What Will the WTO Ministerial Mean for the Future of the Trade System?

By   // Monday, December 2, 2013 http://americastradepolicy.com

The Director-General of the World Trade Organization, Roberto Azevêdo will convene a meeting of Trade Ministers from around the world in Bali, Indonesia from December 3rd to the 6th, in an effort to salvage a small package from the Doha Development Round. The Doha Round, a massive negotiation among the 159 members of the World Trade Organization (WTO), was launched with great fanfare twelve years ago. The objective was to substantially reduce tariff and non-tariff barriers on all products, rein in agricultural subsidies, and liberalize trade in services, among other objectives.

Hopefully Ministers will approve a “trade facilitation” agreement at the Bali Ministerial, which can, over time, lead to a substantial reduction in customs barriers around the world, as well as some minor agreements on agriculture and development. While the trade facilitation agreement would be a significant plus for the world trade system, agreements reached at this Ministerial will fall far short of the lofty goals set for the Doha Round. And it is possible that no agreements will be reached in Bali. So what are these potential agreements? And what does all of this mean for the future of the world trade system?

Customs barriers to trade, including things such as excessive fees and documentation requirements, are some of the most significant barriers to expanded trade today, and these are a particular problem in many poorer developing countries. A World Bank study estimated that if low-income countries reduced these barriers to the same level now found in middle income countries that their imports might increase by some 15.2 percent and their exports by 14.6 percent. Multi-national corporations which source parts and materials from around the world and sell globally also would benefit from an agreement to reduce these barriers.

The Trade Facilitation Agreement would require all WTO members to reduce listed customs barriers over time. For some developing countries this is a difficult and expensive task that requires substantial training, new equipment and often some significant cultural changes, and many developing countries are concerned that they may not be able to meet the requirements of a new agreement. Accordingly, the agreement would provide for funding by the World Bank, the International Monetary Fund and three regional development banks to enable developing countries to implement their trade facilitation commitments. The key sticking point is who determines if this funding is sufficient. Developing countries feel that they have been stuck with excessive costs to implement prior WTO agreements, particularly the agreement on Trade Related Intellectual Property, and are nervous that they might get stuck again.

Another agreement that could emerge at Bali relates to food security. The so-called G-33 (a group of developing countries led by India) is pressing a food security proposal that would permit governments to purchase food from local farmers at higher than normal prices in order to distribute it to vulnerable populations in the future in the event of price spikes. This could run afoul of the WTO subsidy agreement and the G-33 wants a “peace clause” that would shield these purchases from a WTO challenge. The U.S. has opposed this proposal, arguing that these countries already exceed their subsidy commitments, and countries like Pakistan have expressed concern that products purchased at above market rates will later be dumped in their market, injuring their local farmers.

There are also two other agricultural agreements that could emerge in addition to the food security proposal. One would limit agricultural export subsidies, which are largely given by the EU, but also to a lesser extent by the U.S. and others. These are highly trade distortive, and were to be prohibited as part of a large agreement on agricultural trade, had the Doha Round been successful.

The other pertains to the administration of tariff-rate quotas applied to many agricultural products, which provide for a low tariff on imports under the quota and then a generally trade-prohibitively high tariff on imports over the quota level. These quotas often go unfilled if the countries that are eligible to use them have a bad harvest.

So what does all of this mean for the world trade system? Obviously no agreement at Bali would deal the WTO a severe blow and call into question the ability of the multilateral system to conduct successful negotiations in the future. Even a small package centered on the above issues should lead to serious thinking about the future of the multilateral trade system.

Failure of the Doha Round has already lead to substantial emphasis on bilateral and regional negotiations, such as the current major U.S. negotiations, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership negotiations. The trend toward bilateral and regional agreements, instead of a broad multilateral agreement applicable to all WTO members, will certainly continue.

And this is a problem. Multilateral agreements have substantial advantages over bilateral and regional agreements. First off, the poorest countries tend to get left out of bilateral and regional agreements, since they bring minimal commercial heft to the agreement.

Second, bilateral and regional agreements all have their unique rules, particularly “rules of origin” which define how much content a product has to incorporate from within the region to qualify for special treatment. Every agreement has different rules, which chops world trade up into different baskets and greatly reduces efficiency.

Finally, regional trade blocs can create political friction. One of the pillars of the WTO is the “most favored nation” (MFN) rule which requires all members to give the same treatment and apply the same tariff it gives to one member to all members. Free trade agreements are exempted from this MFN rule, and the founders of the trade system after World War II envisioned that free trade agreements would be the exception, not the rule. They made MFN a fundamental pillar because they believed the trade blocs that formed after World War I contributed to the political friction that led to the Second World War.

Failure of the broad multilateral negotiations has also led to narrow sectoral agreements that will only apply to a sub-section of WTO members. Three such agreements are nearing completion now, one on information technology products, one on services and one on government procurement. Unfortunately, these are areas that had been drivers of multilateral trade liberalization. Without these “engines”, future success of multilateral negotiations under the WTO is even more doubtful.

The Doha Development Round and the future of the trade system are explored in detail in my book Globalization and America’s Trade Agreements.

Image Credit: WTO Director-General Selection Process – Mr. Roberto Carvalho de Azeveda, courtesy of Flckr and WTO.