WTO

As the worldwide economic crisis of 2008 demonstrated, the economies of governments the world over are highly interdependent. Within this context, the World Trade Organization is coming under closer scrutiny. Negotiations are repeatedly failing and governments continue to violate commitments under WTO agreements with a dispute resolution process many countries find unsatisfactory. This paper reviews both the theoretical and practical economic and political implications of the faltering -yet ongoing -DOHA Round trade liberalization negotiations.

Recent WTO Negotiations: Seattle, Cancun, and Doha

Difficulties during WTO negotiations over the last decade can be attributed to three primary factors: the sheer numbers of member countries who all want to actively participate, the divergent interests between developed and developing nations, and finally the bureaucratic and management complications which arise from the increasing scope of WTO regulations. The most recent round of trade negotiations in the WTO began in the winter of 2001 in Doha, Qatar. In Qatar, the Doha Development Agenda was lauded as the most comprehensive and ambitious undertaking by the WTO yet (Reiterer, 2009, p. 359). The Doha Development Agenda, as it is informally known, includes provisions which focus on agricultural subsidies, services, and the problems facing developing nations (Reiterer, 2009).

At the time, the negotiations begun in Qatar, neither China nor Russia had yet acceded to the WTO; currently members of the WTO involved in the negotiations number 154 countries with more countries in the process of applying. The WTO has a consensus-based model where every country has in effect a veto over every decision and which requires decisions to be unanimous in order to binding (Reiterer, p.366, 2009). The tools of negotiation and bargaining are faced with an impressive obstacle; that of forcing concessions and compromises from so many different countries (Reiterer, 2009). Though the consensus rule often operates to equalize bargaining power among small economies and large economies, it can also lead to negotiation deadlocks.

The ministerial meetings of the WTO have been an exercise in negotiation deadlocks. The last two ministerial meetings of the World Trade Organization in 2009 and 2011 were both held in Geneva, Switzerland (Scott & Wilkinson, 2011). The 2009 ministerial meeting was considered a success but delegates did not discuss any of the substantive proposed mandates placed on the Doha Development Agenda. They did not because negotiations collapsed in July of 2008 and discussion over the next year failed to produce the degree of progress which would have justified a serious undertaking of the agenda (Scott & Wilkinson, 2010, 142). Likewise another deadline for concluding the Doha Round negotiations in December of 2011 was also missed, bringing negotiations up to ten years. The only bright spot was the accession of Russia to the WTO and a renewed commitment by the member countries to identify new negotiating strategies (Associated Press, 2011). In the following pages, I attempt to identify the mechanisms which would allow one to measure the economic consequences and the implications of either protracted trade rounds or an outright failure of the Doha Round negotiations.

Economic Consequences of Failed Negotiations: Positive & Negative

Estimating the economic costs of failed negotiations to liberalize greater trade is a matter of emphasis. The economic costs will be determined, in large part, by focusing on the question of who benefits and who is harmed by either scenario. The two scenarios are one in which the Doha talks move forward and one in which they are indefinitely stalled. In this sense the economic casualties, so to speak, can be defined in a number of binary categories. There are the interests of the developed nations v. developing nations, the interests of importers v. exporters, and the interests of consumers v. those of industry, and finally the interests of WTO members v. those of nonmembers. These binary categories, are of course an over simplification. They, however, provide a framework which allows one to identify the true political economic costs of the WTOs recent struggles. Equally important, the binary framework also allows for a more in-depth look at the economic benefits that may accrue to some groups; in this instance, especially nations who are nonmembers of the WTO and nations who stand to lose if the talks move forward. The binary categories although not true analytical categories, nonetheless, identify the field of participants whose losses and benefits must be considered in the overall analysis. The categories help to answer the question: how can we identify and assess the costs and benefits of failed WTO negotiations.

The Negative Economic Consequences

One may identify and assess the economic costs of failed WTO negotiations by three different methods. One way is to calculate the net decrease in global trade focusing on both importers and exporters; another ways is to calculate the reputational damage to the WTO structure; finally, one may look at the costs to consumers

Declining Net World Trade

One of the best methods to asses an d identify the economic costs of failed WTO negotiations is to find a case study of what would occur in a world where international trade is compromised. Of course the premise is that we are all better off trading with one another. Since the WTO seeks to liberalize and regulate trade, an ineffective WTO, would have a negative impact on trade volumes. The crisis of 2008 and the dramatic decrease in global trade provide a method for analyzing the costs of failed WTO negotiations.

In the face of the crisis, Levchenko et. al, (2010) noted that U.S. imports declined by 20% and all of the decline could not be attributed simply to more protectionist measures by nations experiencing trepidation about the state of the world’s economy. Aside from the collapse post 9/11, the 2008 decrease in trade was exceptionally high, with “double digit” decreases in trade worldwide (Levchenko et. al, 2010, 215). The authors collected and analysed aggregated data from U.S. imports and exports in order to determine where and how the marked decreases in trade volume occurred. Their findings led them to conclude that international trade volume decreased in response to a larger impact in the “overall economic activity” of the world’s economy rather than in response to the financial crisis itself (Levechenko et. al, 2010, p. 251).

The implications for using trade volume to assess the economic costs of the negotiations failures is attenuated it is not direct. Based on the Levechenko study the appropriate analysis is to first determine that negotiations have broken down permanently, then to assess the impact on the volume of global trade. Of course this analysis requires a type of benchmark, presumably one could use the pre and post trade volume data from the Uruguay, Tokyo, and Kennedy era trade round negotiations. And in this way, assess the loss of a Doha Round failure. The economic costs of a net decrease in global trade may sometimes be precipitated by financial and political collapses. The decrease in global trade in the wake of the 2008 financial crisis demonstrates the myriad of factors which must be considered when calculating true cost.

Reputational Damage to the WTO

The reputational cost to the WTO may be difficult to quantify, but it is still important to assess as an economic cost, primarily because, it will have implications for the pressures ministers receive from their domestic constituents based on their views of the WTO’s continued relevance. The reputational damage to the WTO and to the ministerial meetings will indirectly translate into economic costs because the damage will create problems of perception. The perception is that the WTO is faltering and that it on the brink of becoming obsolete. EU trade commissioner, Karel D. Gucht, stated that “our credibility has been seriously damaged by our failure to get Doha off the ground” (Associated Press, 2011). It was clear that the three day conference, like the conference in Geneva in 2009, was not going to address substantive issues.

There are perils to hosting ministerial conferences where nothing of substance is discussed. The public, which does not know about the ongoing negotiation meetings in Geneva, which occur outside of ministerial conferences, will believe that the Doha Development Agenda has been abandoned. Additionally, there will be perils for the member governments whose reputations will be compromised at home. These are reputations which they will need in order to continue to push trade liberalization policies on domestic markets where job losses are sure to occur. EU member states have become increasingly alarmed by the effect of liberal trade policies and on levels of employment and on wages.

Cuvyers et. al, (2003), expand on studies confirming that in the UK, Sweden, and Germany, wages are being depressed and labor flight is occurring (p. 249). Like the U.S., the European nations experiencing labor flight experienced it in the low skilled sectors where the threat of globalization is greatest (Cuvyers et. al, 2003, p. 249). At the same time that trade ministers are facing greater scrutiny for their actions abroad, citizens are suffering at home, and are more likely to punish politicians at the polls who espouse trade policies which they believe will lead to the loss of jobs.

Cost to Consumers

The negative costs of stagnant negotiations and an ineffective Doha round to consumers is both indirect and direct. The direct costs of course come in higher priced goods because those firms with comparative advantage may be denied entry into the home market (Guzman & Pauwelyn, 2009, pp. 11-15). The indirect cost is centered on the loss of entire markets due to unsettled disputes among nations. The economic costs of failed negotiations which weaken the WTO’s ability to remain the premiere arbiter of trade disputes will introduce gross inefficiencies into the global market. The kinds which are not easily resolved as nations begin to identify alternatives to the dispute resolution process of the WTO. The WTO’s dispute resolution process will not be available to the members of bilateral, regional, and multilateral agreements which will proliferate in the event of a Doha Round negotiation failure. As countries attempt small scale agreements the usual duties and countervailing duties, along with the appeals process will be absent. This is an indirect cost because governments will be financing new arbitrations for each single dispute or turning to already overburdened court systems which lack expertise and resources.

The Positive Economic Benefits

One may identify and assess the economic benefits which may accrue in the face of failed WTO negotiations by looking at the following three factors. Firstly, the increase in regional and bilateral cooperation among nations, secondly, the benefits to developing nations who may continue protectionist measures, and finally we may assess the benefits to domestic markets who will experience less competition if and when global trade does decrease.

Bilateral and Regional Agreements

It is important to note that even if the WTO Doha Development Agenda continues to falter or fails to produce a new consensus, what is clear is that this does not necessarily translate into a net decrease in international trade. The mechanisms by which countries trade internationally, and the regulatory framework within which they operate, will simply shift from the WTO to bilateral, multi-lateral, and regional agreements (Reiterer, 2009). The failure of trade negotiations at the global level may increase cooperation among regional partners. Since only incremental progress has been made in the Doha round negotiations, many countries are, beginning to seriously turn to regional and bilateral agreements as a substitute for the agreement from the WTO which is not yet forthcoming (Scott & Wilkinson, 2010, 148).

The impact of these agreements will vary. It will of course be negative for the WTO as a whole as it will serve to undermine it. On the other hand it will be positive for nations who need an alternative. Unfortunately, the biggest beneficiaries of bilateral agreement and regional agreements will be the larger economies. Smaller nations will have far less leverage in a one-to-one negotiation setting with no ability to veto. Scott et. al, (2010(, note that “power asymmetries between developed and developing nations…are exacerbat[ed] in bilateral agreements (p. 148). In this sense, much of the economic benefits of a failed Doha Development Agenda will accrue to developed nations with large economies who will then be able to build a series of bilateral agreements which favor their economies.

Developing Nations

The positive economic benefits which may accrue will be determined in large part by the developing countries who believe they are defending themselves and the stage of economic development in which they reside. Contemporary analysis suggests that though trade may decrease is poverty it is far from the “panacea for poverty alleviation…” it is often suggested it that international trade can accomplish (Reiterer, 2009, p. 360). Developing nations such as Mexico and South Africa are often accused, rightly, of imposing non-tariff barriers in their markets (Drope, 2007). The particular case of South Africa and Mexico serves to demonstrate how developing nations may actually benefit from a less centralized and effective trade regime under the WTO.

It is important to distinguish developing nations which have a strong central government and those who have a state controlled market economy. Mexico and South African fall into the former group because both countries have “strong political institutions…and private interests [which] wield genuine political power” (Drope, 2007, P. 402). Mexico and South Africa are the two countries who use a GATT provision allowing governments to heavily tax foreign firms the most. The GATT provision allows taxation on firms a government believes is selling products in their domestic markets for lower than the manufacturing costs (GATT, Art, VI). An anti-dumping measure, as it is called in the GATT, is considered a remedy governments may use to protect domestic markets which are actively being undercut by foreign markets; it is a tool however, which is often abused. (Drope, 2007, P. 402). Research has shown that governments impose these taxes on foreign firms who simply happen to compete against domestic industries which are powerful enough to lobby their governments to institute what is essentially a protectionist tax (Drope, 2007, P. 403-06).

The effect of the use of the anti-dumping taxes on a foreign firm is an increase in the cost of business of exporting into that specific market. If the taxes are sufficiently high then foreign firms will often leave rather than stay and compete. In this way domestic industries benefit from an absence of competition. The story does not end there, because the foreign firms often turn around and complain to their respective governments who then complain to the WTO dispute settlement body, countries like South African and Mexico are often faced with countervailing measures and litigation at the WTO. In light of this, a benefit to developing nations of an obsolete WTO brought about failures in the Doha negotiations would be the ability to institute protectionist non-tariff barriers without censure or retaliation.

Domestic Markets

Domestic markets fair differently under increased globalization and in world trade. There is a certain case to be made that among the benefits which may accrue under failed negotiations of the Doha Round, the largest go to the domestic markets of non-competitive industries in developing countries, and the second largest degree of benefit goes to the domestic employment markets of developed nations whose companies will be outsourcing. Spence (2011), notes that the distribution of jobs and wealth on the basis of a more integrate market varies widely even within developed nations. For instance, the growth of the U.S. economy did not translate into increased employment, because of the redistribution of jobs and supply chain industries outside of the U.S. The U.S. now possessed a growing economy that did not translate into jobs at home (Spence, 2011, p. 28).

This disconnect contributed to the creation of the so called gap between the rich and the poor. Those segments of society which benefited the most from liberalized trade and integrated markets were among the most educated and affluent class. This trend will only increase in the United States, presently the employment structure of the United States is one in which new jobs are created in the non-tradable sector many of which require advanced degrees, and the middle income jobs in manufacturing and construction have become scarce as they are outsourced overseas. This illustration of domestic employment proceeding along a different trajectory than that of the nation’s GDP demonstrates how the failures of the Doha round, including all of the ministerial meetings since 2001, may translate into an economic benefit for the domestic markets of developed nations.

The Future of World Trade

Many of the concerns facing the world revolve around trade in so far as trades role in the larger economy. The majority of what countries produce is consumed by their own populations and most countries trade most heavily with their regional partners; those within geographical or political proximity. As such, the factors which will determine the future of world trade are just as varied. Authors, Matoo, et. al, (2009), survey the consequences of the breakdown in negotiations which occurred in 2008, and assess the most complex challenges facing international trade.

Of particular importance to this paper, is many of the challenges named in the study are areas where the WTO does not currently regulate matters. This further underscores the continued relevance of the WTO. Matoo, et. al, (2009) identify seven primary obstacles, including: the uncertainty of markets and supplies; energy resources; currency valuations; sovereign wealth funds; and, environmental concerns (pp. 15-26). The breadth of regulations which the authors believe the WTO should undertake, if it is to remain viable, is astonishing. It suggests that the markets of nations are so integrated that the correct move is towards a stronger international non-governmental organization and increasing regulatiosn rather than domestic autonomy or sovereign decision making. Among the factors which should be included in future WTO summits, the currency valuation, energy, and sovereign wealth funds will likely cause the greatest discord among nations. The commonality among the three is due their relationship with national security and the military capabilities of a government. Mattoo et. al, note that United States and Europe are increasingly constructing barriers to prevent foreign investment in key sectors such as shipping ports (pp. 22-23).

Hysteria over the failure of the DOHA Development Agenda to result in an agreement is mounting. So far, the Doha round negotiations at ten years have exceeded the length of all previous negotiation rounds both under the GATT and the WTO. Reiterer, (2009, p. 359), notes the Doha round has been plagued by missed deadlines which exceed even those of the Uruguay round, where the WTO was created. There are very few clear winners and losers, what is clear, is that the wins and losses will vary and that most countries will receive both costs and benefits due to stalled negotiations. On balance it would seem that it is in the best overall interests’ of the world for them to move forward and for the WTO to remain relevant.

In the end costs may come in many forms, but the highest costs may come in the loss of human development potential and the loss of a global transnational organization with the ability to respond uniformly. The premise of international trade is that open markets facilitate economic development which in turn decreases poverty. Indirectly then, the costs of decreased international trade, and a decrease of the WTOs influence, may cause poverty and all of its associated costs, to become further entrenched in the global economic system. The case for the continued relevance of the WTO is strong, and the costs of failed negotiations are high.

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