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 [Update late 2017: Oops… No, they did not. For different reasons both of them failed to complete or enter into force ]

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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