The ‘swoosh’ of trade policy

The Globalization Insitute, a newly-minted, self-described ‘Cobdenite’ group in London has published it’s second paper in which Dr Razeen Sally—described, by the Institute’s publicist, as “Europe’s most senior trade economist”—presents his prescriptions for “the future of trade, development and international institutions”. Just do it is Dr Sally’s recommendation to governments on trade liberalization; an unfortunately empty slogan with zero traction in the real world of trade advocacy

I met Dr Sally last month when he visited the Center for Independent Studies in Sydney. This brief paper (barely 16 pages, PDF file) grandly entitled “2005 and Beyond: The Future of Trade, Development & International Institutions “ is a slightly extended version of the talk he gave at the CIS lunch. His thesis is that the WTO has passed it’s use-by date, in part because

“Hyperinflation of the membership has almost crippled decision making.”

That sentence alone should give you some idea of Dr Sally’s poor control of hyperbole (something he shares with the Institute’s publicist, after all). “Hyperinflation”? Does he really mean that the gradual expansion of the WTO membership from 120-or-so in 1995 to 148 of the 200-or-so economies that now participate in global economic affairs is not only “inflated”—as if some of them perhaps don’t belong in WTO—but inflated to a “hyper” extent?

What possible reason can there be for thinking that it’s somehow ‘inflationary’ to include in the only body that oversees the global trading system a large proportion of the economies whose citizens create trade? And when does this attempt to be representative of the economies participating in global trade become “hyper” in the sense of “excessive”? Seventy-five percent of the economies in the world? Eighty percent? Could it ever be “hyper” to “inflate” representation even to full representation? Of course not: no more than it could be “hyper” to include all taxpayers on an electoral role.

This isn’t a point about democracy, however, as much as a point about the self-interest of all members of WTO in seeing the rules of the global system remain unique and universal. The WTO aspires to universal membership because the open, multilateral trading system is a public good. The maintenance of a public good demands that all beneficiaries subscribe to it’s upkeep: as soon as you create a class of ‘non-contributory’ beneficiaries you set the scene for the deterioration of the amenity. This is because, in the networks of the trading system, my amenity is a function of your contribution to the system; if you don’t contribute, my amenity is less.

Because it is a public good, the benefits of WTO are “non-exludable”; that is, all economies will be beneficiaries, whether you mean them to be or not. For obvious political and practical reasons, it is impossible to require all economies to contribute to the maintenance of the open-markets-fair-process system of WTO if they are not represented in the system. They must take some responsibility for the system, which means, as many people—other than Dr Sally—would agree, taking some ownership.

Dr Sally fears, however, that the WTO ‘club’ has already allowed too many (developing) economies to join and that their interests are too diverse. He argues that the WTO is becoming “UN-ised” by “deep internal fissures” among its membership. His recommendations: pull back to the “core agenda” of market access reforms and leave the running of the show to the economies with “workable governments and … bargaining power.” As for the rest, Africa, the G-90 …

“the plain fact is that their very marginal involvement in the world economy, bad-to-terrible governance and scarce negotiating resources make them unable to play more than a secondary and reactive role”

I suppose, in a sort of colonialist-nostalgic mode this stuff could be said to be “provocative”. But, in truth, it’s as impractical as it is impertinent. In 1948, the U.S. and the U.K. could pretty much dictate the agenda for the world trading system. But the reason they no longer do so—apart from their smaller share of world trade—is that no one, least of all their own constituents, wants to marginalize ‘non-core’ economies like Indonesia, or Colombia, or Pakistan, or Egypt or Kenya or Nigeria or all those other populous members of WTO whose stronger participation in world trade and deeper integration into the world economy is one of the main objectives of WTO1.

The WTO is undoubtedly stumbling toward it’s high policy objectives and some of them are probably beyond reach of many members at present. But a ‘two-speed’ WTO would only deeply disaffect many governments and condemn the whole program—the ‘core’ program on market access included—to probable failure.

As for correcting ‘deep fissures’ in WTO, Dr Sally has chosen precisely the wrong recipe. I’m not sure that ‘deep fissures’ should be made to disappear. After all, the resolution of conflict is WTO’s goal, not its supression. But if Dr Sally wants to remove the ‘deep fissures’ he would have to cut either the U.S. or the E.C. out of the Organization; they are the most frequent, most litigious and most raucous disputants in WTO whether on beef-hormones, or GMOs or anti-dumping, or multi-billion dollar tax subsidies or agriculture or … you name it. But, of course, both the E.C. and the U.S. are among Dr Sally’s ‘core’ economies. Scratch that idea.

Decision-making in WTO is a real problem. I chronicle some of the problems in my book on “WTO’s first ten years”, forthcoming soon I hope. After looking at the mistakes and achievements of that decade it seemed to me that effective decision making will have to be learned. It does not look like being a matter of formula or of architecture alone; if it were, the solutions would have been worked out already. Solutions that are effective and inclusive are likely to be context-dependent. The process of improvement is likely to remain iterative, depending on feedback from Members and stakeholders in the trading system followed by renewed efforts. It won’t be fixed soon, but giving up on inclusiveness is merely a counsel of despair.

It is evident, too, that there are very different agendas of trade reform and economic integration among WTO members. That’s probably one of the reasons that regional agreements have grown so rapidly: allowing some to move ahead faster than others. Although I agree with some of the rude remarks Dr Sally makes about these agreements, I suspect they may help to dissipate the centrifugal forces in WTO

Also, I agree with Dr Sally that one solution to the current management problem is to focus more strongly in WTO on the ‘market access agenda’. But I know that idea did not originate with me or with Dr Sally. It was the theme of former-USTR Zoellick’s surprise December 2003 letter to other WTO trade ministers, signaling a return to the negotiating table after the collapse of the Cancún Ministerial meeting. It worked for the good reason that improving market access is the lowest common denominator of effective trade reform; one that all governments recognize.

But Dr Sally, like many academic analysts before him, seems to believe that because governments recognize this, they should Just do itTM

This Nike strategy (“Just Do It!”) makes political sense too. Rather than relying on one-size-fits-all international blueprints, governments have the flexibility to initiate policies and emulate better practice abroad in experimental, trial-and-error fashion, tailored to specific local conditions

This is a semi-charming idea. But, like the ‘autonomous liberalization’ strategy that was supposed to sustain the original APEC (Asia Pacific Economic Community) concept, it’s not a strategy for political action. As experienced trade advocates know, it absolutely does not “make political sense”.

A few days ago I amused myself with concocting alleged laws of negotiating physics. Gallagher’s First Law of Motion in WTO negotiations is:

bq.  Trade distortions in place tend to remain in place, absent some external force. Changes to trade measures mean a re-distribution of income, making political enemies of those whose profits are taken away but without winning the recognition of those from whom the burden is lifted. This is the conservative bias in trade policy.

No global trade advocate who really does want to reform market access barriers should ever ignore the First Law. Governments do not want to “Just Do It” because to cut a trade barrier they will have to fight entrenched forces that were effective in installing the barriers in the first palace without, very likely, the support of consumers who are being taxed by the barriers. This does not mean that government’s won’t do it. But it usually means that they need some correlative reason to do it, like an agreement with a trading partner on “mutual disarmament”.

I know from experience that many economists—perhaps Dr Sally—will turn up their noses at the odious aroma of mercantilism in this analysis. But if you want to pursue effective trade advocacy, you’ve got to look for practical strategies that comprehend the interests of the decision-makers and minimize the opposition.

I commend Dr Sally’s paper to you. There are several other equally vexatious ideas ( the ‘ripple’ theory of infectious trade liberalization is one that I will keep for another day) to excite your languid spleen.

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1 There’s more on these objectives in the five short paragraphs of the Preamble to the Agreement Establishing WTO

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