Too Much Legitimacy Can Hurt Global Trade

Op-ed in the Financial Times

January 13, 2013

The list of candidates to succeed Pascal Lamy as director-general of the World Trade Organization has just been finalized. Astonishingly, not one of the nine aspirants is from the world's four big major trading entities—the United States, Europe, Japan, or China—that together account for more than 55 percent of global merchandise exports. That is both a metaphor for what ails the supervisory body for global trade and a signal of its bleak prospects.

Over time the WTO has become an institution where smaller and poorer countries have acquired a stake and voice. This transformation may seem a welcome sign of legitimacy. But it has gone too far. For its future effectiveness, indeed survival, the WTO needs to be de-democratized, with the large countries reasserting themselves. Otherwise, trade will become more fragmented and friction-prone, undermining the very system from which the smaller countries stand to benefit and slowing global growth momentum.

The multilateral trading system faces an existential threat with liberalization increasingly taking place outside the WTO, either through unilateral reform or via increasingly popular regional trade agreements.

But these agreements did not jeopardize the WTO for the important reason that none of them was between the large trading nations themselves. Ominously, that now stands to change. The United States has thrown its weight behind the Trans-Pacific Partnership which could potentially include Japan. It is also seriously contemplating a transatlantic agreement with Europe.

Soon, there will be a scramble among other large nations to conclude deals with each other. Multilateral trade as we have known it will progressively become history. So too might the WTO's importance and relevance because it was the institution where the United States, Europe, Japan, and China liberalized trade and settled disputes.

Leaving aside the experience of European integration, which had its unique post-second world war imperatives, it is the United States that will bear history's burden for these new developments. The United States, which began the process of undermining the non-discriminatory trading system by negotiating regional agreements with Israel and Canada in the 1980s, will have effectively ensured its completion by embarking on these new agreements.

How can this be addressed? The effectiveness of the WTO as a forum for fostering further liberalization has been undermined by at least two factors. The first is the Doha Round of multilateral trade negotiations. Launched in the aftermath of 9/11, the world has neither been able to conclude nor bury them successfully.

As a result, it has become impossible to move to a more relevant agenda that can expand market opportunities for the private sector and deal with the current concerns of governments. An example is food, where a decade ago subsidies and barriers to imports were the important issue. Today, high prices and barriers on exports are more important.

Similarly, currency manipulation is now a pressing issue—but is not on the Doha agenda. Emerging powers such as China and India must be more active in shaping this new agenda and constructive about liberalization in the WTO or risk their trading partners seeking alternatives to it.

But interring Doha will not be enough to revitalize the WTO's effectiveness. Unlike the IMF which has suffered from a democratic deficit and legitimacy problem, the WTO has suffered from too much democracy and associated blocking powers. A few small countries can effectively exercise their veto if, say, cotton subsidies—an issue of legitimate concern to them but not necessarily of systemic importance—are not addressed.

This veto must be taken away or future negotiations could be stymied by any of the WTO's 157 members. This outcome can be achieved by allowing the larger countries to negotiate among themselves while offering assurances to the smaller countries that they would receive the benefits of such negotiations and be spared any burdens.

Unless this change occurs, the WTO cannot deliver on its key mandate of being a forum for further liberalization. And if it cannot, it will be reduced to a body that settles trade disputes between countries based on rules that are increasingly overtaken by those negotiated under regional agreements.

Recently the legitimacy of the IMF and World Bank was under question because the procedure for selecting their leaders appeared rigged in favor of Europe and the United States. It is perhaps ironic that, in the case of the other part of the Bretton Woods troika—the WTO—the absence of candidates from the most economically powerful countries would be seen as lamentable. But it is, as it signals that the world's largest trading nations have relinquished responsibility in making it an effective and relevant multilateral institution. That is a situation that threatens to make everyone a loser.