Future of the world trading system: Asian perspectives

Authors: Richard Baldwin, Graduate Institute, and Masahiro Kawai and Ganeshan Wignaraja, ADBI

The WTO risks losing its centrality in the world trading system due to its focus on 20th century trade issues and lack of progress in the Doha Round.

World Trade Organisation (WTO) director general Pascal Lamy answers a question during a news conference following a Trade Negotiations Committee meeting, at the WTO Headquarters, in Geneva. (Photo: AAP)

Asia, meanwhile, has built a deep network of supply chains and is experimenting with new forms of regional trade governance. Asia’s experience of open trade-led development offers lessons for other regions. Better coherence is also vital between Asia’s regional trade rules and global trade governance.

The 1995 creation of the WTO — as an institutional extension of the GATT — held out the promise of an effective, rules-based world trading system where all countries were treated alike. In addition to establishing a global judiciary for trade disputes, the WTO was expected to provide a forum for trade negotiations and other related functions. Progress on the dispute-resolution side has been brilliant, but the promise to facilitate trade negotiations has yet to be fulfilled.

Recent developments, however, have thrown the world trading system into a state of flux causing uncertainties over global trade governance under the WTO. There is little doubt that the world trading system has changed fundamentally over past years with the rise of emerging markets, the expansion of international production networks and supply chain trade, signs of new commercial and industrial policies, and the spread of trade-agreement-led regionalism. These developments are all here to stay but the WTO has not kept up with them. Furthermore, the WTO Doha Round has been going on for more than a decade. Despite being the longest multilateral trade talks in history, it shows no signs of concluding anytime soon. WTO centricity in global trade governance is eroding and risks continuing to erode.

The rise of Factory Asia through supply chain trade has placed it increasingly at the heart of the global economy. The slicing of production stages into geographically separate stages illustrates how Asian countries uniquely interact with each other through trade and investment. Trade and regional integration are likely to influence Asia’s future growth, with some predicting that the region will account for over half of world GDP by 2050.

Asia is also experimenting with new approaches to free trade agreements and economic policies to sustain economic growth amidst a fragile world economy. Bilateral trade agreements are spreading with the risk of a troublesome Asian ‘noodle bowl’ of different, competing tariff schedules, exclusion lists, rules and standards. Additionally, there are two competing mega regional proposals for trade agreement consolidation — the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership. How Asia thinks and acts on these issues will likely influence the world economy.

As Pascal Lamy, Director-General of the WTO, writes in his essay:

Asia has been a successful model of development through trade, which has inspired many others around the world. There is no doubt that the region will continue to inspire the trade community in the next decades to come.

With its significant economic and trade weight in the global economy, Asia is expected to shoulder more responsibilities and take the lead in the global trading system in the future. Their contribution to a successful WTO Ministerial Conference in Bali in December 2013 will be essential.

Asia’s experience of open trade-led development offers many valuable lessons for other regions. These include the importance of pursuing market-friendly trade and industrial policies to develop supply chain trade, improving surveillance of non-tariff measures, and consolidating trade agreements into a large region-wide one. Using more accurate data to measure value-added trade and participants in supply chain trade, such as small firms, provide empirical insights for policy development.

In the longer term, better coherence between Asia’s regional trade rules and global trade governance is vital. Improving the quality of large Asia-wide trade agreements, a WTO agenda on supply chains and trade agreements, and significant reforms of the WTO are necessary moves towards this end. Issue-based plurilateral agreements and an eventual multilateral agreement on investment can also play a role in facilitating coherence between regional and global rules on trade.

Richard Baldwin is Professor of International Economics the Graduate Institute, Geneva, and part-time Visiting Research Professor at the University of Oxford.

Masahiro Kawai is Dean and CEO of the Asian Development Bank Institute.

Ganeshan Wignaraja is Director of Research of the Asian Development Bank Institute.

This article was first published here on VoxEU. The VoxEu eBook, ‘Future of the world trading system: Asian perspectives’, is available for download here.