The WTO’s troubles began much before the financial crises erupted. Trade protectionism is on the rise but the institutional foundations of international trade deals have been shaky for several years. The Doha round of trade negotiations, commenced in 2001, has repeatedly stalled as states have failed to reach a consensus on key issues. These difficulties have undermined the efforts to multilaterally reduce remaining trade barriers and shifted the momentum of trade liberalization towards bilateral and regional trade agreements.
Why have multilateral trade deals been so difficult to conclude in the past years? The WTO has been hailed as the most effective international institution that has delivered enormous welfare gains to its members since the GATT Agreement was first negotiated in 1947. In 1995, when the contracting parties of the GATT established the WTO and expanded the institution's mandate to include services and intellectual property rights, the continuing progress towards a truly liberal multilateral trade order built around the all-mighty WTO seemed inevitable.
Much has happened since the conclusion of the Uruguay Round. Most importantly, what has complicated the WTO’s ability to facilitate international trade agreements is the fundamental shift in the balance of economic power that underlies international trade negotiations. At the end of the Uruguay Round in 1995, the United States and the European Union were in the position to dictate the negotiation agenda, facing few constraints from the other contracting parties. Now, in contrast, the talks are frequently brought to a halt by developing countries that vocally resist the imposition of US and EU’s trade preferences on them. Most recently this past July, the attempts to revive the Doha Round in Geneva failed due to the opposition of new trade powers, India and China. The US and EU are facing an entirely different strategic situation whereby their power is increasingly constrained by that exercised by the recently empowered emerging economies.
This new economic order that is replacing the American brief hegemony (or, in the field of trade, the shared dominance of the US, the EU and perhaps Japan), has been characterized as the age of “multipolarity” or “non-polarity”, referring to the inability of any single economic power alone to exercise leadership over international economic affairs. In 2001, Goldman Sachs published a provocative report “Dreaming with BRICs: The Path to 2050” , outlining a staggering picture of what the balance of economic power will look like in the coming decades as the BRIC countries – Brazil, Russia, India and China – catch up and even surpass the current G-7. In this new economic order, the US, together with its traditional allies and trade partners, shares the stage with emerging trade powers that constrain what the US can accomplish. And the relative power exercised by the US will only continue to decline in the coming decades.
So how will international economic institutions, including the WTO, adjust to this new economic order? How can it accommodate the emergence of new powers?
A pessimistic scenario suggests that the WTO does not adjust. The institution that rests on consensus-based decision-making might well have reached its limits and is not capable of delivering new benefits to its growing membership. The governments have arguably already satisfied the most salient needs of their powerful interest groups, leaving a dwindling pool of uncertain and contested benefits for states to negotiate in future trade rounds. These remaining benefits are naturally more difficult to negotiate among a growing group of distinctly heterogonous trade powers. This line of developments would marginalize the WTO’s role with respect to future trade liberalization commitments and leave the institution in the role of adjudicating disputes stemming from existing agreements -- with uncertain success. Thus, the best hope for free traders would be to pursue more >modest agreements in bilateral and regional settings.
A more optimistic scenario about the WTO’s future maintains that the gains available through bilateral and regional trade agreements do not make the institution obsolete. >Under this view, protectionism continues to resurge and will span across global markets. New trade barriers are erected. If decades of hard won gains from multilateral trade liberalization are suddenly reversed, states may concede that bilateral and regional solutions will not be sufficient to halt the trend. The unraveling of previous liberalization commitments underline the need for an enforcement mechanism, which is already embedded in the WTO system. In this respect, states have few alternatives to the WTO. This view predicts that the WTO will remain the central pillar of the world trade system.
Even under the optimistic scenario, however, it is hard to imagine that the WTO could retain its relevance without undergoing significant institutional reforms or adopting changes in ways trade deals are negotiated. First, grand bargains akin to the one reached in the Uruguay Round seem increasingly unlikely in the future. A “single undertaking” whereby all agreements are concluded by all states are almost unimaginable in the present environment. Any such comprehensive negotiation agenda is likely to lead to the lowest common denominator that the US, EU, Japan, China, India and Brazil and several other new key players can agree on. At the same time, it is difficult to see how such diluted agreements would offer any net gains that would justify long, complex and costly negotiations that big WTO rounds involve. Without a prospect for substantial gains, states are likely to shift to other institutional fora where agreements are faster, cheaper and more certain to reach. A better strategy for those willing to preserve the WTO’s central role would thus be to relax the single undertaking approach and move towards more plurilateral agreements among a smaller group of like-minded trading nations. Whether this would fragment international trade order any less than the ongoing move towards bilateral and regional trade agreements, however, is less clear.
In any event, the old model where the US and the EU determine the direction of the trade talks is no longer sustainable. International institutions cease to be relevant when the decision-making structures no longer reflect the distribution of power among the member states comprising the institution. The difficulty today is that there are too many trade powers with too divergent preferences for there to be effective leadership for the WTO. And without effective leadership, the institution of 153 members is increasingly without a direction.