Can multilateralism be revived?

Shawn Don­nan at the FT says that it needs a health­ier life-style.

Mul­ti­lat­er­al­ism is weaker than it has ever been. But, in trade, it has never been as robust as it seemed on the sur­face. For now, I doubt there is a rea­son­able prospect it can be revived in its orig­i­nal form. Instead, we should try to find means of res­cu­ing non-discrimination from the mul­ti­lat­eral system’s collapse.

This is a longish post (about 1,000 words). I start by review­ing the che­quered his­tory of trade mul­ti­lat­er­al­ism and reach a con­clu­sion here.

It’s impor­tant to remem­ber that mul­ti­lat­er­al­ism was a con­cept invented as recently as 1948, when the char­ters of the UNO and the still-born ITO were drafted. In trade it meant a novel com­bi­na­tion of non-discrimination — even then a ven­er­a­ble con­cept — and uni­form rights and oblig­a­tions for mem­bers of a mul­ti­lat­eral pact.

But the “uni­form rights/obligations” com­po­nent was a myth from the start. As the bril­liant Robert Hudec observed a large num­ber of GATT’s “devel­op­ing” mem­ber coun­tries took a prag­matic view of the Gen­eral Agree­ment. They enjoyed the ben­e­fits — espe­cially non-discriminatory access to the indus­trial coun­try mar­kets — but kept their heads low, because they hardly com­plied with their oblig­a­tions and rarely made any of their own trade con­ces­sions. Their motto, said Hudec, was “never com­plain, never com­ply”. (By the way, Aus­tralia was in that same group — except that we com­plained loudly enough — right up to the 1980s.)

So why did mul­ti­lat­er­al­ism in trade seem to work if (a numeric major­ity of) GATT mem­bers were ‘cheat­ing’? Two reasons.

The first was the impre­cise met­ric of ‘reci­procity’ in GATT, and in the early WTO. Reci­procity was the “glue” that held the two parts of mul­ti­lat­er­al­ism together, but it had no strict “met­ric”. A mem­ber coun­try enjoyed the full ben­e­fits of the GATT non-discrimination guar­an­tees as long as its trad­ing part­ners were pre­pared to con­sider it was in com­pli­ance with its GATT oblig­a­tions. Many smaller economies (newly inde­pen­dent devel­op­ing economies; for­mer colo­nial depen­den­cies includ­ing Aus­tralia) got away with mak­ing very few tar­iff con­ces­sions. Still, they were con­sid­ered “rec­i­p­ro­cal”. Since devel­op­ing coun­tries had small shares of world trade at that time, the USA, EC, Japan were not too par­tic­u­lar about their sched­ules of tar­iff con­ces­sions. Nor did they bother, usu­ally, to chal­lenge devel­op­ing coun­try non-compliance before a GATT dis­putes panel.

The sec­ond rea­son that the “non-discrimination-in-return-for-full-compliance” deal seemed to work despite the devel­op­ing cout­nries non-compliance is that the indus­tri­al­ized coun­tries, too, played fast and loose with the core prin­ci­ples of the Agree­ment. They gave them­selves waivers from GATT oblig­a­tions that rubbed the wrong way. They treated the inter­ests of devel­op­ing coun­tries in agri­cul­ture and com­mod­ity trade as a second-class issue (until, finally, the USA and EC came to blows on agri­cul­ture in the 1970s). While the GATT sys­tem suited their pur­poses, cut indus­trial tar­iffs among them and cor­ralled devel­op­ing coun­tries on the West­ern side of the Cold-War’s con­fronta­tion, the indus­trial coun­tries were con­tent to be part of the “con­spir­acy” of pre­tended multilateralism.

When, finally, the myth of reci­procity wore unbear­ably thin for the USA — when, in the late 1970s, it was forced to grant non-discriminatory access to fair treat­ment in trade reme­dies — it squeezed the idea of non-discrimination into the ‘conditional-MFN’ Tokyo Round ‘Codes’ on e.g. anti-dumping and anti-subsidy penal­ties. There, reci­procity could be made very spe­cific and minutely determined.

A few years later — in the decade from the mid-1980s to the mid-1990s — trade reci­procity at last came into sharp focus. The GATT’s vague set­tle­ments (details swept under the car­pet) that Mike Fin­ger, called “A diplomat’s eco­nom­ics” were no longer going to work. Again, there were sev­eral rea­sons for the change but I’ll high­light just two.

First, by the early 1980s trade had assumed a much greater role in US out­put. The US Con­gress became much more assertive about its own role in trade agree­ments. It started issu­ing tem­po­rary autho­riza­tion to the Pres­i­dent to nego­ti­ate mul­ti­lat­eral agree­ments in the mid-1970s. Then, in the 1980s it began to require the Pres­i­dent achieve and, in cer­tain cir­cum­stances, uni­lat­er­ally enforce, “rec­i­p­ro­cal” access and treat­ment for US exports in for­eign mar­kets. (The US econ­omy was recov­er­ing from the dol­drums of stagfla­tion more strongly than other indus­trial nations and the strength of the dol­lar was pun­ish­ing US export com­pet­i­tive­ness in Japan, Asia and Europe.)

Sec­ond, the cal­cu­lus of reci­procity changed after, first China (from the late 1980s) and then India (after its reforms of the mid-1990s) entered the world mar­ket in a seri­ous way. By the time China began its decade-long bid to re-enter the GATT/WTO, the idea that devel­op­ing coun­ties could “not com­plain, not com­ply” was well and truly dead.

Con­clu­sion: A mul­ti­lat­eral trad­ing sys­tem was, and remains, a much bet­ter idea than the nation­al­ism and inco­her­ence that pre­ceded it in the 1930s. But it is no longer entirely in our grasp. It did not slip away at Bali in 2013, or at the Cli­mate COP in Copen­hagen in 2009, or in Geneva in August 2008 when Doha died. It has been a thing of shreds and patches, now, for quite some time. Since at least that happy day in 2001 when China joined WTO.

Non-discrimination remains the jewel in WTO’s crown. Its lus­tre is some­what dimmed by the fog of pref­er­en­tial regional agree­ments. But, to the extent that many of these are (very) mod­est improve­ments on WTO-guaranteed rights, the value of Arti­cles I of GATT and Arti­cle II of GATS is still unequalled. TPP and TPIP may change that… we’ll see.

The alter­na­tive, that no-one wants, would be the rapid dete­ri­o­ra­tion of a global asset: the non-discriminatory WTO sys­tem. That asset is what allows, for exam­ple, global value chains adap­tively to deliver four-fifths of world trade in goods and ser­vices. Our pros­per­ity depends on it.

Until such time as China, India, Rus­sia (Indone­sia… etc) and the for­mer indus­tri­al­ized economies are ready to accept the same oblig­a­tions — don’t hold your breath — the old mul­ti­lat­er­al­ism is not in prospect. WTO mem­bers will have to find means to marry non-discrimination with dif­fer­ent degrees of oblig­a­tion and pos­si­bly vari­ances in ‘rights’ (nar­rowly defined).

Such mar­riages already exist: the Infor­ma­tion Tech­nol­ogy Agree­ment, the GATS Under­stand­ing on Finan­cial Ser­vices are exam­ples of pluri­lat­eral agree­ments within the precincts of WTO that do not tram­ple on the non-discrimination prin­ci­ple. There are very likely other mod­els, too.

My guess is we have some time, now, to work on mod­els that the Pres­i­dent of China and the next Pres­i­dent of the USA could endorse.

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