The Beginning of World Trade Disorganization?

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The Beginning of World Trade Disorganization?

How the WTO is linked to the relative decline of U.S. power.

The Beginning of World Trade Disorganization?

WTO Ministerial Conference, Bali, December 3, 2013

Credit: World Trade Organization via Flickr.com

Last summer, the World Trade Organization (WTO) entered a phase of paralysis as India unilaterally shifted its stance and vetoed the Trade Facilitation Agreement, a modest attempt to remove red tape at borders. The WTO, as its director-general Roberto Azevêdo lamented, has plunged into the “most serious crisis” ever since its formation in 1995. India eventually agreed to back down under American persuasion.

Meanwhile, in an effort to update the WTO’s Information Technology Agreement of 1996, China presented a long list of IT products that it requests be excluded from the new agreement and prompted a deadlock, only later to make concessions as U.S. threw its weight behind the 18-month negotiations.

Uniting the two incidents is the emerging sense of frustration with the WTO platform and, consequently, the growing need for direct U.S. intervention in safeguarding agreements. The WTO has entered a new phase of existential crisis, being multilateral in appearance, but bilateral in essence. This is in revealing contrast with the past, when the U.S. could only be the spoiler, not defender, of the multilateral trade regime it established.

Why is this happening to the WTO? There is a simple yet powerful explanation: The entire system of the WTO is underpinned by the American hegemon supplying political and economic capital. If the U.S. is in relative decline, the trade system will naturally fragment. This theory is known as the hegemonic stability theory.

Hegemony and World Order

In history, a hegemon is largely associated with the presence of international economic infrastructure. In the 19th century, the British hegemon underwrote the liberal international order in the form of free trade and gold standard. The liberal order was later re-established by the American hegemon, which has overseen the Bretton Woods system from 1945. By contrast, the absence of a leading power is a recipe for disintegration, as illustrated by the economic disorder during the inter-war period. It follows that a hegemon is required to provide the public good of an open, stable international economic order.

How does the case stand in trade governance? After the Second World War, the U.S. utilized its overwhelming military and economic power and initiated the General Agreement on Tariffs and Trade (GATT) for trade liberalization. However, constrained by a bipolar structure shared with the Soviet Union, the U.S. opted for a relatively weak trade regime that did not realize the full potential of an open trading system. The GATT article XVIII, for example, granted special and differential treatment (S&D) to developing countries to allow for prolonged deviations from the doctrine of free trade

This was no longer the case as soon as the U.S. entered the “unipolar moment” after the Cold War. The WTO, concluded at the Uruguay Round to replace the GATT, was permanent in setting, wider in scope and stronger in dispute settlement. WTO membership, on U.S. insistence, would be conditioned on the acceptance as a single undertaking of an extensive bundle of old and new agreements, including the GATT 1994, the Agreement on Trade-Related Investment Measures (TRIMS), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Intellectual Property Rights (TRIPS). This highlights not only the scope managed by the new trade system, but also the newfound will and capacity of the U.S. to underwrite the system.

In the arena of international relations, power shifts all the time. The WTO was created at a time when developing countries, notably China, India and Brazil, have been rapidly catching up the West in economic and ultimately political terms – a trend that has become even more salient after the financial crisis of 2007-08. Under changing power distribution, developing countries are less willing to back down. Disagreements between developed and developing countries have become ever harder to resolve. Seen in this light, India’s rejection of the Trade Facilitation Agreement is a reflection at one point of the 13-year deadlock at the Doha Development Round, and ultimately of the inevitable decline of the WTO.

Added to this noise of world trade disagreements is the sight of world trade disorganization. The 2010s have seen the return of regionalism and competing trade blocs – the very thing the WTO wishes to eliminate. The U.S. is currently negotiating two separate geo-strategic trade deals, the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), respectively with Europe and the Asia Pacific, all outside the framework of the WTO. China, in response to its exclusion from the TPP, is busy promoting an alternative, the Free Trade Area of the Asia-Pacific (FTAAP), that would keep the Americans at bay. Overall, the failure of the WTO is indeed closely associated with the rise of multipolarity. Given the current trend, the WTO seems destined to fail slowly but surely.

There is a caveat concerning the validity of this argument: if the WTO impasse can be explained by U.S. hegemonic decline, we should be observing a similar disintegration of two other pillars of global economic governance – IMF and the World Bank. Yet, the crisis confronting this duo, if any, is not as pronounced as that facing the WTO. Does this suggest that U.S. relative decline will not really lead to a WTO stalemate, after all?

The answer is a resounding “No.” The key to understanding this perceived discord lies in institutional design. IMF and the World Bank adopts a weighted system of voting, under which the West dominates decision-making and dismisses challenges from rising states. In contrast, in the WTO, each member state has de facto veto power. This enables weak states to translate power into disproportionately large influence to be wielded against the U.S., materializing in advance the impact of U.S. hegemonic decline.

Indeed, the tide against IMF and the World Bank by rising states has begun to surface in recent years. In July 2014, Brazil, Russia, India, China and South Africa established the BRICS Development Bank, and, among the five, China launched the Asian Infrastructure Investment Bank (AIIB). Both aim to provide development capital to developing countries – a direct challenge to the U.S.-dominated Bretton Woods order.

A Way Out: Capitalism With a Human Face?

If U.S. relative decline is inevitable, is there really nothing that it can do? A trick is to transform the “social purpose” of the WTO. John Gerard Ruggie, an international relations scholar, suggests that a legitimate social purpose to which rising states adhere would enable a regime to outlive hegemonic decline. In the context of trade, if rising states themselves endorse the virtue of free trade, why would they object to the existence of the WTO?

Therefore, ideas precede any notion of hegemony. In the context of trade, developing countries often do not oppose free trade per se. What they protest is 1) trade neoliberalization, and 2) Western hypocrisy. Trade neoliberalization, for example, imposes a stringent intellectual property rights regime that condemns copying – a developmental route taken by the U.S., Japan and China – and makes industrialization difficult. This is made worse by Western hypocrisy, which imposes trade neoliberalization on developing countries on the one hand, yet turns a blind eye to generous agricultural subsidies at home on the other. All these turn the WTO into an object of resentment among developing states.

This does not need to be the case. Under the GATT era, the trade regime was featured by the “welfare state” model, which involves a compromise between laissez-faire capitalism and social welfare. It was this (in addition to a bipolar structure) that gave rise to the special and differential treatment to developing countries and, more broadly, the appeal to flexibility and pragmatism in condoning protectionist behaviour (which is unseen in WTO’s legalistic regime today). This might explain why the GATT managed to survive the rise of Japan and the European Community but the WTO struggled to fend off the impact of the rise of the rest.

A return to capitalism with a human face will save the WTO, not least by letting states themselves define their gains from trade. States only support the ideal of free trade (and the WTO) when they gain from it. A softer regime for the WTO, presumably under U.S. support, would enhance legitimacy, enabling the trade body to sustain itself.

As a side benefit, U.S. support for WTO reform is a golden opportunity to reassert U.S. leadership, restore confidence in the American liberal order, and pre-empt alternative trade arrangements. The U.S. would be able to recast its current image as a major beneficiary of the current unfair system, and thus enhance its soft power. In light of the return to great power politics in the 21st century, this is of crucial importance.

Gordon Wong is a London-based researcher in international relations.