Summary:
– After years of failed negotiations, the Bali Agreement within the framework of the WTO should usher in a new era for the global trading system.
– Negotiations had stalled mainly because of the large number of member countries and their differences, making it hard to reach an agreement that all members would have to accept for it to be valid.
– The negotiations resulted in a minimal agreement on three issues: trade facilitation (limiting administrative barriers), agriculture (temporary constitution of food stocks of basic commodities), and development (customs duty exemptions for certain products from least-developed countries).
– This agreement presents a significant opportunity but remains insufficient in the face of current challenges, particularly with regard to increased competition from bilateral agreements.
The Bali (Indonesia) agreement of December 7, 2013, resulting from the 9th WTO Ministerial Conference, comes after a long period of deadlock in the multilateral trading system. In fact, no comprehensive trade agreement had been reached for nearly 20 years. This agreement comes after the election of the new Director-General of the WTO (Roberto Azevedo) and several weeks of negotiations. Potentially, this agreement could mark the beginning of a new dynamic in negotiations, even if its scope has been deliberately minimalist in order to avoid a new deadlock that could be fatal for this organization.
Key facts about the WTO
The WTO is the successor to the GATT and its scope of action is clearly defined. The WTO (World Trade Organization) was created in 1995 and took over from the GATT (General Agreement on Tariffs and Trade), which was a transitional agreement signed in 1947. While GATT applied only to trade in goods, the WTO also covers trade in services and aspects of intellectual property rights that affect trade. The WTO is governed by an Interministerial Conference composed of representatives from all member states and assisted by a General Council.
The WTO does not have supranational powers. In other words, no country can be forced to accept rules to which it has not subscribed. Indeed, one of the specific features of this international organization is that it is based on the principle of consensus among member countries and on the « one country, one vote » rule. Ultimately, the combination of these two rules gives each nation a de facto right of veto and makes it very difficult to reach an agreement. However, the dispute settlement procedure (via the Dispute Settlement Body – DSB) gives the WTO the power to authorize countries to sanction others if they have not complied with the rules.
The WTO is the institutional embodiment of the multilateral trading system. The WTO’s multilateralism aims to establish common rules between several states. In practice, this involves inter-state negotiations in order to collectively enact rules. Within the framework of the WTO, member nations have made a number of commitments: on the one hand, they must comply with agreements binding their trade policies and, on the other hand, they must enter into negotiations to liberalize world trade (reducing tariff barriers—customs duties—and non-tariff barriers—standards, etc.).
There are two fundamental principles of WTO multilateralism:
– « reciprocity, » meaning that a country agrees to open its domestic market to the extent that other countries agree to do the same;
– the « most-favored-nation clause, » meaning that the trade advantages granted by one country must benefit all other member states, thereby preventing discrimination.
Until the Bali agreement, the WTO’s multilateral trading system was in crisis. Although this crisis has not yet been overcome, short-term fears about the WTO’s ability to develop international trade are less pronounced and this agreement may represent an opportunity to give new impetus to global trade.
Reasons for the deadlock in the WTO’s multilateral trading system
First, it is important to highlight the technical and mechanical reasons why trade negotiations within the WTO are struggling to reach consensus:
– The number of countries has increased since the creation of the WTO, from 120 members in 1995 to 160 today (the latest signatory being Yemen). Technically, it is more complicated to reach an agreement when there are a large number of countries involved, especially when an agreement must be adopted unanimously.
– Secondly, the initial round of negotiations (the Doha Round) initially covered a large number of issues. However, the WTO’s negotiation mechanism means that an agreement can only be reached if it is accepted in its entirety. Therefore, either there is a comprehensive agreement or there is no agreement at all. Thus, the more ambitious the objective, the more difficult it is to reach agreement on it.
Finally, it should be noted that what was relatively easy to achieve during the negotiations has already been achieved. This leaves the most problematic issues, which countries have been unwilling to liberalize further because they are often the most politically sensitive (the « hard core » of the negotiations).
In addition to these technical and mechanical reasons, there are other factors that explain the changing context of the negotiations:
Indeed, as the negotiations progressed, the very nature of globalization evolved with:
- emerging countries becoming increasingly powerful;
- increased fragmentation of the global production chain, which is transforming the concept of « business sector » (making the boundaries between each activity more porous and less easily identifiable) and increasing the number of times that intermediate goods must cross borders to enable the production of a final product;
- an increase in the service content of manufactured goods;
- changes in raw material prices;
- changes in the interests of the countries involved in negotiations;
At the same time, the increasing complexity of protectionist measures taken by states is making negotiations more difficult. Indeed, there has been a significant emergence of issues related to non-tariff barriers, whereas negotiations used to focus mainly on tariff barriers. In concrete terms, trade negotiations previously focused largely on reducing customs duties, whereas now this is more complicated because protections have become multifaceted, with issues such as intellectual property, investment protection, and public procurement negotiations.
All these contextual developments ultimately mean that we have to negotiate on an issue that was defined 20 years ago, while trade policies are facing a shift from a context of overproduction with a downward trend in prices to a reverse context where the trend is toward underproduction and rising prices.
Key points to remember from the Bali agreement
The Bali interministerial conference focused on three topics. The objective is far from matching the initial agenda for the negotiations, as it covers a limited scope related to trade facilitation and two sub-areas related to agriculture and development. Several topics were excluded from the negotiations, such as customs duties and health and environmental standards applicable to imported products. Ultimately, the three topics considered were:
– trade facilitation (through the simplification of customs procedures);
– agriculture (particularly with regard to subsidies);
– development (measures related to Least Developed Countries – LDCs).
The negotiations resulted in a minimal agreement. In fact, the agreement has been dubbed « Doha Light » in reference to its limited scope and range of topics covered. The practical advances in each pillar are as follows:
– With regard to trade facilitation, the agreement amounts to reducing bureaucracy at borders. Countries have agreed to digitize customs documents, use the internet, simplify procedures, and speed up customs clearance for perishable goods. However, not all countries are required to implement these measures according to the same timetable. Developed countries can implement these measures quickly, while developing countries have two years to do so and least developed countries (LDCs) have four.
– With regard to agriculture (the main sticking point until now), a group of 33 countries (the G33) led by India has obtained the right to build up food stocks of basic commodities. The aim is to be able to cope with price volatility and thus meet the food security needs of a population that is sensitive to sudden price changes. It should be noted that with an election year in 2014, domestic political interests in India are not absent. The mechanism allows the governments of the countries concerned to purchase agricultural products from their farmers at prices above market prices and then resell them at low prices to the population. However, as this measure is similar to a subsidy for domestic production and exceeds the 10% tolerance level set by the WTO, it cannot be sustained and a lasting solution must be found within four years.
– Finally, with regard to development, and in order to better integrate into world trade, the 49 least developed countries are granted a customs duty exemption for products of which only 25% of the added value has been generated within those countries. In other words, poor countries are increasing the number of exported products that are exempt from customs duties when shipped to industrialized countries.
The expected economic effects are potentially significant but difficult to assess. On the one hand, these measures will take time to be ratified, then implemented, and finally to produce their effects. On the other hand, it is always difficult to attribute a precise impact to a particular agreement because these measures are part of an overall context in which it is difficult to isolate specific factors. Nevertheless, even if these figures are probably overestimated, it appears that measures to facilitate trade could increase global GDP by around $1 trillion ($600 billion for emerging countries and $400 billion for industrialized countries), thereby creating 21 million jobs (18 million in emerging countries and 3 million in industrialized countries).
Despite its limited scope, the agreement has the merit of existing. In WTO jargon, this agreement is « low-hanging fruit » (editor’s note: the lowest fruit on the tree can be picked easily), which implies that « the fruit at the top of the tree is the most difficult to reach. » In other words, since a more ambitious agreement is unlikely to be achievable without a great deal of time and effort, it is preferable to be satisfied with even minor progress for the time being. In addition, the multilateral trading system had been facing such a deadlock for many years that the WTO had been reduced to its dispute settlement body alone. Therefore, another failure would have jeopardized the future of the WTO, as its ability to influence international trade and its legitimacy would have been profoundly and probably irrevocably called into question.
Outlook
The Bali Agreement provides an opportunity for the WTO’s multilateral trading system to emerge from the crisis. Although the crisis is not yet over and the underlying causes remain, short-term fears about the WTO’s ability to influence international trade are less pronounced and this agreement may represent an opportunity to give new momentum to global trade, which has slowed significantly as a result of the global crisis.
Nevertheless, this agreement alone cannot provide a lasting solution to the deadlock in the multilateral trading system. Several factors could help the organization to break out of the partial deadlock in which it finds itself, namely: (1) not trying to reach a comprehensive agreement but attempting to proceed in « small steps » by focusing on accumulating small, unambitious agreements, (2) revising internal negotiation procedures, and finally (3) trying to develop plurilateral (multi-party) agreements in order to create momentum for other countries. Of course, this list is not exhaustive and does not claim to be able to solve problems that are inherent in the very architecture of the WTO, whose very particular general philosophy is essentially based on the idea that consensus emerges from conflict and that negotiations progress in fits and starts, as opposed to an idiosyncratic movement of the negotiations as a whole.
Beyond the short-term challenges, the issue relates to the multilateral system’s ability to combat the emergence of competing bilateral agreements. The deadlock in the negotiating cycle has led the main players in world trade who wish to advance trade liberalization to change their approach by entering into alternative bilateral agreements (between two countries) outside the WTO framework. Several agreements of this type are being developed between major nations, although the strategic objective may also be to isolate China on the international stage, notably through the Transatlantic (EU-US) and Trans-Pacific (US-Asian countries) agreements. Beyond the « competition » generated by these agreements within the WTO system, the proliferation of such agreements may also have a less favorable overall effect than having no agreements at all. Indeed, they potentially lead to « trade diversion, » i.e., a mechanism whereby a country will be led to grant a preferential tariff to a country (and therefore import primarily from that country) even though it is not necessarily optimal for it, simply because there is an agreement with that country. Ultimately, the real challenge for the WTO is to outline ways in which it can remain relevant in defining international trade rules.
