The Multilateral Trading System: A Response to Its Challengers

In order to avert the risk of total financial collapse and global depression, monetary and fiscal policies have been activated in many countries in ways not seen in a long time. However, it is yet to be known whether those massive policy interventions will suffice to avoid the worst declines in output and employment suffered since the 1930’s. Suddenly we realise that we lack the conceptual and empirical frameworks to prescribe with a reasonable degree of confidence what and how long it will take to overcome the most dangerous phase of this crisis. Neither do we know what the exit strategy will be once the emergency has been overcome. Quite frankly the economics profession has been deeply embarrassed by recent events.

Protectionism could derail recovery efforts

What we do know with certainty is that protectionism could derail all those efforts applied on the fiscal and monetary fronts. Despite the multitude of statements against protectionism made by leaders and their finance and trade ministers in recent months, it would be irresponsible not to recognise that the mercantilist spectre is knocking at everybody’s door. It hasn’t taken long to confirm again that pledges and actions are not necessarily consistent in this crisis. Interest groups everywhere are already working the system to take advantage of the global recession and advance their protectionist agendas, something they haven’t been able to do for a full generation. Unfortunately, as the recession gets worse, protectionist forces will become even stronger. A perverse cycle of feedback between recession and protectionism is no longer an historical reminiscence of the 1930s but a possible scenario now - hopefully still with a low probability - in the months and years to come. We could soon find ourselves regretting how little, or in fact nothing, states have done to improve the institutions created mostly in the second half of the 20th century to manage the process of global integration. For it is a fact that in the last ten years as globalisation accelerated dramatically, the process of international reform stalled.

Multilateral trading system: A victim of indifference

Sadly, the multilateral trading system has been a major victim of states’ indifference to international reform. Given how much global trade and investment has propelled world economic growth over the last decade, it is hard to believe how little effort has been applied to updating the multilateral trading system. For years the multilateral trading system has been challenged, almost under siege, on many fronts. It has been challenged in the first place by the failure to honour the Doha Agenda and conclude the Round successfully. The story of unaccomplished deadlines and the repeated collapse of the talks are so well known that doesn’t need to be repeated here. The system has been challenged not only by what countries have failed to do, but also by the damage they have done through the proliferation of discriminatory trade agreements (DTAs) that for the most part run head on against the essential principles of reciprocity and non-discrimination upon which should rest the entire system. DTAs have taken attention and political capital that could have been used to improve the multilateral system and, by aggravating the discrimination instilled in trade preferences, they have made the hurdles to achieve multilateral agreements much higher. Furthermore, DTAs have introduced unnecessary and costly complications to the practice of international trade through the rules of origin that unavoidably accompany them.

The multilateral trading system’s value and suitability for pursuing effective trade reform has been questioned even by true free traders. Observing both the rather low proportion—one-fourth—of total trade liberalisation achieved multilaterally over the last quarter of a century as well as the failure to conclude the Doha Round, a few otherwise unquestionable supporters of globalisation concluded some time ago that the WTO should be deemphasised as an instrument of trade liberalisation and, rather, that this liberalisation should be allowed to proceed along unilateral or preferential routes. In this vision, instead of helping to build a liberal international order, the WTO, with its complicated agenda and institutional architecture could, in fact, be retarding its completion.

This view is wrong. It’s true that a country should not need to expect reciprocity to harvest the benefits of freeing its own trade. But unilateral liberalisation is not sufficient to provide trade partners with the certainty and stability offered by market openings delivered through the multilateral system. Nor does it help to solve commercial disputes. It has also failed to provide reform in sectors, like agriculture, of great interest to producers of developing countries and consumers of developed ones. Furthermore, it should not be ignored that sometimes creating the domestic political conditions for trade reform truly does require the reciprocity supplied by multilateral negotiations, particularly in the presence of powerful domestic vested interests that are against the liberalisation policies.

The present crisis will give ample evidence, for better or for worse, that multilateral liberalisation is irreplaceable. The fact that it has not made significant progress since the conclusion of the Uruguay Round is not proof that it is not needed —or that it is not possible.

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