Future of the WTO: Governing the world economy beyond trade

Let me build on Greg and Richard’ assumptions and try to sketch a way forward. We all seem to agree that new, meaningful trade deals will not at least in the near future be struck in the WTO. Instead, negotiations are more likely to take place in the bilateral and regional context. There is less agreement among us on whether bilateral and regional progress will pave the way for multilateral trade deals in the future. We can speculate whether the WTO will be revived or made obsolete through these preferential trade agreements (PTAs). It is possible, and maybe even likely, that the net benefits from new global trade deals will gradually diminish as PTAs continue to proliferate. The opportunity costs of forgoing the WTO negotiation process would inevitably seem lower when the various new regional trade relations become more entrenched.

Acknowledging this shift towards regionalism, Richard asks: “Will we see competition between blocs? Cooperation between them? What will be the implications for multilateralism?” China’s recent effort to build closer trade relations with its Asian neighbors is one of the most interesting developments. That trend is likely to continue. Greg seems correct in doubting the emergence of coherent rival geopolitical blocks. But the most important regional trade deals will be built around the US, EU and China. In addition, we will see a fragmented web of PTAs within, across and beyond the key trade regions.

I would predict some competition but no confrontation among regional blocks. We may see attempts of the “big three” – the US, EU and China – to expand their spheres of economic influence though negotiating PTAs with other states, in particular the energy-rich states in the Middle East, Central Asia and Africa.

Assuming there will be no major confrontation or geopolitical rivalry among the main trade blocks, the prospects for some limited form of multilateralism remain.However, the most pressing issues calling for multilateral agreements today do not stem from a traditional trade agenda. Instead, we are already witnessing the demand for multilateral regulation to shift to issues like cross-border financial activity, sovereign wealth funds (SWFs), currency manipulation, energy, and climate change. Just this week, the Europeans called for the doubling of IMF’s resources in order to bolster the fund’s role in assisting states through the financial crises. States are meeting later this year in Copenhagen, hoping to launch the negotiations on a new global climate change treaty. These are the pressing issues that governments (correctly) prioritize over reviving multilateralism in trade. At the same time, however, these new priorities have implications on trade, whether it is through states’ attempt to fight climate change through discriminatory border or tax measures or states’ attempts to manipulate their currencies to secure better terms of trade.

While the trade agenda may be incrementally advanced through regional and bilateral deals, multilateral action is required to address issues like climate change. There the opportunity costs of forgoing multilateral rules are much higher than they are in trade. Prospects for global solutions in combating climate change, however, seem to be weakened by many of the same dynamics that have undermined multilateral trade negotiations.

Given the magnitude of distributional issues among economic powers on issues ranging from climate change to SWFs, I am not envisioning ambitious, binding, and enforceable commitments that strip away China’s ability to adjust the value of its currency, invest freely though its SWF or agree to reduce its carbon emissions to a level desired by the Europeans. Yet stakes are too high to give up on multilateralism altogether. Thus, what we may see is multilateral cooperation in a “second best world”.

In the multi-polar world where interests diverge, coercive power against equals is rarely available and where an increasing number of powerful states guard vigorously their sovereignty, the best multilateral governance that can be accomplished will be voluntary. There will be no new Bretton Woods or other grand new institutions. But we may see attempts to re-create an informal steering group for the world economy – a new and much more relevant G-8. The current G-8 has little significance, not least because its composition fails to reflect the shifts in the distribution of economic power.

So what would a new and more relevant G-8 be like?

A new G-8 -- or say G-10 -- would gather the most important economies under its umbrella to cooperate on issues ranging from financial crises to energy and to trade. If trade was discussed, trade ministers of the G-10 would attend. Energy agenda would call for the presence of the G-10 energy ministers. This group could not bind any state within or beyond G-10 against its will, but when consensus on for instance a trade issue was reached among the group, the issue would likely be ripe for a successful agreement within the WTO.

Yet how could this new G-10 be made more relevant? First, we should avoid the mistake of cementing the membership to reflect current power structures. G-10 would consist of ten states with the highest GDP at any given year. New states would be invited to join the club as they passed the old economic powers in terms of GDP. Existing members would need to give up their seats as their relative power declined. This would avoid creating institutional structures that inevitably become outdated as the balance of power changes. (just think of the UN Security Council). Second, we should give all states a stake in the system. China will only become a “responsible stakeholder” and take ownership of the international economic order if it is invited to shape its content. Thus, members of the new G-10 would rotate in chairing the steering group. A state holding the presidency would set the agenda. This is the model used in the European Council among 27 member states. At best, this has led to effective leadership in the EU where each country has the incentive to push through major reforms during its presidency in order to take the credit for the achievements. Similar to the European Council, previous years and next year’s chairs would co-direct the G-10 with the sitting president to ensure continuity.

Granted, analytically, this is not a clean model for global governance. The death of multilateralism can be a theoretically more compelling vision if we take the current distribution of power and the constraints stemming from current political economy seriously. The new G-10 may end up being little more than a status symbol and a talking shop. But if we are not prepared to pronounce multilateralism dead, something along these lines would be within the boundaries of my “tempered optimism” about the future of multilateralism and global economic governance.