The ‘next trading system’

• Despite much dis­ap­point­ment with WTO & MCM11, it’s not clear that USA, CHN, EU are ready, able to redesign the trad­ing sys­tem. The recov­ery in trade vol­umes will weak­en their incen­tive. Still, change is needed.
• The sys­tem we have is out­dat­ed, over-com­pli­cat­ed and weak where it should be strong. It needs not re-inforce­ment but re-con­struc­tion, prob­a­bly using some of the same mate­ri­als but with a sim­pler design.
• The les­son of three failed sys­tems since 1945 (ITO, GATT, WTO) is that to be effec­tive and to endure changes that inno­va­tion, pros­per­i­ty, demo­graph­ics will bring, a glob­al sys­tem must have a clear assign­ment and uncom­pli­cat­ed rules.
• The sole assign­ment should be: cut inter­na­tion­al trade costs due to reg­u­la­tion. Tar­gets could be any action or allowance that weak­ens, dis­torts com­pe­ti­tion. But comity/peace demand some def­er­ence to auton­o­my. This lim­its the scope (most­ly) to border/establishment regulations.
• Diverse geo­gra­phies, his­to­ries, insti­tu­tions, demo­graph­ics impose a trade-off between the scope and scale of fea­si­ble trade agree­ments. Glob­al scale means nar­row­er scope i.e. more reg­u­la­to­ry auton­o­my for Mem­bers (and vice ver­sa). Still, it’s a trade sys­tem, not the Ten Commandments.
• Nar­row scope with broad scale works (ITA agree­ment). Small­er scale (con­ti­gu­i­ty) and more ambi­tious scope is a known-good com­bi­na­tion: NAFTA, EU-15, ANZCERTA. But there is no good exam­ple of ‘mul­ti­lat­er­al­iz­ing’ ambi­tious small scale deals.
• Only one ambi­tious pluri­lat­er­al (GATT 1948) swelled to mul­ti­lat­er­al scale. It cod­i­fied big steps in (most­ly autonomous) lib­er­al­i­sa­tion & expand­ed its rule-set but at the cost of sham com­mit­ments obscured by diplo­mat­ic deals. Dis­cred­it, uncer­tain­ty fol­lowed.
• Pluri­lat­er­al and region­al trade agree­ments (P&RTA) are not the prob­lem. Some have deliv­ered net gains (although that’s a weak argu­ment for more). The prob­lem of the trad­ing sys­tem is not there, but in the stymied glob­al frame­work of WTO.
• A trad­ing sys­tem serves but can­not com­plete the open­ing of bor­ders. A bor­der­less world might be more pro­duc­tive (migra­tion) but it is incom­pat­i­ble with estab­lished state wel­fare sys­tems, secu­ri­ty arrange­ments, oth­er insi­tu­tions. So, infeasible.
• Exten­sive pri­vate (MNE) net­works of trade, tech­nol­o­gy & finance account for two-thirds+ of inter­na­tion­al exchange. They tra­verse, but don’t erase, mul­ti­ple bor­ders: the assets they exploit even depend on bor­ders. But bor­der costs mul­ti­ply along the chain, cut­ting glob­al welfare.
• Although border/establishment reg­u­la­tions should be the pri­ma­ry tar­get, reg­u­la­tion of a firm’s con­tin­u­ing oper­a­tions also adds to trade costs. But mul­ti­lat­er­al action here can only be high-lev­el (eg. nation­al treat­ment) or trip-up on com­plex­i­ty, excep­tions, data problems.
• Trade trans­mits most mar­ket inter­ven­tions across bor­ders. It would be best to ban any that dis­torts com­pe­ti­tion (sub­si­dies, weak IP con­trols). Unlike­ly. Still, the sec­ond-best response is not ‘reme­dies’ that com­pound the dam­age but a dis­pute or nothing.
• Nei­ther GATT nor WTO elim­i­nat­ed the scourge of anti-dump­ing (tai­lored pro­tec­tion­ism). Pri­vate pric­ing deci­sions that are not col­lu­sive should nev­er be the tar­get of joint action by gov­ern­ments. But car­tels should be.
• One way for­ward on sys­tem design is to work back from the com­mon parts of suc­cess­ful P&RTAs to a com­pat­i­ble uni­ver­sal frame­work. An enforce­able ker­nel that may look a lot like Parts I & II of GATT + goods, ser­vices, IP sched­ules to the MFN/NT com­mit­ments + a DSU.
• What about all those Annex 1 agree­ments of WTO? Merge essen­tial GATS, Govt Pro­cure­ment (SOE?), TRIPS oblig­a­tions into the ker­nel (with sched­ules). Any­thing else not out-of-date becomes pluri­lat­er­al (opt-in), rene­go­tiable & ambitious.
• Hard ques­tion: should pluri­lat­er­als exist only where their scale is suf­fi­cient to extend ben­e­fits on an MFN basis (as in ITA)? I say no. Where ‘reci­procity’ becomes ‘dis­crim­i­na­tion’, I guess the rec­i­p­ro­cal incen­tive may be more pro­duc­tive than ‘fair­ness’.
• Of course, it’s not a “trad­ing sys­tem”. Gov­ern­ments don’t account for trade any more than they account for eco­nom­ic growth; altho they shame­less­ly claim cred­it for both. It’s an agree­ment on the lim­its to anti-trade reg­u­la­tion. So, expect action to be late self-interested.

 On reflec­tion, a few weeks after I post­ed this, I think that the biggest bar­ri­er to sys­tem redesign at present is the unwill­ing­ness of the USA and Chi­na to engage with each oth­er on trade sys­tem reform. The chal­lenges posed for both Chi­na and the USA by China’s rise (and the dynam­ics of the DPRK nuclear prob­lem) mean nei­ther has much cur­rent inter­est in what used to be called (in the Nineties) the “lib­er­al inter­na­tion­al eco­nom­ic order”.