negotiations between trade blocs, the idea that a few regional trade blocs will eventually negotiate with each other is an old one. Putting aside the earlier objection that regional trade blocs is not what we are seeing with the current trade deals, let's assume that these blocs do develop. If we want these blocs to negotiate with each other, it would be very helpful to have some sort of forum where they could talk about the trade that occurs not just within their region, but world-wide. Some kind of organization to support these talks, and to enforce the new world-wide rules, would also be useful. It occurs to me that what might be good in this regard is some kind of ... hmm, what to call it? ... I know, a World Trade Organization!
I agree wholeheartedly with all of Lester's concerns, and have a few more of my own.  Most importantly, I think Altman mistakenly characterizes the WTO as a monolithic entity whose only value lies in its ability to generate new trade liberalization beyond its existing agreements and Members' existing commitments.  By this metric, the WTO is a "failure" whenever it ceases to produce new agreements/commitments through negotiations.  And while I and many other free traders are sympathetic to the argument that the WTO's value as a negotiating vehicle may be coming to an end, that's hardly all that the WTO is.

In fact, I'd argue that there are at least three other "pillars" of the WTO that are far more valuable to the global economy than the "future negotiations/agreements" pillar that Altman solely emphasizes.  First, the WTO is immensely important for what it's already achieved in terms of free trade.  Its numerous trade disciplines, including fundamental non-discrimination principles, and Members' basic commitments (which they're required to make when they join the organization) serve as a broad and impressive baseline of trade liberalization - one far broader and deeper than many, if not most, of the bilateral/regional trade agreements being negotiated right now.  Indeed, FTA negotiations discuss "WTO-plus" arrangements because the WTO's agreements are the standard by which all other FTAs are measured.  Without that important baseline, what would prevent backsliding?  (And try to say "politicians' commitment to free trade" without laughing - I dare you.)

Second, the WTO accession process is an important economic and diplomatic tool that nations can use to help turn certain, ahem, "outsider" nations into more responsible global stakeholders.  Because of the diplomatic and economic benefits that come with WTO membership (under existing - not new - agreements, mind you), nations like China, Russia and Iran are willing to open their books, reform their laws and embrace significant economic liberalization (e.g., privatization, the elimination of subsidies, trade barriers and other market distortions, intellectual property protections, investment protections, etc.).  The result: economic growth (for both WTO Members and the acceding nations) and enhanced global stability.  And it's achieved without a single shot fired.  Not bad.

Third, the WTO is and will remain a vitally important mechanism for resolving global trade disputes without self-defeating protectionism (or worse).  There have been over 400 disputes at the WTO, many of which have been resolved through consultations.  The ones that weren't so easily resolved went to formal dispute settlement, and almost all of those resulted in Members' voluntary reformation of the measure(s) found to violate WTO rules.  Sure, a few high profile cases haven't been amicably resolved and instead resulted in retaliatory tariffs, but the fact that there have been only a few such cases - and that the WTO has absolutely no coercive power to enforce its decisions - is a testament to just how much the WTO's membership values the organization.  And in a world of regional trading blocs and no WTO, just who exactly would adjudicate disputes among the different blocs?  Or would they simply not trade with each other (or trade in limited, economically-insignificant volumes)?  And wouldn't that result in just the sort of trade diversion that Lester and many economists warn about?

Look, I'd never argue that the WTO is without fault, and the problematic Doha Round is a perfect example of some of the trade body's problems.  Indeed, we free traders have always said that, in an ideal world, the WTO would be obsolete because everyone would pursue unilateral trade liberalization.  Of course, we live in a world not of perfection but of other "Ps," like politicians, protectionists and public choice theory.  So the WTO still has value - a lot of value - just maybe not as the next great vehicle for ambitious trade liberalization.

And it's certainly not going to be "obsolete" anytime soon, contrary to Altman's bold prediction.

Maybe Altman recognizes the weaknesses of his broader arguments about the WTO, or maybe he really is just criticizing the WTO's "negotiations" pillar.  Indeed, he concludes his interview (entitled "Why the WTO Is Obsolete") by saying (emphasis mine):
The WTO has outlived its usefulness as a setting for trade negotiations. It can still be a good place to resolve disputes (though this can take years) and share ideas, but most countries would be better off choosing their own trading partners and lowering trade barriers at their own pace.
I'd say that the organization still holds more value that Altman admits here, but at least he has recognized that the WTO is more than just a trade negotiating vehicle.

Hey, it's a start, but in the future Altman might want to think about painting with a finer brush (and using more accurate titles to his op-eds).

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