The WTO's governance functions in the era of preferential trade agreements

18 April 2016

The WTO’s governance functions might be negatively affected by the proliferation of preferential trade agreements. Should this happen, the shift would disproportionately affect small trading nations.

 

Returning from this year’s World Economic Forum in Davos, Director-General of the World Trade Organization (WTO) Roberto Azevêdo reported enthusiasm among government and business representatives about working with the WTO. Despite the non-reaffirmation of the Doha Development Agenda (DDA), Azevêdo confirmed openness to talk about the DDA’s pending issues, in a manner that is inclusive of all members, businesses, and civil society organisations, and to do so in a Geneva-based policy process that “has more frequent political guidance”[1].

Meanwhile, major WTO countries are focusing efforts on negotiations taking place outside of the multilateral trading system. In this context, one pertinent question is how the WTO will transition through the era of preferential and megaregional trade agreements. Put differently: how will the ongoing fragmentation of the global trading system into bilateral and regional blocs, built on a baseline of existing multilateral rules, affect the WTO’s functions in global trade governance?

In this article, I present reflections on how (1) transparency and dialogue, (2) adjudication and (3) negotiation in the WTO may evolve under the current trend of preferential trade agreements. Rather than predicting the WTO’s institutional and political future, I provide food for thought in the ongoing debate about the benefits and challenges of trade multilateralism in the twenty-first century. I suggest that although the WTO's governance functions will remain essential to the global trading system, and particularly for small trading nations for whom they constitute a global public good, they may suffer some damage in their ability to operate as long as trade governance centres on preferential deals.

The analysis is informed by 104 interviews with members of trade policy communities in Brazil, Canada, China, the EU, India, South Africa, the US, and Geneva held between March 2014 and April 2015. Together with Professor Ann Capling from the University of Melbourne, we interviewed trade officials, business representatives, trade unionists, civil society representatives, and academic experts on their views about the WTO and the future of multilateral trade governance[2].
 

Transparency and dialogue

Providing for transparency and dialogue among trading nations is a key WTO function in global trade governance. The WTO’s Trade Policy Review Mechanism (TPRM) serves to periodically assess trade policy measures taken by individual WTO members. In addition, trade officials in Geneva maintain close working relationships on a daily basis, allowing them to discuss global economic events and potential trade policy responses.

Interviewed practitioners confirmed that the close contact and interaction through member states’ representations in Geneva is invaluable for the formulation of trade policy at the international level and at home. Continuous engagement among members of trade policy communities further affects the level of trust and good faith that is necessary for international cooperation to succeed.

In an era where global trade rules increasingly look like a spaghetti bowl, TPRM will become more, rather than less, important. This is particularly true for trading nations that do not possess the institutional capacity or level of private sector organisation to keep abreast of evolving trade policies in their key export destinations. In addition, dialogue among trade policy communities can nowhere be as efficient as in Geneva. Even if there are stark differences in staff numbers among members’ WTO missions, one forum for policy dialogue exists that brings together the global trade policy community in one physical location.

However, interviewees further suggested that even well-resourced trading nations today allocate less personnel to the multilateral sphere, due to the fact that preferential deals absorb a high amount of human and financial resources. As experienced negotiators warned, the quality of representation in Geneva not only depends on numbers, but also on the quality of staff. There is a risk that in the era of preferential agreements that countries stop sending their best and brightest to Geneva. The quality of dialogue and exchange among the global trade policy communities could subsequently drop, as brains and money drain to the realm of preferential negotiations.
 

Adjudication of trade disputes

The Dispute Settlement Mechanism (DSM) is one of the WTO’s prime achievements. Trade disputes among nations can be resolved in an adjudication process that is in principle open to all WTO members and made effective through the possibility of sanctions. Despite the proliferation of preferential trade agreements, members’ enthusiasm for WTO dispute settlement appears unbroken to date.

Similarly to the WTO’s dialogue function, this may at least partly stem from the institutional limitations of preferential trade agreements when it comes to resolving trade disputes. Although preferential deals contain dispute settlement clauses often modelled on the WTO DSM, many do not create an institutional architecture to support the day-to-day operation of trade courts. Some interviewees pointed out that preferential agreements therefore lack the administrative and procedural infrastructure required to run effective, fair and transparent trade law adjudication. As a matter of fact, the ever-growing number of disputes filed[3] under the DSM clearly points to the centrality of the WTO’s adjudication function in global trade governance.

Yet, the global adjudication architecture for trade is fragmenting under the rule-making diversion of preferential agreements. Moreover, there has long been a concern that the WTO DSM will crumble under the pressure of an ever-increasing volume of casework. According to one of our informants, the number of cases that the WTO Secretariat can realistically support was estimated to lie at approximately twelve complaints a year. In the current state of affairs, strains on financial and human resources resulting from a higher number of cases are one important reason why disputes take longer to resolve on average in the WTO. Another perceived risk is that the Dispute Settlement Body could be pushed to exceed its remit by filling the trade rule book through judicial law-making, which is not foreseen in WTO agreements.

Nonetheless, preferential agreements only provide legal recourse for contracting parties, although their rules produce effects on trade flows of non-members. For small trading nations that are party to preferential agreements, limits on institutional capacity may further turn out to be a bigger obstacle to accessing legal recourse than in the WTO, where the Secretariat provides some administrative and procedural support. Like under transparency and dialogue, the loss of an institutional support structure in trade adjudication can be expected to affect small trading nations disproportionately.
 

Trade negotiations

Interviewees indicated that they continue to see the WTO as the preferred forum for international trade negotiations in principle. Its membership of 162 countries and multilateral character can provide the world with one unified set of global rules for trade. Irrespective of their opinions on the DDA, interviewees strongly shared the view that the multilateral table will continue to hold relevance in trade governance for these reasons.

For the foreseeable future, plurilateral negotiations on new issues, such as environmental goods, and the left-over issues of the DDA are set to animate rule-making activity in Geneva. To the extent that the GATT and the WTO were gradually built on a series of plurilateral agreements, codes and decisions, the approach seems tried and tested. Given the high value trade policy communities attach to multilateralism, there is an assumption that plurilateral concessions can be multilateralised in the long run. The risk remains that plurilateral agreements undermine core multilateral principles of inclusiveness, non-discrimination, and transparency. This partly depends on whether plurilaterals will apply on an MFN-basis.

Whether and how the results of preferential and megaregional agreements can be multilateralised will also affect the shape of the global trading system to come. On the technical level, there is concern about the increasingly diverse and multifarious nature of the network of preferential agreements. On the political level, trade has become an economic policy priority for the majority of countries over the last three decades, partly as a result of WTO membership. Trading countries, big and small, today hold an expectation of being involved in setting the rules regulating their trade flows. A number of interviewees expressed the view that these technical and political evolutions could produce obstacles for lifting the multilateral baseline.

The binding nature of WTO DSM may further affect the general political environment of trade negotiations more than is usually acknowledged. Interviewees reported that the enforceability of trade rules has made negotiators cautious about ambiguous language in trade deals, precluding the use of creative ambiguity as negotiating technique in trade. This may imply that preferential agreements could constitute the privileged forum for trade negotiations for some time to come.
 

Conclusion

In global trade governance, there is a clear need for transparency and dialogue, adjudication of trade disputes, and the negotiation of new rules. As a quasi-universal one-stop shop for these functions, a multilateral body like the WTO remains the ideal in global trade governance.

While the global trading system can theoretically operate with a multilateral baseline on which preferential agreements build, limitations to financial and human resources in trade policy communities mean that one avenue is in practice pursued at the expense of another. Due to the multiplication of trade policy forums, there is a risk that the WTO’s governance functions will suffer under preferential agreements.

The shift would disproportionately affect small trading nations, for whom the WTO governance functions constitute a global public good that is not replaced by the network of preferential agreements. In addition to pending DDA issues, global trade policy communities need to direct their attention to these problems, in order to secure trade and sustainable development for all.

Author: Silke Trommer, University Lecturer in Global Sustainable Development and World Politics at the University of Helsinki. She is co-editor of Expert Knowledge in Global Trade (Routledge 2016, with Erin Hannah and James Scott) and accompanying Global Policy blog (http://bit.ly/1SytBIX).


[1] WTO, “Azevêdo welcomes optimism on the WTO in Davos”, 23 January 2016. https://www.wto.org/english/news_e/news16_e/dgra_25jan16_e.htm.

[2] The project was funded by the Australian Research Council.

[3] See : “Annex to Director-General's Statement at the DSB Meeting of 28 October 2015 : Current Dispute Settlement Activity”, 28 October 2015. https://www.wto.org/english/news_e/news15_e/dsbannex_e.pdf.

 

 

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