The WTO: A "Fragile" Body under Attack by Protectionist Policies in the U.S. and EUPublished: July 27, 2005 in Knowledge@Wharton
If anyone is qualified to speak about world trade, it's Peter Sutherland, chairman of BP and Goldman Sachs International. Sutherland was founding director general of the World Trade Organization and director general of GATT (The General Agreement on Tariffs and Trade). He also served as attorney general of Ireland and as the EC Commissioner responsible for competition policy.
In his opinion, the World Trade Organization -- a rules-based agency set up in 1995 to settle trade disputes between nations and to promote open borders for global markets -- is in danger of being subverted by the protectionist policies of developed countries toward their domestic industries, specifically textiles and agriculture. And yet undermining the WTO would be "a fatal and terrible mistake."
In offering his perspective on the WTO, Sutherland looked at the years following World War II when Western societies tried to create a structure within which "commerce and development could take place in a way that avoided the conflicts that had been part of the history of the Western world up to that time." In the immediate post-war period, Sutherland said, "the European Union became a reality."
But the EU was only part of the plan "to set up multilateral structures on a global basis." Also created were the World Bank and the International Monetary Fund under the umbrella of the United Nations. A "third rung in that ladder" was to be the International Trade Organization, but the ITO was defeated by the U.S. Congress. In its place came the GATT, whose mandate was to begin developing a multilateral trading system -- one based on negotiating trade agreements with many nations at the same time, as opposed to bilateral trading partnerships.
Ten years ago, the GATT was finally superceded by the WTO, a truly global trade institution conceived of as "an independent dispute settlement mechanism that allows a country to take proceedings against another country," followed by "an objective adjudication which cannot be blocked," Sutherland said. WTO rulings are, in essence, "very public statements of wrongdoing against parties which have infringed their trade obligations." The system also "allows the other party the right to retaliate. ... The GATT system had not allowed that type of clear adjudication" -- the mechanism it did allow required 100% consensus, so a ruling could be blocked by the very same party that had breached the law. That distinction, Sutherland said, "is key to understanding what the WTO is about, and key also to the fragility of the ruled-based system that we now have."
The number of cases brought before the WTO since its creation -- 300 -- is "staggering," Sutherland noted. Those 300 cases have involved, in one way or another, 100 of the WTO's 150 members. But by far the biggest offenders, "because they are by far the biggest trading partners ... have been the U.S. and the European Union."
Rumsfeld in China
The WTO's rule-based system -- which may seem "arcane, complex and incomprehensible," perhaps because the documents that created it totaled to 22,000 pages -- is central to "the development of the new world [that grew out of] the collapse of the Iron Curtain," according to Sutherland. "The essential debate about the free market economic system, that it assures the greatest possible efficiency and innovation, is at least in theory accepted globally."
That acceptance means trade and commerce can be used "not merely as a generator of prosperity and growth but also as a system which can mitigate the tensions between peoples that have created wars for centuries." In other words, when nations disagree on geopolitical issues, they have incentives to find peaceful solutions because their economies are so intertwined.
For example, noted Sutherland, when U.S. Secretary of Defense Donald Rumsfeld, on a recent trip to the Far East, criticized China for its weapons arsenals, and China criticized Rumsfeld for his criticism, "we have a least some possibility that the excesses of rhetoric on either side can be reduced by the substantial degree of investment across borders that has been created largely as a result of a more integrated global trading system."
And so "the $46 billion that was invested last year from outside China into China," Sutherland added, "begins to act as perhaps not quite a tipping point, but a point which creates a certain concern, not just in Wal-Mart but elsewhere, about the dangers of disrupting trading and investment relations through political tension."
In the context of these developments, said Sutherland, the issue of textiles and U.S. and European protectionism is especially serious. "We told the Chinese, the Indians and the Bangladeshis" that beginning January 1, 2005, there would be no more protection of the U.S. and European textile industries. "And then January 1 comes and Europe and the U.S. suddenly say, 'Sorry, we have this irresistible political pressure and we won't comply with our obligations.'"
Trade pressures are further aggravated by the EU and U.S.'s continued subsidization of their agricultural industries. As many observers have noted, the U.S. government spends billions of dollars subsidizing American farmers, which depresses the world price of certain commodities that are critical to the economies of developing countries. Add to this Europe's own trade tensions "across the Atlantic," Sutherland said. "Of those 300 cases I mentioned, the vast majority have been trans-Atlantic crossfire, which others have joined in from time to time.
"And now we have the Airbus/Boeing dispute, although I shouldn't say 'now'; we have had this dispute, it seems to me, from the beginning of history. It never stops. It just goes up and down in waves. Perhaps this should be resolved outside the dispute settlement mechanism rather than imperiling this fragile institution that we have."
Egypt, India and Sub-Saharan Africa
In describing the WTO, Sutherland emphasized that it was not "conceived as a development agency but as a place where trade negotiations can take place ... and be properly monitored and developed." Having said that, he added, "for a long time the main trading negotiators -- Europe, the U.S. and Japan -- more or less made agreements that they wanted to make and ignored responsibilities to the developing world, particularly in textiles and agriculture. But even more seriously was their failure to extract from the developing countries the commitment to liberalization that was in [the poorer countries'] best interests."
He offered an example. During the post-war GATT period, the Europeans and Americans "told the Egyptians, 'Look, you stay on our side during the Cold War and you needn't bother about liberalizing your economy. We won't rock the boat too much.' They said the same thing to India." As a result, "in per capita GDP, Korea -- a somewhat reluctant and belligerent fighter itself in the world of multilateral trade negotiations -- had the same GDP as Egypt in 1955, but today it is seven times larger." In addition, India "gets about one tenth of the foreign direct investment that China gets.... We have not merely allowed and countenanced this situation to develop; we were active participants in it. So it wasn't that the developing countries were pushed too quickly -- they weren't pushed at all."
The danger of the Doha development round -- the latest round of world trade talks which began in Doha, Qatar, in 2001 -- is that it "perpetuates that type of thinking .... It has been translated into meaning, 'You give and we take. We keep our protections.'" That, Sutherland said, is what's wrong with the global trading system.
And what, he asked, have globalization and the WTO done for Africa? Not much. While statistics show that overall, developing countries have benefited from trade, "that has been largely in the Far East, China in particular. It hasn't happened in Africa." But the failures in Africa aren't the WTO's fault, Sutherland argued. The trouble with sub-Saharan Africa, "which is a blight on the moral conscience of mankind, is that it hasn't been able to participate in globalization. It hasn't got the infrastructure, the training, the education, the capacity. And their governments are riddled with corruption, with no interest other than ... the closest offshore account. That is the problem."
The WTO does have a role to play, but it's to ensure that negotiation is conducted in a reasonable, fair way and that the rules of the game are applied. "What it shouldn't be doing, but what it has been doing since its inception, is undermining its own basic principles."
To illustrate his point, Sutherland noted that the "fundamental principle of the multilateral trading system is the principle of most favored nations, which says that" a country has to give the same terms of trade to all its trading partners that it gives to its most favored one. "So if you reduce your tariffs [for one country's imports] from 50% to 5%, you do it for everybody, not just for one. What in fact has happened, if you take the EU as an example, is that out of the 150 members in the WTO, only nine of them operate on the basis of most favored nation."
The U.K.'s "relationship with the U.S. is a most favored nation relationship, as is Japan, Australia and Canada. All are most favored nations." Meanwhile, the rest of the world has "special and differential treatment." But in some cases, countries that receive this special and differential treatment end up "producing goods that are not necessarily best suited to their economy and in which they do not have fundamental, competitive advantage .... This situation also creates a blockage against global liberalization, because the country that has the special and differential treatment says, 'Wait a second, if we have overall tariff reduction, my special treatment evaporates. Everybody now is the same and I have competition coming in that I thought I had obliterated with my special treatment.' This is another example of the EU and the U.S. undermining the basic principles of a structure which we set up."
The Future of Global Trade
So where do we go from here? "I think that when the WTO was created, the biggest threat came from the anti-globalizers," Sutherland noted. "They said that globalization was bad because it reduced protection for the developing countries, which will just get trampled. But all of the evidence points to the contrary, and I think the anti-globalizers have lost their case. They now recognize that in fact the most important [foundation] for their moral concerns, which I applaud, is a rules-based system. And if they undermine that, they are destroying the most valuable multilateral development in global terms since the last war. It has been the most noble political and economic ideal that this old continent has ever created. So bringing down the WTO, destroying multilateralism or destroying the EU would be a fatal and terrible mistake. The risk today, the real risk now, is the protectionism that I can see coming down the tracks in the U.S. and EU."
The reason for the 'no' vote in France was "fear - fear of globalization, fear of trade opening, fear of a new world, fear of the movement of people from Central and Eastern Europe and further afield into Europe and so on," Sutherland said. "Fear is driving bills through [the U.S.] Congress to attack and undermine the trading relationship with China. Fear is driving a new wave of protectionism. And my great fear is that in five or ten years' time, we will have a Europe behind walls, perhaps even behind common walls with the United States."