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. [Oops! Nei­ther of them is inter­est­ed. (Ear­ly 2018)]

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