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Rediff.com  » Business » Whither Trade Organisation?

Whither Trade Organisation?

By Subir Gokarn
December 19, 2005 17:13 IST
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The declaration of the Hong Kong ministerial meeting of the World Trade Organisation would have been released during the day on Sunday. Unfortunately, publication deadlines did not allow me to delay writing this column till it was put out, so I shall have to speculate on its tone and contents to provide a backdrop to my arguments.

Going by news reports over the last five days, it is reasonably clear that no significant breakthrough will be made.

There appeared to be some progress towards a commitment to phasing out subsidies on agricultural export by the US and the EU, but with a relatively long timeframe. In reciprocity, the developing economies seemed to be willing to progressively reduce tariffs on goods, applying the so-called Swiss formula, in which higher current rates would be reduced more rapidly.

Even if the declaration does contain some indications of commitments on these two fronts, it will seem like an incredibly low return for all the effort that a ministerial meeting involves--using a sledgehammer to swat a fly might be an appropriate metaphor.

In fact, since the Uruguay Round of trade talks concluded in 1994, establishing the WTO in 1995, almost all the ministerial meetings are more remembered for the loud and colourful protests by a wide range of anti-globalisation groups than for any substantial movement towards a genuinely more free trade environment, which is perceived by the majority of the players as a positive sum game.

The one exception to this, some would argue, was the outcome of the Doha meet in 2001, when the concerns of developing countries took centre stage for the first time since the initiation of the current regime.

The Development Round, as it was labelled, was supposed to more effectively address the conflicts and trade-offs between basic requirements such as food security, the degree of protection required to sustain growth and economic diversification, and moving towards a genuinely free trading environment for goods, services, capital, labour and knowledge.

Four years later, however, it is pretty obvious that, while "development" may remain an explicit objective of the process, there is little clarity or agreement on what the system needs to do to accommodate it.

So, is the failure of the Hong Kong meet the end of the road for the evolution of the global trading regime, as some participants have claimed? Purely from the perspective of timeframes, one would hardly think so.

Let's remember that the General Agreement on Trade and Tariffs (GATT), the framework that preceded the WTO and was subsumed into it, persisted for 50 years, the last seven of which it took to arrive at a successor framework and, that too, with lingering doubts and scepticism. It obviously took some time for the more serious doubts to be substantiated with experience and it was not until the Seattle meet in 1999 that concerted efforts to review that Uruguay Round agreements were made.

It seems highly unlikely that review and reorientation will happen in so short a period of time. More so, when the number and relative bargaining power of players change even as the game is on.

But, beyond this, there are strong reasons to believe that we do have the makings of an enduring framework. At its best, it will facilitate the movement towards an efficient global location of production, supported by reasonable domestic safety nets.

At a minimum, it will consolidate on the gains that have accrued so far and prevent any reversal that may be motivated by its failure to address the concerns still persisting. In short, what was said about democracy--that it is the worst system of governance we have, except for its alternatives--is equally true for a multilateral regime such as the WTO.

Three factors will have a significant influence on the boundaries within which the system operates over the next several years.

The first is the rather obvious benefits that the developing countries now classified as "emerging" by the global investment community have experienced in the increasingly open trade environment for manufactured goods. The most visible macroeconomic manifestation of this is the steadily declining rate of inflation in these economies, despite accelerating growth. Competition from imports is a major contributor to this process.

Yes, these benefits have been at the aggregate level and many groups of people may not have had the flexibility to redeploy themselves in response to changing incentives. But, the appropriate response to this is to create appropriate safety nets to buffer these groups, rather than denying the entire country the benefits of the new regime.

The second factor is the apparent willingness of so many countries to enter into regional agreements. Generally speaking, these indicate two positive traits amongst participants. The less affluent countries typically open up much more than they seem to be inclined to in the multilateral process.

And the more affluent ones seem to be a little more sensitive to the domestic distributional concerns of their poorer neighbours. In other words, regional agreements seem to find it easier to achieve the trading environment that the larger system aspires to. While this points to some structural problems with the multilateral system, it also underlines that fact that most countries are not all that averse to opening up within a somewhat less intimidating framework.

The third factor is the significant distancing of countries in Sub-Saharan Africa from the emerging economies. It is simply meaningless to think in terms of a universal and homogeneous "development agenda." The G-110, which has been formed in Hong Kong, has all the makings of a non-starter.

The equal participation of this set of least developed economies in the multilateral framework is analogous to an under-12 cricket star being included in the test team. The development problems and challenges of these countries require much more radical solutions, assuming that some are available.

Trade concessions may be a part of them, but will not be of any use if they are disconnected from the other components of potential solutions. The processes of the WTO would, I suspect, be a little more manageable if the teams on either side of the "emerging" vs. "affluent" debate were more homogeneous and cohesive.

To sum up, the biennial events of the WTO are similar to our own political outcomes of hung parliaments or assemblies. As frustrating as they are, they simply do not justify giving up on the process.

The author is chief economist, Crisil. The views here are personal.

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