Economic Affairs

Bringing trade rules into the 21st century

The WTO is supposed to police world trade but instead is held captive by its members and an outdated agenda.

Last week, the World Trade Organisation (WTO) held its 11th ministerial meeting in Buenos Aires. Did you hear much about it?

Neither did I.

In the run-up to the meeting, trade experts warned everybody: don't expect much. That turned out to be an understatement. The trade ministers of the 164 countries attending the meeting in Argentina could agree on precisely nothing - not even on what they should talk about. The Buenos Aires jamboree was a dialogue of the deaf.

The WTO is supposed to be the policeman of world trade, which sets the rules and disciplines by which countries do business with one another, so that we don't have to operate by the law of the jungle.

The WTO's Doha Round of trade negotiations has dragged on for 16 years and there is still no end in sight. Countries' patience is wearing thin, including the administration of US President Donald Trump, who, in his campaign, threatened to pull the United States out of the WTO and is openly disdainful of the organisation - and of multilateral trade in general.

Companies have long ceased to care much about the proceedings of WTO meetings although they still need the organisation to settle trade disputes - one area in which it remains effective. Civil society is also losing interest. Even the once-vociferous protesters who used to lambast the WTO as a champion of the twin evils of capitalism and globalisation don't bother to show up any more.

Why has this once-mighty organisation that is so important for the world fallen so far from grace? Why do its members find so little to agree about? How can the WTO be salvaged?

Part of the problem is size. The membership of the WTO has expanded from 123 in 1994 to 164 at present. In a way, this is good. It means that more countries have to follow the organisation's rules: For example, they can't discriminate between their trading partners - if they grant special favours to one country, they have to extend the same favours to others. Their commitments are supposed to be binding and enforceable. They also can't discriminate between their own companies and foreign companies - at least in theory.


ST ILLUSTRATION: MANNY FRANCISCO

But size and diversity complicate decision-making, especially if all members have to agree. Unlike the World Bank and International Monetary Fund (IMF), where countries have different levels of voting power, the WTO is supposed to operate by consensus. So, even a small minority of countries can block a decision they do not like. This has happened several times, including in Buenos Aires.

SO 20TH CENTURY

In recent years, developing economies, particularly China, India and Brazil, have become more prominent and influential. While they can be outvoted by developed economies in the World Bank and the IMF, this is not possible in the WTO.

So, in Buenos Aires, for instance, China and India were able to block a widely supported attempt to ban subsidies for illegal fishing (a move that European Trade Commissioner Cecilia Malmstrom described in a tweet as "horrendous"). India and some other developing countries were also able to derail an initiative to put e-commerce on the negotiating agenda of the WTO.

The examples highlight another serious problem with the WTO: its agenda is increasingly becoming out of date. It continues to pursue what is essentially a 20th-century agenda. But the nature of global trade has changed. Most trade today is not about making goods in one nation and selling them to consumers in other nations. About 70 per cent of global trade is now in intermediate and capital goods and services, through supply chains.

The iPhone is a classic example. It is designed in California and assembled in China, but its components come from more than 200 suppliers from all over the world. For example, it contains displays and flash memory made in Japan and South Korea, touch ID sensors made in Taiwan, gyroscopes made in France and Italy, accelerometers made in Germany, batteries made in South Korea and glass for the screen made in the US. Thousands of products are "made in the world" in this way.

What the world needs then is a trade system not just for selling already-made goods, but a system for making goods through supply chains.

To operate efficiently and fairly, supply chains need quite different rules from those addressed by the WTO. "At the border" issues such as tariffs, quotas and subsidies are less important, while "behind the border" issues such as rules to protect investments and intellectual property and regulations on product standards are more important.

Services such as design, engineering, logistics, telecoms and finance play a vital role in supply chains. Services are even embedded in products. In the case of the iPhone, for example, the merchandise components account for less than one-third of the value of the final product. Most of the value is derived from services, such as research and development, design, software development, engineering and marketing. Apple's App store, which hugely enhances the value of the iPhone, is a service.

Barriers to cross-border movement of services are now barriers to trade. By not focusing on such issues, the WTO rules fail to address the realities of business.

The WTO is aware of its shortcomings. Some of the best research on how value chains have changed world trade comes from the WTO itself. The organisation has also taken some steps forward - for example by forging an agreement on trade facilitation (which speeds up Customs and port procedures and is vital for supply chains), which was ratified in February.

But it is a member-driven organisation and most of its members - particularly developing countries - are more focused on settling 20th-century issues of traditional trade such as agriculture, patents on pharmaceuticals, and rules governing anti-dumping. They don't want to expand the agenda to new areas such as e-commerce and supply chain-related issues.

So countries have been forced to address these issues through other means. One way is through bilateral agreements, such as those that Singapore has signed with 12 individual countries. Another way is through big multi-country agreements like the Trans-Pacific Partnership - which contain strong provisions for "new issues" like IP protection and e-commerce.

So-called plurilateral agreements within the WTO (which involve more than two countries but not a great many) are also possible. While they may start with a small group of countries, over time, others join in. An example is the International Technology Agreement (ITA), which was agreed at the WTO ministerial conference in Singapore in 1996 and reduces tariffs on more than 200 IT products.

At first, only 29 countries signed up. But at the 2015 ministerial conference in Nairobi, another 53 countries added their signatures. The ITA now covers more than 95 per cent of trade in IT products.

Negotiations on e-commerce look like they will go plurilateral. After the failure in Buenos Aires to include this issue in the WTO's main agenda, some 70 countries agreed to go ahead with negotiations on their own. As with the ITA, others will eventually come on board or risk being left behind.

NEW APPROACHES

More plurilateralism may in fact be the key to rescuing the WTO from being marginalised.

Some trade experts favour radical approaches. For example, Professor Richard E. Baldwin, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, proposes a "WTO 2.0" that focuses on supply-chain trade, which calls for completely different disciplines than traditional trade and which the current WTO is incapable of addressing.

WTO 2.0 should have a restricted membership, he suggests, since most nations do not participate in supply chains anyway, and if they were made members, they might try to extract gains on traditional trade issues in return for their agreement on new issues. In other words, WTO 2.0 should itself be a plurilateral organisation.

Another suggestion is for the WTO to abandon the Doha Round of negotiations. This is what a number of countries proposed at the 2015 ministerial meeting in Nairobi. This proposal has merit - the WTO is being held hostage by a set of negotiations that is going nowhere and is unable to move on.

But many large developing countries, including China, India and South Africa, are not willing to abandon the round just yet. Nor will all the Doha issues - particularly trade in agriculture - simply go away merely because the round is declared dead.

What may be needed then is for the WTO to continue focusing on traditional trade issues but also to not just permit, but encourage more plurilateral trade agreements on new issues. In other words, the WTO should embrace a process of creeping multilateralism. It may be the only way in which it can move, incrementally, towards meeting the needs of 21st-century trade.

A version of this article appeared in the print edition of The Straits Times on December 20, 2017, with the headline 'Bringing trade rules into the 21st century'. Print Edition | Subscribe