Guest blogger Shuaihua Cheng provides a Chinese perspective on global trade governance and the economic crisis, focusing on the upside of a downturn.
The most critical problem facing global trade governance at this moment is that we have focused too much on problems at the World Trade Organization (WTO). It is dangerous to disregard the fact that the WTO has functioned well as a stabilizer of basic global economic order amidst economic turmoil.
Too often people perceive the WTO cup as half empty. In comparison to the inadequacy of financial governance today, the world is fortunate to have the WTO! In spite of the dramatic financial crisis and economic downturn, widespread protectionism has not occurred. As observed by many economists, trade contractions in the past few months are mainly attributable to shrinking demand as an indicator of international nature of recession, rather than trade protectionism.[1] There have been some new trade restrictive measures in major economies, but that happened even before the crisis. Several new WTO disputes have been launched at the WTO in recent months on such measures,[2] which again demonstrate the credibility of the multilateral trading system and the trust that the WTO’s members place in it.
GIVE CONFIDENCE IN THE WTO
At the G20 London Summit, finance will be the center of attention. However, the meeting provides a crucial and opportune moment for leaders to be reminded of the great value of the WTO. This will not only help reinforce the right priorities in the global trade agenda, but also provide lessons for crafting future global governance on finance as well as perhaps on climate change.
The first and highest value of the WTO is its legitimacy. All WTO Agreements are based on peaceful negotiations and consensus among all Members. The creation of such a system was not an accident. One of the most important features of the WTO system is that it has been designed to prosper during not only good times, but challenging ones as well. Through a package of legally binding Agreements, all Members can avoid wild trade protectionism, such as that which took place in 1930s, for instance. This value might not be so obvious in an economic boom, but it is critical when protectionism pressures are higher, such as during an economic crisis.
For politicians, trade protectionism can be an easy policy tool to pick up, although it does appear to be widely understood that closed markets will do little to protect domestic economies but risk spurring damaging retaliatory protectionism. The existence of WTO commitments pushes policymakers to look harder for alternative solutions. It reinforces the principle of an open economic order as a rule-based regime that can not simply be put aside.
Secondly, WTO Agreements seek to strike a balance between trade liberalization and sustainable development. Some commentators continue to describe the WTO as an organization solely devoted to promoting freer trade. Some negotiators and even WTO staff also emphasize (too much) this market access dimension. But the Preamble to the WTO Agreements signed in Marrakesh recognizes that trade liberalization is only a means to a broader end – that of sustainable development. Indeed, the WTO sets out a broad range of objectives for the multilateral system, including “raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.”[3] Also, there are clear arrangements to address sustainable development concerns in specific WTO agreements, from those concerned with trade in goods and services to those focused on issues such as technical barriers to trade, and sanitary and phytosanitary measures, etc.
Thirdly, the WTO boasts a rule-based, independent dispute settlement system. Viewed as the “crown jewel” of the Uruguay Round and the “linchpin” of the multilateral trading system, [4] the WTO Dispute settlement system aims to address conflicts arising from different understandings of Members’ commitments under WTO Agreements. The dispute settlement system is not perfect. Several reform proposals to make it fairer are under discussion among Members. But the system has demonstrated considerable success in dissuading Members from irresponsible violations of their commitments, in part due to the constructive fear of retaliation and profound understanding of WTO’s systematic dividends.
At their London Summit, G20 leaders should consider how the values and lessons of the WTO could assist their efforts to craft sustainable governance of global finance in the 21st century.
2009 PRIORITIES FOR GLOBAL TRADE GOVERNANCE
Having not fully recognized the value of WTO in defending global trade from unbridled protectionist interventions in past year, there have been many faulty recommendations for G20 priorities in the trade arena. Many commentators have suggested that concluding the Doha Round must be the top priority. Others emphasize the importance of a ‘moral’ commitment to curbing new protectionism.
A conclusion of Doha Round deal would indeed have important symbolic significance in addition to the benefits of greater market opening opportunities. But there is question of opportunity cost. Should leaders invest their energy now on concluding the Doha Round, or focus on monitoring how Members honor their existing commitments and obligations? The latter is perhaps more relevant, urgent and achievable. If members are not able to implement their existing commitments and WTO rulings, who will believe in any new deals? The only agreement that WTO Members currently share about the Doha Round is that what is currently on the table is “imbalanced”[5]. The failure of WTO members to meet the deadline set by the G20’s November 2008 Summit reflects lack of the necessary progress on the domestic progress. In many key countries, trade ministries have simply proven unable or unwilling to strike a deal to open own national markets where the potential foreign market opportunities are obscure or subject to implementation hurdles.
We have also seen a broad range of appeals for the G20 moral and political commitments to avoid taking “murky protectionism”- “measures that abuse legitimate discretion allowed by various international trade agreements”[6] (i.e., trade measures that are protectionist but legally-consistent with WTO rules). It is true that current WTO agreements and the dispute settlement system may not be able to properly address such legal but perhaps immoral measures. While political success is possible in this area, the prospect of policy failure is high because such commitments are hard to measure and murky protectionism is difficult to define.
Making lofty or vague political commitments on abstract issues is always easy but less often does it make a difference on the ground. To the contrary, such promises can make situations worse when rhetoric is revealed to be hypocrisy as policymakers and the public come to appreciate the challenges of persuading powerful domestic lobbies, already suffering under the weight of economic crisis, to undertake moral obligations.
The top priority, therefore, should for G20 Members to honor their existing WTO commitments. This pragmatic goal has four benefits. First, it is fundamentally legal and concrete. Second, it is strategically vital for global trade and economic stability. Third, it is measurable and transparent. Fourth, WTO has functions assigned for solving conflicting understanding on specific trade measures among members on their WTO legality.
At the moment when any tensions are so easily politicized, we should avoid name-calling and refrain from labeling simply any trade restrictive measures as protectionism. Instead, we should employ the test of ‘WTO legality’ as the single most important benchmark against which to assess disputable trade measures. It is important to note that certain trade restrictive measures are legal under WTO rules and even encouraged for sustainable development purposes, provided they abide by agreed principles. A balanced view about the balanced WTO is critical for stabilizing global social and economic order.
The second priority is to strengthen the WTO Secretariat’s personnel and expertise in two areas: dispute settlement and monitoring. The current crisis is expected to increase the number of disputes that are brought to the WTO. The Secretariat’s legal affairs department may thus have a heavier burden. An efficient and top quality service is essential to help clarify and resolve disputes on controversial trade measures. In the area of monitoring, there is a need to improve the WTO Trade Policy Review system and to enable greater scope for independent consultations among members and with the Secretariat on their trade policy options for responding to financial and trade difficulties.
Third, transatlantic leadership is key to making the G20 process a success. The UK Prime Minister, Gordon Brown, has already called for stronger transatlantic partnership for a global new deal[7]. The United States and Europe need to find a solution for a financial crisis which began within their shores and power centres. They also need to address negative impacts of this crisis on other countries, particularly the poorest countries, through multilateral development assistance schemes, including Aid for Trade in the WTO context. The transatlantic powers also need to accommodate other G20 members in the spirit of trust and partnership with a view to sharing proper responsibilities in a new political and economic order.
TRIPLE BOTTOM LINES
The leaders should express their confidence in the WTO as a manifestation of the potential for effective global economic governance. Members should agree on concrete matters such as honoring their existing commitments in WTO Agreements, rather than making any new unreachable or immeasurable commitments. The United States and European Union should implement respectively the WTO Appellate Body’s rulings against them in recent cases on cotton and bananas.[8]
Shuaihua Cheng is Programme Officer on Strategic Analysis and China, ICTSD.
This article is part of a forthcoming compilation on a trade agenda for G20 leaders edited jointly by Dr. Carolyn Deere Birkbeck (Global Economic Governance Programme) and Ricardo Meléndez-Ortiz (International Centre on Trade and Sustainable Development (ICTSD)). The compilation will be published on 23 March 2009.
[1] See, for instance, “Sharp Trade Contraction Knows No Borders,” New York Times, 16 January 2009, available at www.nytimes.com and “IMF seen forecasting 5 pct trade drop before G20,” 9 March 2009, available at www.lse.co.uk/macroeconomic-news.asp
[2] The WTO has established 12 disputes cases since September 2008. For more details, see www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm
[3] “Marrakesh Agreement Establishing the World Trade Organization,” www.wto.org/english/res_e/booksp_e/analytic_index_e/wto_agree_01_e.htm
[4] Esserman ,Susan and Howse, Robert (2003),”The WTO on Trial,” Foreign Affairs, Volume 82 No. 1, January /February.
[5] For instance, “U.S. warns “imbalance” in Doha talks needs fixing,” International Herald Tribune, 2 March 2009, available at www.iht.com ; “Chinese ambassador calls for realism in WTO trade talks,” Xinhua News, 28 November 2008, available at www.gov.cn/misc/2008-11/28/content_1162927.htm.
[6] Baldwin, Richard and Evenett, Simon J., “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,” 5 March 2009. The book is available at: www.voxeu.org
[7] See, for instance, “Brown arrives in Washington in search of new special relationship,” 3 March 2009, TIMES, www.timesonline.co.uk
[8] For the update news report of EU Bananas case, see ictsd.net/i/news/bridgesweekly/35126/; US case on cotton, see ictsd.net/i/news/bridgesweekly/6629/
