Too much legitimacy can hurt global trade

Author: Arvind Subramanian, PIIE

The list of candidates to succeed Pascal Lamy as director-general of the WTO has just been finalised.


Astonishingly, not one of the nine aspirants is from the world’s four biggest trading entities — the United States, Europe, Japan or China — even though together they account for more than 55 per cent of global merchandise exports. The absence of candidates from these economies is both a metaphor for what ails the supervisory body for global trade, and a signal of its bleak prospects.

Over time the WTO has become an institution where smaller and poorer countries have a stake and a voice. This transformation may seem a welcome sign of legitimacy. But it has gone too far. For its future effectiveness, indeed survival, the WTO needs to be de-democratised. Large countries must reassert themselves. Otherwise, trade will become more fragmented and friction-prone, undermining the very system from which smaller countries stand to benefit and slowing the momentum of global growth.

The multilateral trading system faces an existential threat. Liberalisation increasingly takes place outside the WTO, either through unilateral reform or via increasingly popular regional trade agreements.

Before now, these agreements did not jeopardise the WTO because none of them was between the large trading nations themselves. That now stands to change. The United States has thrown its weight behind the Trans-Pacific Partnership, an agreement that could potentially include Japan. It is also seriously contemplating a transatlantic agreement with Europe.

Soon, there will be a scramble among other large nations to conclude deals with each other. Multilateral trade as it is known now will progressively become a relic of history. So too might the WTO’s importance and relevance as the institution where the United States, Europe, Japan and China liberalise trade and settle disputes.

Leaving aside the experience of European integration, which had its unique post-World War II imperatives, it is the United States that will bear history’s burden for these new developments. The United States, which began the process of undermining the non-discriminatory trading system by negotiating regional agreements with Israel and Canada in the 1980s, will have effectively ensured its completion by embarking on these new agreements.

How can this be addressed? The effectiveness of the WTO as a forum for fostering further liberalisation has been undermined by at least two factors. The first is the Doha Round of multilateral trade negotiations. Launched in the aftermath of 9/11, the world has neither been able to conclude nor bury them successfully.

As a result, it has become impossible to move to a more relevant agenda that can expand market opportunities for the private sector and deal with the current concerns of governments. An example is food, where a decade ago subsidies and barriers to imports were the important issue. Today, high prices and barriers to exports are more important.

Similarly, currency manipulation is now a pressing issue — but it is not on the Doha agenda. Emerging powers, such as China and India, must be more active in shaping this new agenda and constructive about liberalisation in the WTO, or risk their trading partners seeking alternatives to the organisation.

But interring Doha will not be enough to revitalise the WTO’s effectiveness. Unlike the IMF, which has suffered from a democratic deficit and legitimacy problem, the WTO has suffered from too much democracy and associated blocking powers. A few small countries can effectively exercise their veto if the body does not address, say, cotton subsidies — an issue of legitimate concern to them but not necessarily of systemic importance.

This veto must be taken away or future negotiations could be stymied by any of the WTO’s 157 members. This outcome can be achieved by allowing the larger countries to negotiate among themselves while offering assurances to smaller countries that they would receive the benefits of such negotiations and be spared any burdens.

Unless this change occurs, the WTO will be unable to deliver on its key mandate of being a forum for further liberalisation. And if it cannot do that, it will be reduced to a body that settles trade disputes between countries based on rules that are increasingly overtaken by those negotiated under regional agreements.

Recently the legitimacy of the IMF and World Bank was under question because the procedure for selecting their leaders appeared rigged in favour of Europe and the United States. It is perhaps ironic that, in the case of the third organisation in the Bretton Woods troika — the WTO — the absence of candidates from the most economically powerful countries would be seen as lamentable. But their absence is lamentable because it signals that the world’s largest trading nations have relinquished the responsibility of making the WTO an effective and relevant multilateral institution. That situation threatens to make everyone a loser.

Arvind Subramanian is Senior Fellow at the Peterson Institute for International Economics and Senior Fellow at the Center for Global Development.

This article was first published here in the Financial Times.