Examining Efficacy of World Trade Organization

The age-old debate between the advocates and the detractors of the WTO and similar international trade-mediation organizations has always been about the efficacy of these organizations in today’s world.

Some claim that these organizations are nothing more than a bureaucratic behemoth; a throwback to the times when an economic superpower could bully and cajole relatively economically weaker nations into acceptance of inferior terms of trade. Some also claim that in today’s world, with the dominance of regionalism and multilateral agreements within and between economic regions, the notion of economic bullying by a superpower is as outdated as the very organizations that purportedly defend it.

The World Trade Organization

The WTO came into existence on the 1st of January 1995 under the Marrakech Agreement, replacing the General Agreement on Trade & Tariff (GATT). The primary objective of the WTO when it came into existence was to supervise and liberalize international trade. However, with the passage of time, it also became a mediatory body in cases of disputes between countries that were party to a WTO multilateral agreement. As of 2008, there were 153 member nations in the WTO, and 30 observer nations, who were awaiting membership. This ensured that when it came to the dispute resolution process, the WTO had sufficient negotiating power, by virtue of the strength of its membership.

The Doha Round

The Doha Round was the most recent trade negotiation round of the WTO, originating in Doha, Qatar in 2001. It then had subsequent ministerial-level negotiation rounds in Cancun, Mexico in 2003, and Hong Kong in 2005, accompanied by related negotiations in Geneva in 2002, 2004 and 2006, and Paris, France in 2005, and Potsdam, Germany in 2007.

Objective:

The overall objective of this round of the negotiations was to lower trade barriers around the world, and increase international trade. The specific agenda of the Doha Round encompassed 20 topics, with the following 3 main issues:

Agriculture – The Doha Round was dominated by discussions over agriculture. Agriculture is particularly important for developing countries, as a vast majority of the population in developing countries lives in rural (and primarily agricultural) areas. The first proposal in Qatar in 2001 called for the end agreement to commit to substantial improvements in market access; reductions (and ultimate elimination) of all forms of export subsidies; and substantial reductions in trade-distorting support. [1]

The European Union and developing countries, led by Brazil and India pressed the United States of America to reduce trade-distorting support to domestic agriculture. USA insisted that the EU and developing countries limit the number of import-sensitive and special products that were exempt from cuts, and that they substantially reduce tariffs.

However, disagreements still abound over these contentious issues, and were one of the main reasons for the eventual failure of the Doha Round.

Non-Agricultural Market Access – This was meant to address the case of pharmaceutical products in case of health emergencies in developing countries. Under the terms of the TRIPS (Trade Related aspects of Intellectual Property Rights), countries or companies with an patent to produce a particular pharmaceutical drug were to compulsorily make them available to developing countries in case of an emergency, such as during the SARS outbreak, or the H1N1 epidemic. The Doha Round aimed to clarify some of the provisions of the TRIPS, as many developing nations felt the language wasn’t clear enough.

Special & Differential Treatment – In the first Doha Round, the ministers had affirmed that developing countries would be accorded special and differential treatment as compared to developed countries. However, there was a divide along the developed and developing countries on this issue. Developing countries wanted to negotiate changes on the S&D provisions, and speed up deadlines, whereas the developed countries wanted time to study the S&D provisions, and open-ended deadlines.

Outcome:

Talks in Geneva in July 2008 eventually stalled and broke down, after USA and an assortment of developing countries led by India and China failed to reach a compromise on agricultural import rules. In particular, there was insoluble disagreement between India and the USA over the special safeguard mechanism (SSM), which was meant to protect farmers in developing countries from price, falls or import surges, by allowing the governments of these countries to import a special tariff on agricultural products.

Multilateralism & Bilateralism

The definitions of multilateralism and bilateralism are manifold. For the purposes of this paper, we will limit our definition based on the number of countries party to the agreement: in case of bilateralism, there are only 2 countries involved in a trade agreement, whereas in the case of multilateralism, there are 3 or more countries party to the agreement.

Advantages of Multilateralism & Bilateralism

Multilateralism has often been called the weapon of choice for the developing country. While an economically weaker nation may be bullied by a stronger nation into accepting terms of trade that are not entirely beneficial to the weaker nation in a bilateral agreement, this would not take place in a multilateral trade agreement. By forming a ‘trade bloc’, weaker nations can band together to increase their collective bargaining power, and therefore force the erstwhile stronger nation into at least considering equitable terms of trade. In case of a multilateral agreement, the economic size of a country (in theory) fails to have any bearing on the outcome of any trade negotiation, as it is balanced by the collective economic strength of the other negotiating nations.

In 2010, the Environmental Protection Agency (EPA) in the USA attempted to pass a law to cancel a 30-year federal import-tariff subsidy on corn-ethanol imported from Brazil. This would ensure that corn-ethanol would now be more expensive as compared to other sources of energy, leading to a drop in imports, directly affecting the Brazilian industry. As Brazil did not possess the economic clout to take on USA directly, it took the case to the WTO, who then stepped in to mediate in the negotiation. Had Brazil not been a part of the WTO, it would have been forced to accept the American terms, and suffer losses at home due to the vagaries of an economic super-power with far greater bargaining power.

Multilateral agreements can help in far more than simply serving as a stronger bargaining tool. They can also protect countries from ‘dumping’ situations, such as when Taiwan was ‘dumping’ plastic retail bags in the USA at prices far below cost to create artificial competition, and drive out competitors from the market. Due to the WTO’s strict Anti-Dumping Agreements, the USA was able to issue stringent import tariffs on these products, and prevent the situation from escalating further.

However, despite the emergence of high profile multilateral organizations like the WTO and UN, most trade negotiation is still performed at the bilateral level. Bilateralism affords nations a degree of flexibility and ease of negotiation not accorded by the compromise driven system of multilateralism. In addition to this, bilateralism allows disparities in power, resources and technology to be exploited by the stronger nation to their advantage, thereby allowing them to dictate the terms of trade, unlike in multilateralism, where the one country one vote rule applies. One of the best examples would be the Canada-USA free trade agreement, which has shaped the open trading system in North America.

Disadvantages of multilateralism & bilateralism

While obviously both multilateralism and bilateralism present many advantages, there are inherent disadvantages to both systems.

In the case of multilateralism, negotiations can often be protracted to the point where they are no longer relevant to the current world economic situation. The best example would be the Doha Round, where although negotiations began in 2001, they could not be resolved even after 7 years!

Multilateralism also removes the element of bullying from the negotiation, which while benefiting the weaker nation removes the strategic advantage of the nation with the stronger bargaining power.

In case of bilateralism, the disadvantage is the polar opposite of multilateralism. While it benefits the country with stronger bargaining power, the country with lesser bargaining power is forced to accept inferior terms of trade in the course of the negotiation.

Conclusion

While both multilateralism and bilateralism have a unique set of advantages and disadvantages, it is clear that they are suitable to be applied in very different cases.

Therefore, we could say, in theory, multilateralism suits developing countries, as it affords them a platform to band together, and negotiate for better terms of trade, whereas bilateralism on the other hand better suits developed countries, as they would have far greater bargaining power to mould terms of trade to their advantage.

However, this conclusion is based purely on theory, assuming those non-economic factors such as technology, military power and other socio-political factors are not taken into consideration when defining the bargaining power of a country. In reality, all these factors make trade negotiation a complex blend of both multilateralism and bilateralism.