Where is the world trade system heading?

Abstract

As economic powers from the developing world, particularly China, have emerged in the past few decades, their weight has altered the balance in the global trading system. This has presented challenges in the World Trade Organisation (WTO), where the Doha Round of multilateral negotiations has dragged on for more than a dozen years. Frustrated by this stalemate, many countries have sought alternatives. Among these are ‘mega-regional’ trade agreements such as the proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and EU, and a 16-member Trans-Pacific Partnership (TPP).

In this volume, leading commentators – including two former heads of the WTO – examine the possible consequences of this shifting trade landscape. Is globalisation in reverse, and have countries been retreating from liberalisation since the world financial crisis of 2008– 09? Are the ‘mega-regional’ deals an existential threat to the WTO regime, or can they be used as building blocks towards wider multilateral agreement on a broad range of issues, from industrial standards to intellectual property rights. And what does it all mean for the balance of geopolitical power between the developed and developing world?

Notes

1 The Havana Charter creating the ITO was signed in March 1948 but it was never ratified by the US Congress, leaving international trade to be managed via GATT.

2 While the textile sector was significantly liberalised in the Uruguay Round, both agriculture and services remain subject to enormous distortions and thus offer the potential for significant economic gains, if suitably liberalised. This is a fact that appears to have been overlooked by recent commentators expressing the concern that multilateral liberalisation has little to offer, as much of the liberalisation has already been undertaken in preceding multilateral negotiation rounds.

3 Quoted in Alan Beattie and Edward Alden, ‘US not prepared to accept ‘“Doha lite”’, Financial Times, 10 June 2006.

4 For details on trade liberalisation beyond that contained in this chapter, see Arvind Panagariya, ‘The Free Trade Area of the Americas: Good for Latin America?’, World Economy, vol. 19, no. 5, September 1996, pp. 485–515.

5 These rates have been calculated using the annual growth rates in Appendix table A1 in International Trade Statistics 2011 (Geneva: World Trade Organisation, 2011).

6 Russia and the former Soviet Republics of Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan.

7 William Davey, ‘The future of the WTO: what is next for the WTO?’, Paper presented at Stanford University Conference on the Future of the WTO, Stanford Center for International Development, 26–27 April 2012.

8 The Tariff Act of 1930, commonly referred to as the Smoot–Hawley Tariff, significantly raised US tariffs on nearly 900 products. Other countries retaliated and world trade contracted sharply – by 66% between 1929 and 1934.

9 Further details on these patterns of south–south trade can be found in Pravin Krishna and Matthias Matthijs, ‘Trading Up or Trading Down: Emerging Markets’ Changing Interests in the World Trade System’, SAISPHERE (the magazine of Johns Hopkins School of Advanced International Studies), 2013–14, pp. 28–31.

10 These so-called ‘Singapore issues’ are: transparency in government procurement; trade facilitation (customs issues); trade and investment; and trade and competition. Only work on trade facilitation continues.

11 See Bernard Hoekman, ‘Emerging Economies and the WTO’, Paper presented at Stanford University Conference on the Future of the WTO, Stanford Center for International Development, 26–27 April 2012.

12 The Cairns Group of agricultural exporters was formed in 1986 to lobby at the Uruguay Round for the liberalisation of trade in agricultural products. Taking the name of the Australian town where the first meeting was held, the initiative was spearheaded by producers in both developed and developing countries who wished to make sure that their products were not locked out of markets in Europe and Asia.

13 Article XXIV of the General Agreement on Tariffs and Trade (GATT) 1994, http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXXIV.

14 The earliest systematic critique of preferential trade agreements was provided by Jadish Bhagwati in ‘Regionalism and Multilateralism: An Overview’, in Jaime de Melo and Arvind Panagariya (eds), New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 2007). Subsequent contributions in this spirit include Jagdish Bhagwati and Arvind Panagariya, ‘Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?’, in Bhagwati and Panagariya (eds), The Economics of Preferential Trading (Washington DC: AEI Press, pp. 1–78); Panagariya, ‘The Regionalism Debate: An Overview’, World Economy, vol. 22, no. 4, 1999, pp. 455–76; and Pravin Krishna, ‘Preferential Trade Agreements and the World Trade System: A Multilateralist View’, in Robert Feenstra and Alan Taylor (eds), Globalization in an Age of Crisis: Multilateral Cooperation in the Twenty-First Century (Chicago, Il: University of Chicago Press, 2013). An accessible survey of the theory of preferential trading is provided by Panagariya, ‘Preferential Trade Liberalisation: The Traditional Theory and New Developments’, Journal of Economic Literature, vol. 38, no. 3, June 2000, pp. 477–511.

15 World Trade Report 2011 – The WTO and preferential trade agreements: From co-existence to coherence (Geneva: World Trade Organisation, 2011).

16 Ironically, it is conceivable that the difficulty with complying with the rules of origin within preferential agreements is large enough to at least partially explain the low take-up of PTA preferences by firms, especially small and medium-sized enterprises. For a detailed discussion, see the World Trade Report 2011.

17 See, for example, Jagdish Bhagwati, ‘Threats to the World Trading System: Income Distribution and the Selfish Hegemon’, Journal of International Affairs, vol. 48, Spring 1994, pp. 279–85.

18 The fragmentation of trade and its increased relevance over time has been well documented in the economics literature. For instance, Varian points out that the iPod music player is made from more than 400 parts that originate in several different countries and are finally assembled in China; see Hal Varian, ‘An iPod Has Global Value, Ask the (Many) Countries That Make It’, New York Times, 28 June 2007.

19 Indeed, at a more basic level, the various theoretical aspects of production networks, such as trade in intermediates, foreign investment and multinational production and so on, are old issues in the literature and do not interfere with the basic welfare propositions concerning the dominance of multilateral free trade over other policies.

20 The principal factor behind the rise in intra-regional trade in Asia is the liberalisation and faster growth in the countries within this region. This also explains in large part the decline in intra-regional trade in North America during the 2000s, despite NAFTA, which has worked to divert trade towards regional partners.

21 Aggregate Measurement of Support (AMS) means the annual level of support, expressed in monetary terms, provided for an agricultural product in favour of the producers of the basic agricultural product or non-product-specific support provided in favour of agricultural producers in general, excluding support provided under programmes that qualify as exempt from reduction under Annex 2 to the Uruguay Round Agreement on Agriculture.

22 Bhagwati, ‘Threats to the World trading System’.

23 Peter Drahos, ‘Weaving Webs of Influence: The United States, Free Trade Agreements and Dispute Resolution’, Journal of World Trade, vol. 41, no. 1, 2007, pp. 191–210.

24 As an example, experts are sharply divided on whether the current WTO rules allow a carbon tax on imports. Under these circumstances, if a country such as the US were to introduce a carbon tax on imports and it were challenged in the WTO, the Dispute Settlement Body would have to take a view on the matter even though the existing rules do not provide clear guidance one way or the other.