DEPUTY DIRECTOR-GENERAL ALAN WM. WOLFF
As far back as fourteen years ago, it was said that technology was flattening the earth.(1) What was meant was that globalization was creating an equal opportunity to compete in world markets. To a large extent this is true. The observation has been borne out for many businesses with increasing intensity as well as velocity. It has sped the creation of global value chains. It has given enterprises both large and small potential access to markets anywhere.
- World merchandise trade volume is up 2.7 times since 1995, the year the WTO came into existence, more than double(2)
- In dollar terms, the value of world merchandise exports increased 3.8 times between 1995 and 2018, from $5.17 trillion to $19.48 trillion.
- The value of world GDP rose 2.7 times, from $31.00 trillion to $84.74 trillion.
As a result, is there near universal applause for humanity’s economic progress?
There is a backlash, not in the main against technology. Almost no one is discarding his or her smart phone. Instead there is a reaction against external forces, globalization, seen to be threatening a way of life, and more precisely causing the uneven distribution of the benefits of a more open world. The reaction takes the form of an urge toward retrenchment, less enthusiasm for international exchanges. This can be expressed in the demonstrations of gilets jaunes on the streets of the cities of France, as well as in a substantial number of election results and the adoption by a number of governments of measures that reflect a move toward populism and nationalism. The policy prescriptions of the populists include consideration of resurrecting borders not just against the movement of people but against commerce, through consideration of changes in the taxation of international business, on occasion through competition policy, and most often through aggressive and often restrictive trade policies. Aside from immigration, trade has been the largest target of popular reaction. This may be because it seems the most visible and the least complex to understand, even if this is not really the case.
Discontent and cynicism walk hand in hand. I just got back to Geneva yesterday (via the Japan G20 Agricultural Ministers Meeting) from a visit to Washington. There is no shortage of understandable dismay and unproductive cynicism in the U.S. capital among those who should be undaunted advocates for what has been and can be accomplished by and through the multilateral trading system. The trade policy community is worse than disillusioned, it is not providing direction for where policy should be headed.
Foreign policy analysts are now concluding that the absence of conflict among major powers since World War II is anomalous in the annals of human history. Peace as an international condition has been found to be an aberration. The international order led by the United States and its allies seems ever more fragile, as does the alliance itself. Less remarked upon and more remarkable is the existence of the multilateral trading system, itself subject to assault. The global trading system began to be taken for granted, like the wallpaper in a room. It is now being examined, so far less systematically than required, for a renovation.
Complacency, inattention, can be a curse. It has been said that the memory of individuals does not outlast a few generations, so that a flood that occurred before one’s grandparents time does not prevent rebuilding now in flood plains. The first-hand accounts of the flood die with the eye-witnesses. Likewise, the tariff wars of the 1930s are only the stuff of legend, not experience. Reliving them is not seen by most as a very high risk, the tariff salvos between the two largest trading nations notwithstanding.
Questions arise as to the durability and even the benefits of the multilateral trading system. These questions need to be answered.
If there is a trade war, isn’t that proof that the WTO has become irrelevant?
Well, no. There has never been an international pact that has prevented war when one or more of the parties decided to commence hostilities. International agreements are clearly not an iron-clad guaranty against war, whether armed conflict or a trade war.
Part of the cause of cynicism about the WTO now present in the Washington trade community is the current U.S.-China exchange of increased tariffs, and to a lesser extent increases in trade restrictions centered on steel and aluminum and those threatened on automobiles. Does that mean that the system is increasing irrelevant? No — on the contrary, in most of world trade still takes place within the rules. And even in the case of US-China trade relations, a number of their disputes are still being litigated before WTO panels. A new equilibrium is being actively sought between the two largest trading countries. That is always true where there is a rising power that unsettles and existing world order. The final chapter in this story has not yet been written and may remain short of completion for many years to come.
The relevance of the WTO is also called into question by the increasing reliance by countries on bilateral trade agreements in preference to use of the multilateral trading system. The evidence is mixed as to the contribution to the world economy of individual bilateral and regional agreements. They can be a testing ground for new ideas, which is useful. There are many specific provisions in bilateral agreements that are now the template for multilateral negotiations. This is particularly true for E commerce, where the Joint Initiative of 77 WTO Members accounting for three quarters of the world economy is capitalizing on E-commerce provisions contained in bilateral and regional agreements.
There is also a broader question: if countries increasingly rely on bilateral agreements to managing their trade, is this on balance good for world trade? This question is largely unexamined by either the participants or nonparticipants. The problem: trade concessions made bilaterally can be more trade-diverting than trade-creating. They may simply add additional doses of discrimination, complexity and cost, often through requirements of regional content.
Whether they are on net, positive or negative for the world, bilateral trade agreements would not be possible in their current form without being based on the foundation of the rules and procedures of the multilateral trading system.
Is the WTO unresponsive to the rise of populism, to growing income inequality, to the plight of those seemingly or actually left behind by globalization?
It is wholly inadequate to respond to that charge with the bromide (even if true) that the issue of the distribution of benefits of trade and the softening of changes brought about by trade is a matter largely within the province of national governments. It does nothing to blunt criticism of international trade. It is not enough to say “not our problem” if there is to be political support for an open international trading system. Nor does it bring crowds to their feet cheering when they are told that what David Riccardo had to say about trade being good is spot on. There has to be a better answer, and there is.
The trading system is about fairness and predictability. Just as when you enter a crosswalk, you rely on a system of rules governing the conduct of drivers — that you will have a high probability of reaching the other side of the street — the rules of the international trading system provide the same benefit for international commerce. The WTO gives assurance that for the most part tariffs will not suddenly be raised beyond the levels WTO Member governments committed to, nor will quotas be imposed. The headlines tell us that there are major exceptions to this benign picture, but in the main, trade takes place within the rules.
If you are very good at making a product, ingenious at creating a new app or providing innovative or otherwise useful services, provide quality and efficiency on the assembly line, or at work on a computer, you want a fair deal when it comes to the boundless opportunities world markets should provide, to receive a commensurate reward for your talent and efforts. And if you are less adaptable, if you are older, and not engaged in international commerce, you still want your children and their children to have the benefit of a fairer world.
Two of the principal WTO provisions delivering fairness are the bedrock WTO commitments that require that there be no discrimination based upon where a product comes from upon the entry into a country and that there be no discrimination once a product clears customs and enters the stream of domestic commerce. At a human level, we understand that equal pay for equal work is a basic element of fairness. An equal chance to sell your product in any market, whatever your home country, is a basic right underwritten by the WTO and is applicable in all 164 Member countries.
There are a series of more specific rules. Discriminatory standards are far more effective than tariffs in eliminating trade. However, because the WTO’s rules, it is relatively rare that standards are imposed for reasons mainly of protection.
Providing fairness, providing decent rules for international competition, is the central purpose of the WTO. This is vitally important whether for current and future farmers, for those in manufacturing, or in software engineering. David Riccardo was right. Trade will lift the economies of the world, but that is too ethereal as a way to justify the trading system except to a roomful of economists. Supporters of the multilateral trading system have the right policy but the wrong narrative for explaining to the public why there is a WTO. Fairness is understandable, and countless examples of what is fair and how fairness is underwritten by the rules of the multilateral trading system are at hand and can be offered.
Is the WTO fit for purpose?
The nations of the G20, without apparent dissent, met on December 1 of this last year and stated that the trading system needed reform. The G20 leaders, having given no guidance as to what reforms they might have intended, left it up to all of us – trade officials, WTO secretariat members, academics, nongovernmental organizations, and far from least, business executives, to supply the answer. Years ago, a famous business consultant, Peter Drucker(3), stated that it was the responsibility of CEOs to shape the external environment in which their companies must compete. He was not talking about effecting changes in consumer tastes. He was stating that company executives, to increase the chances of their companies’ success, need to have an impact on public policies that affect their businesses. Each of the topics of this session — taxation, competition policy and trade and investment policies will have a major impact on international business.
As the world economy undergoes another revolution driven by artificial intelligence (AI), Big Data, by new technologies of all stripes, the rules of international trade need to be updated, and the existing WTO machinery needs to be scrutinized to assure that it is sufficient to meet new challenges. Technology moves quickly, improvements in institutional mechanisms do not.
The Members are reviewing whether the existing Committees of the WTO, in which most of the work of the organization takes place, are performing as well as they should or whether changes are needed. Some areas of the administration of the rules from all reports are effective, particularly standards, both for manufactured products and for food safety. All areas deserve review to determine if they are doing what the Members want them to do, and objectively whether the trading system is as well-served as it should be. As technology evolves, it is the responsibility of the WTO Secretariat to use the latest in Information Technology tools to serve the Members and the public. We are on the threshold of seeking to understand more fully how AI and Big Data can be harnessed in this cause. Developments will continue in this regard, and the efforts to adapt in fact need to be perpetual.
As noted, 77 Members accounting for three-quarters of the global economy have signed up to consider rules for Electronic Commerce. This subject, along with Investment for Development, another joint initiative, are advancing toward the drafting of text. The E-Commerce endeavor has become increasingly more important as the moratorium on customs duties on electronic transmissions, renewed every two years, may finally expire in December. What this would mean for trade is unknown, but it could be extremely negative. Data moves across borders, it is carrying with it accounting services, consulting reports, inventory, results of R&D, music, video, technical assistance, in short all of the information that makes the modern world economy possible. Could all of these cross-border transmissions after December 2019 be subject to tariffs in any amount, whatever any government chooses? Clearly not, as other trade commitments would be impaired. But much of this is uncharted territory, and the risks of the unthinkable, a tariff war that the world has not experienced since the Great Depression, would increase.
The WTO is an international organization, not supra-national body. It is what its Members want it to be. They have created rules which they to a very large extent choose to live by. For a WTO 2.0, they will have to decide how effective they want the governance (used in the sense of management not government) by the WTO of the multilateral trading system to be. The three basic functions of governance are legislative (rule-making), settling disputes and executive management. Members are currently taking important action on aspects of rule-making, such as for E-Commerce. They are working actively to bridge the gaps that exist between the United States and its trading partners that are currently forecast to limit the life of the Appellate Body (and to some extent WTO dispute settlement itself) to months. The third element, as to how the executive functions of the organization should be improved, has not yet been the subject of a similar amount of attention.
There is much that remains to be done. The world is not a single market. We are being schooled daily in this rediscovered reality by the British agony of dealing with BREXIT. Were there a global single market, there would be no debate over BREXIT. This British debate – considering the costs to UK GDP of having various economic ties with the continent short of the single market, or no ties at all, is useful for considering the shortfall of the international trading system from what it could be.
While no country wants a global single market, the lost economic activity from not improving freer movement for trade in services, produce and products, advancing the protection of intellectual property and creating new rules for E Commerce, is vast. World trade is characterized by something of a GLOBAL BREXIT GAP. It is entirely possible to close part of the gap. Absent positive change in what the WTO does and how it does it, by the time the WTO is 50 in the year 2045, the losses from not doing so will be a large part of $100 trillion in global economic activity foregone — based on an extrapolation of the UK Treasury’s calculation of difference between a single market and living with the current WTO level of trade regulation.
The response to the G20 mandate has to be a comprehensive list of improvements to the WTO, assembled over time, but with a sense of urgency. No WTO Member is acting as if it wishes to jettison the system. A growing number do say that they want to improve it. The evidence that the WTO is invaluable is attested to by the fact that 22 countries want to join, adding to the existing membership which numbers 164. And none have left. Being outside the WTO is being in a state of nature for trade, and that is a very high risk and low reward situation.
Gaining international consensus on trade policies and rules is neither instantaneous nor free of difficulties. Woodrow Wilson placed his vision of equal trading relations for all participants on the table in the Paris Peace talks in 1919. All subscribed to it, and none implemented it. That vision was only made operational in 1947. The World Trade Organization was not created until 1995. Recognizing the fact that progress is often incremental and painfully slow in the cause of the betterment of human interactions is not a call for patience but for understanding and dealing with reality. That said, there are times when there can be breakthroughs – as in 1947 and in 1995. In the first case, the context was atypical in the extreme, given that it followed the end of an appalling world war. In the second, in 1995, it was simply a matter of making improvements in the system in the face of increasing series of relatively small (although they did not seem so at the time) trade conflicts and coming to the realization that the rules of the trading system left too much uncovered.
The capacity for mischief and worse in relations among countries has been demonstrated repeatedly over the millennia of recorded human history, and in the present. Cooperation, working with others, is harder than complete freedom of action and it can be transient. We need to value what we have, and work not only to avoid backsliding but find ways forward. The system did not come this far to fail now.
Coming back to the advice of Peter Drucker — it is the responsibility of those engaged in commerce — CEOs — to seek to shape the world that they live in for the better. It is not only possible, it has been done before, and it is ever so much more important now. The reason there are wholly new agreements added in the last major negotiation in the 1990s was due to the commitment and tireless work of CEOs who imagined that a better world could be created for trade in services and for respect for intellectual property to foster trade. Business leadership in making improvements in the multilateral trading system is not only possible, it can be an essential ingredient for success.