Challenges to the Multilateral Trading System and Possible Responses

This paper develops three major themes. First, the atmosphere of gloom around the multilateral trading system due to dim prospects of a successful conclusion of the Doha Round notwithstanding, global trade regime remains open and the institution in charge of it, the World Trade Organization, is in sound health. If anything, the Doha Round has been a victim of its own success: considerable de facto liberalization in agriculture has been achieved since the launch of the round. Second, to secure the future of the multilateral trading system, it is nevertheless crucial that the Doha Round is brought to a conclusion even if in a highly diluted form. The damage to the system from an outright failure will be very substantial. Finally, closing the Doha Round will require the United States leading the negotiations. Suggestions that as the largest merchandise exporter, China should now take the lead are frivolous. JEL F13 F15


Introduction
In addition to the obvious-that we both specialize in trade policy-there are two important similarities between the writings of Rolf Langhammer, whom we honor today, An outstanding contribution by Rolf (Langhammer 2009) along these lines is his recent paper provocatively titled "Why a marketplace must not discriminate?" In this paper, he systematically assesses virtually all aspects of the case for the Transatlantic Free Trade Area (TAFTA) and, arguing that it will involve far too much discrimination against third countries, comes out in favor of what he calls the Transatlantic Trade Liberalization Initiative (TALI) that would refrain from discrimination and will 'facilitate global trade by multilateralizing rules for transaction procedures concluded between the EU and the US, and to extend these to third parties. ' (p. 20).
While Rolf has written prolifically, contributing over 200 professional articles, since the multilateral trading system is directly or indirectly at the center of his work and since the failure in bringing the Doha Round to a close to-date preoccupies trade economists today, this paper honors him by taking stock of where we stand today with respect to achieving the goal of free trade and what can be expected in the forthcoming years. Given the fact that an important aspect of the current tensions and fissures in the trading system that have emerged relates to the substantial rise in the economic weight of the developing countries, this subject also brings into sharp focus Rolf's longstanding interest in the developing countries.
Many commentators are today pessimistic about the future of the multilateral trading system. While the failure to bring the Doha round to conclusion after eleven years of its launch provides a substantive basis for this pessimism, the fear on the part of many that the multilateral trading system and the WTO are somehow in deep trouble is exaggerated. Despite the current impasse, there is much to celebrate about the progress made to-date in achieving a liberal trading system and institutionalizing much though not all of it through the instrumentality of the WTO. Moreover, Doha is not really deadcertainly, none of the certified doctors has made such a pronouncement.

The Good News: A Well-functioning and Liberal Trading World Today
In the midst of the gloom surrounding the failure to bring the Doha negotiations to a conclusion, it is easy to forget that the multilateral trading system has had great success in the last two decades. Just as many commentators have declared today that Doha Round is dead, Lester Thurow, an influential intellectual in his time in Democratic circles, had famously proclaimed at the Davos Symposium in 1988 that 'GATT is dead.' While Thurow had many sympathizers at the time, GATT not only survived, it also became the seed that seven years later flourished into the banyan tree we call the WTO today. Rather than the pessimism of Thurow, it was the optimism of Jagdish Bhagwati that prevailed.
In his Harry Johnson lecture (Bhagwati 1990), the latter reminded that when the monarch dies, the British say, 'The Queen is dead. Long live the Queen.' In a similar vein, he suggested, the appropriate response to Thurow would be: "The GATT is dead. Long live the GATT." And that is exactly what happened. The GATT as an institution came to an end with the WTO replacing it but the GATT as an agreement governing goods trade lives on.
To give an idea of the far-reaching accomplishments during the past quarter century, I discuss below the developments in three areas: trade liberalization and growth in world trade, changed developing country attitudes towards trade and foreign investment, and the success of the WTO in implementing trade agreements.

Trade Liberalization is Intact and World Trade is Flourishing
World trade in goods and services is much freer today than in the pre-WTO world.
Protection-motivated non-tariff barriers, which had plagued the system until as recently as the 1980s, are virtually gone. Tariffs have also come significantly down with over protection to industrial products at historically lowest level in almost all countries. Table   1, which shows the latest average tariff rates on industrial products available for the major developed and developing countries, bears witness to this change.
Developed countries have come to bind virtually all their tariffs while developing countries have also bound a substantial proportion of their tariff lines. More importantly, applied tariffs have dropped to their lowest levels in the recent history. Even in India, which is often depicted as a highly protected country, the simple average of applied industrial tariffs is 10.1 percent compared with 8.7 percent in China. While the highest average tariffs are concentrated in the countries in Latin America, even they are below 15 percent. In the developed countries, the simple average of tariffs is uniformly below 5 percent. The proportion of applied tariff rates exceeding 15 percent is also generally low. In Asia, this proportion is below 12 percent in all countries shown in Table 1. Remarkably, at 6.7 percent, this proportion in India is significantly below the 11.6 percent in China. In the developed countries, the proportion is uniformly well below 3 percent with Canada being the major exception. The highest concentration of tariff peaks is in Latin America.  Remarkably, though much smaller in magnitude, exports in the remaining three regions-Africa, Middle East and Commonwealth of Independent States-has been as impressive as in Asia. In each case, merchandise exports have more than tripled during the decade. Growth in the exports of commercial services has been similarly spectacular. In North America, they have almost doubled; in Europe, they have more than doubled; and In Asia, they have more than tripled between 2000 and 2010. The remaining three regions have also seen their commercial services exports nearly or more than tripled.
From the viewpoint of facilitating trade, the WTO has been a huge success.

Developing Countries have Embraced Freer Trade and Investment
The last two decades have also seen a serious shift in the attitudes of developing countries towards international trade. Rather than viewing foreign competition as threat to their industries they now see an opportunity in it. Though reluctant in the 1980s when the International Monetary Fund and World Bank aggressively pushed trade liberalization, they have progressively come to embrace it in the past two decades.
Indeed, in what Bhagwati has called an "ironic reversal," today, it is the developed countries that express fear of foreign competition, with the rhetoric of job losses abroad and leveling of unskilled wages in the face of competition from the developing countries becoming louder and louder.
In the 1950s and 1960s, development thinking was dominated by the view that developing countries needed to foster industrialization and that this required protection to manufacturing against competition from well-established foreign suppliers. Reliance on exports was seen as a non-starter because it as thought that the demand for developing country exports, which consisted of largely primary products, exhibited low elasticity with respect to both price and income and. Low price elasticity meant that any efforts by the developing countries to expand exports would be frustrated by such large endogenous decline in the terms of trade that expanded exports would end up fetching reduced revenues. And he low income elasticity meant that over time, as incomes rose in the industrial countries, their demand would shift in favor of manufactures and services and away from developing country exports with the result that the developing countries will experience a an exogenous secular decline in their terms of trade.
This line of thinking inevitably led the developing countries to seek special and While developing countries today continue to demand special and differential treatment, they participate much more actively in the negotiations.

WTO as an Institution is Intact
A key function of the WTO is to implement the existing agreements among member countries. When the WTO replaced GATT on January 1, 1995, it greatly expanded multilateral discipline on trade. It brought textiles, agriculture and services into the fold of multilateral rules. It also entered new territory by creating a uniform intellectual property rights (IPRs) regime in all areas of intellectual property. And it replaced the relatively weak dispute settlement system in which implementation of the rulings of GATT panels was largely dependent on the goodwill of the offender by a binding system backed by the right to retaliate on the part of the damaged party in case of noncompliance by the offending party.
In a recent paper, Davey (2012) assesses the performance of the WTO in implementing the existing agreements and settling disputes. I largely agree with his conclusion that the institution has been broadly successful in both these areas. With respect to dispute settlement, it had been feared that this function will be usurped by dispute settlement mechanisms in myriad FTAs but William Davey (2012) argues that this has not happened. In his view, this is because WTO dispute settlement system has certain advantages over FTA dispute settlement systems. "The FTA systems tend to have binational panels without possibility of appeal and with no Secretariat support, thus there are more frequent concerns with bias and quality of decisions. While WTO system is multilateral, FTAs are often composed of two or only a few parties. This means that power plays a much more important role in the implementation of results.
There is peer pressure to implement DSB decisions in the WTO, there is nothing comparable in an FTA, particularly where some of the parties have unequal bargaining power." (Davey, 2012, p. 10) Davey (2012) also discusses in detail the functioning of WTO dispute settlement and concludes that despite some shortcomings, it has lived up to expectation. First, after an initial surge, the number of cases brought for consultations has been cut to half of their level in the 1990s. The number of cases has been reasonably steady during the 2000s suggesting that a steady state may have been reached. Second, while some cases have experienced delays with panels taking longer than stipulated, these have been few. The appellate body had given its verdict within the stipulated 90-day limit except in the last two years with these delays arising out of the two massive subsidy cases involving Airbus and Boeing. Third, rulings in almost all cases have been implemented though in only about half of the cases this has taken place within reasonable time. In some cases, implementation has taken quite long but implementation has taken place in all cases.
Finally, developing countries in general and smaller countries in particular have been able to access to the system and use it effectively to protect their trading rights.
A final point worth making is that despite the major financial crisis, which created prolonged high levels of unemployment in the major industrial economies that continue till today, trade disruption has been minimal. No doubt, violations of WTO rules took place in most countries but when seen against the dislocation the crisis created, these were hardly serious and resulted in few WTO challenges by the damaged parties. This was in contrast to the Great Depression when similar dislocations led to a virtual trade war between Europe and the United States that led to the enactment of the infamous Smoot-Hawley tariffs in the latter. On the whole, trade has recovered relatively quickly in the aftermath of the crisis, as evidenced by Figures 1 and 2.

The Bad News: The Failure to Close Doha Carries a Very High Cost
It is tempting to argue that given that world trade a freer today than ever before, that the key WTO members are happy with where they are in terms of market access (see below), and that the WTO has reached a stage at which it could continue to implement the existing agreements and settle disputes as they arise, declaring an end to Doha negotiations and eschewing future multilateral negotiations is a perfectly acceptable outcome. But such an inference represents a serious error of judgment.
As Bhagwati (2012) has pointed out, in addition to the obvious that the benefits that would have accrued from trade liberalization and trade-friendly reform of rules will not materialize, the failure to complete the Doha round has at three other costs: future multilateral liberalization will come to a halt for years o come; multilateral rule-making will be greatly undermined; and WTO authority to settle dispute settlement will be undermined.
The end to multilateral negotiations will leave preferential trade area (PTA) agreements as the only game in town. Because the level of protection was extremely high at the time the GATT was signed, despite vast amount of liberalization over the decades, the world still remains very far from global free trade. As such, the benefits from further multilateral liberalization can hardly be discounted. accounting for one-fifth or more of the world economy, will maintain high protection against one another is something to worry about. The world needs multilateral negotiations to succeed to maintain the momentum for trade liberalization.
But WTO negotiations involve not just trade liberalization but also rule making.
Even if one subscribes to the hard-to-defend extreme view that multilateral negotiations for trade liberalization among as many as 156 members consisting of powerful countries whose interests diverge too much to allow progress and therefore it is best to leave liberalization to PTAs, we need multilateral negotiations to arrive at new rules and reform the old ones. While we may debate, as we have done for at least two decades, whether bilateral and multilateral routes are complementary or in conflict with one another with respect to the objective of worldwide free trade but we cannot debate it with respect to reaching rules that are globally efficient. Rules negotiated bilaterally will necessarily disregard the effects on the third countries. For example, TBT and SPS measures in bilateral arrangements run the clear risk of being used as devices to keep third countries out of the market.
There is also added risk that when disputes arise in areas in which multilateral rules are either unclear or nonexistent, decisions by WTO panels and appellate body will effectively end up making rules. The most obvious example here concerns carbon taxes.
The existing rules in this area are sufficiently unclear to allow multiple interpretations.
And given the current political atmosphere and pressures, it is likely that a future panel might feel compelled to rule such taxes WTO legal. That would de facto establish a new rule to which that the member countries did not actually agree. Similar possibilities exist in the area of labor standards and intellectual property.
Finally, as Bhagwati (2012)  In addition, it bears reiterating in this context that the WTO is not just about trade liberalization but also rules and settlement of disputes. It is inconceivable that the order in the trading system and consequent expansion of the world trade we have observed in the last six decades could have materialized in the absence of the WTO. By implication, the preservation of the institution and all its current strengths is essential. And for that, the eventual conclusion of a Doha agreement remains crucial.
To search for possible solutions, we must first turn to a discussion of what factors have contributed to the current impasse, a subject a consider next.

Challenges to The Multilateral Trading System
At the outset, it may be pointed out that the common impression that the WTO has no achievements to its credit in the area of new negotiations is false. The Information Technology Agreement (ITA), which brought all tariffs on information technology products in the signatory countries to zero, was inked soon after the WTO came into existence. Soon after, agreements were also reached on two services issues: telecom and financial services. Declaration to kick off the wide-ranging Doha Development Round was reached in 2001 alongside the Doha Declaration on the TRPS Agreement and Public Health. The latter was followed up by the decision for the Amendment of The TRIPS Agreement in December 2005 though its ratification is yet to be completed. These were contentious issues at one time and constitute significant achievements. But it is often the case that once a negotiation is successfully concluded, no matter how contentious it may have been initially, it diminishes in significance.
These achievements have, however, been marred by what is definitely a bigger failure of bringing the Doha negotiations to a conclusion. Even excluding the last four years, which have been largely devoid of any significant activity to advance the negotiations, there has been seven years of intense efforts have not produced an agreement.
Considerably progress had been achieved during the last serious effort in July 2008 but given the all or nothing nature of the outcome, no concrete progress has taken place.
With rare exceptions, observers have come to feel that the round has reached an impasse that cannot be broken, with some going so far as to suggest that it should now be officially killed. The silver lining for the optimists, however, is that while the negotiations remain in intensive care on life support, virtually none of the major negotiators has suggested that the life supports be withdrawn. Therefore, the hope that something may still be rescued remains alive.
A key question is why the Doha negotiations have reached the impasse. Many explanations are provided though one can take issue with each.

False Claims Leading to Unrealistic Expectations
The labeling of the negotiations as "development round" created the expectations on the part of most developing countries that the UR round had effectively damaged them and the new round would be about correcting that injustice. This impression was greatly reinforced by repeated subsequent assertions by the heads of international institutions, press, NGOs and many influential academics to the effect that agricultural protection is largely a developed country problem; developed-country subsidies and protection hurt the poorest developing countries the most; it is wrong to ask the poor countries to liberalize when rich countries heavily protect their own markets; and agricultural subsidies and protection in the rich countries reflect double standard and hypocrisy on the part of the rich countries. In addition, respectable institutions such as the OECD gave an exaggerated impression of developed countries subsides by producing measures of subsidies such as the Producer Support Estimate in which it included the protection provided by trade barriers into it. I have documented these exaggerations and falsehoods systematically in Panagariya (2005aPanagariya ( , 2005b and need not repeat the details here. The effect of these assertions was to considerably harden the stance of the developing countries and to give them false hope that they deserved to get one-way concessions on agriculture from the developed countries. But eventually, the developed countries came to demand agricultural liberalization from the developing countries as well that countries such as India and China then found politically difficult and contributed to the impasse.

Doha a Victim of its Own Success
It may be recalled that the language on liberalization of agricultural subsides had been the most contentious subject in the launch of the Doha negotiations. The eventual language in the Doha Declaration included reductions in export subsidies "with a view to phasing [them] out." Disagreements on this language between the European union and India had contributed to the delay in the signing of the declaration at Doha by one full day.
Yet, today, agricultural export subsidies have nearly disappeared and actionable domestic agricultural subsides have come considerably down in both the European Union and United States. Figure 3 shows that the export subsides in the European Union (EU) declined sharply between 2003-04 and 2007-08. As of February 2011, export subsidies in the EU continued to be available for cereals, beef and veal, poultry meat, pig meat, eggs, sugar, and some processed goods but they had not been used on cereals since July 2006 or on sugar since October 2008. In the United States, export subsidies are down to tens of millions of dollars. as measured by the current total AMS [Aggregate Measure of Support], has either declined sharply or ceased altogether. Support for cereals, dairy, and sugar remains more significant but the overall support has seen considerable decline. Figure

Preferential Trade Areas (PTAs)
I have argued ever since PTAs began gathering momentum they were an unfortunate development and they posed a threat to multilateral liberalization. 3 The opponents argued that PTAs were GATT plus or WTO plus and they would complement rather than supplant multilateral liberalization. It is now clear, that PTAs have become a major stumbling block to multilateral liberalization. Export interests, especially in the developed countries, have learned that they get better deals through PTAs since they gain an upper hand over non-members within the union. Therefore, they prefer bilateral rather than multilateral route to liberalization. This is even truer of developed country lobbies pushing non-trade agenda consisting of intellectual property rights and labor standards.
Large developing countries such as India, China and Brazil are strictly opposed to further proliferation of non-trade issues in the WTO, which they see as a trade institution. That naturally diverts the lobbies to PTAs where they face much weaker developing country partners and have a relatively free play. That game is being played almost entirely as Bhagwati (1994) had predicted. He had hypothesized that that a hegemonic power is likely to gain a greater payoff by bargaining sequentially with a group of non-hegemonic powers than simultaneously. In particular, he cited provisions with respect to intellectual property protection and environmental and labor standards as extra benefits secured by the United States through the uneven bargain in the North American Free Trade Agreement (NAFTA).
Keeping away from multilateral negotiations also allows countries to maintain many distortions in agriculture. As an example, absent their consideration in multilateral negotiations, the United States cotton subsidies can continue indefinitely. Buyers of cotton such as Bangladesh use cotton in apparel that they export and are happy to buy it for lower prices that subsidies imply. A the same time, other cotton exporters such as the small West African countries and India cannot challenge the subsidies in the WTO.
In the United States, the pursuit of PTAs has also created a political problem that has spilled over to Doha negotiations. PTAs require Congressional approval and since they are negotiated individually and sequentially, there is repeated acrimonious debate on free trade. The result has been polarization resulting in a loss of appetite to push the Doha round.

Emergence of Large Developing Country Players
The post-UR world has seen the emergence of several large developing countries-Brazil, China, India and Indonesia-that are expected to grow yet larger in relatively short period of time. As it happens, despite considerable liberalization by these countries, especially China and India, the level of protection in them remains significantly higher than in the developed countries. This asymmetry, complemented by the expectation of a very large potential market in these emerging market economies, has given rise to difficulties in bargaining not previously experienced.
In particular, seeing the large developed country markets, developed countries insist on average reciprocity meaning they want the developing countries to open their markets as much as their own. But the developing countries seek marginal or the first-difference reciprocity whereby they are willing to offer only as much additional market access as they expect to receive from the developed countries in Doha negotiations.
The situation is further complicated by the fact that China, which has the larges developing country market today, had to give very substantial concessions for its entry into the WTO in 2001. On the one hand, it remains resentful that it had to give WTO plus concessions to gain the entry and on the other it feels that having completed the implementation of liberalizing measured agreed as a part of the entry conditions in the mid 2000s and not having had any role in shaping the Doha agenda, it lacks the room for additional large-scale liberalization.

A Lack of Leadership
Not to be underestimated is the role the lack of leadership in advancing the Doha round, especially in the United States, has played. A deal had been nearly reached in July 2008 when, pushed by its manufacturing lobby, Susan Schwab, the then United States Trade Representative (USTR), pulled the plug on the negotiation. While the agreement on the formula (including the values of the coefficients in it) for liberalization in the area of non-agricultural-market access (NAMA) had been reached, the USTR reopened the issue by insisting in addition that participation in zero-for-zero tariffs in certain sectors be mandatory for the larger developing countries. That insistence proved the deal-breaker.
Subsequently, President Barack Obama and his USTR have shown no interest whatsoever in advancing the Doha negotiations. Indeed, the president has hardly mentioned the word "Doha" during his entire presidency though he has gone on to complete at least two free trade agreements, one with South Korea and the other with Colombia. The refrain of lower-level officials in the administration has been that China, which now has the largest share in the world market for manufactures, should lead the process.

What are the Solutions?
At the outset, it must be recognized that no progress is likely without the United States having the will to lead. This may not be sufficient to make progress but it is necessary. Other alternatives, EU and China, are not credible. The EU is represented as a single member in the WTO but is hardly united enough to lead and has, indeed, never done it. As regards China, it still lacks the clout and legitimacy to lead the round; it is a stretch to think that the United States and EU will follow China's lead. There is no go on the negotiations without the United States President leading the charge.
Assuming such leadership will be forthcoming in the future, a good starting point will be to conclude a minimalist agreement and bring a least a formal closure to the Doha round. Such an agreement could be built around the progress towards an agreement that had been achieved in July 2008. It should be understood that liberalization in this round for the developing countries will mean binding industrial tariffs at levels below the past bindings but still above their MFN tariffs while that for the developed countries will mean binding subsidies below the past bindings but above the current applied levels. It is far too ambitious for the developed countries to demand bindings below the MFN levels in most developing countries and for the developing countries to expect developed countries to bring bindings on subsidies below their current applied levels. Some issues that had remained unresolved in July 2008 will require flexibility on all sides. Cairns Groups of developing countries, which stand to benefit from agricultural liberalization and still have high tariffs (for example, Brazil, Argentina and Colombia), can surely give some added concessions in industrial goods and the developed countries could show grater flexibility on liberalization in agriculture. Developing countries, most notably India, could redesign the special safeguard they have sought in agriculture such that it is invoked only when there is real threat of injury and not to role back liberalization.
Short of a deal along these lines, the next best option, as suggested by many including Davey (2012), is an even more limited deal that involves stand-alone agreements on some of the least controversial subjects in the Doha agenda. These may include such issues as trade facilitation, dispute settlement and fisheries subsidies. While this fallback option is likely to be seen as a failure of the Doha round, it would still have the advantage of keeping the door to future negotiations open.
Abandonment of both these options and a decision to declare the round as inconclusive will inevitably leave PTAs and plurilateral agreements such as the government procurement agreement as the only game in town. That will without doubt greatly damage the multilateral trading system. It is unlikely that such a process will promote genuine free trade. For instance, it is inconceivable that the Transpacific Partnership (TPP), promoted by the United States as a way to advance freer trade, will be embraced by such major developing countries as China, India and Brazil. Instead, these countries, especially China and India, are bound to pursue their own PTAs that exclude