Economy

G20 Makes Trade Promises That the WTO Cannot Fulfill

Given the failure in negotiating the Doha Development Agenda – the developing countries’ plan to reform the WTO – the G20’s idea of creating a rules-based, open and inclusive multilateral trading system is ironical.

G20 leaders. Credit: Reuters

Leaders of the G20 countries. Credit: Reuters

The leaders of the G20 nations got together for their annual summit in Hangzhou, China, against the backdrop of heightening uncertainties over the health of the global economy. The G20 forum, formed after the East Asian financial crisis in the late 1990s for better coordination between the finance ministers of the world’s major economies, was upgraded to the level of heads of states and governments in the aftermath of the economic downturn in 2008. At that time, US President George W. Bush had gathered the leaders of the G20 countries to collectively work out strategies to cope with the most severe economic downturn in over seven decades. But even after nine meetings between the most powerful leaders, the global community finds itself sitting precariously on the precipice, with these leaders unable to work towards ameliorating the economic uncertainties by establishing a credible and a coherent governance mechanism.

During the past few years, the GDPs of most major economies, especially those in the developing world, have slowed down. In 2015, China showed sub-7% growth rate for the first time in decades, South Africa faced a near stagnation and the Brazilian economy contracted by nearly 4%. As a result, India’s GDP growth numbers are standing out that much more. But it is global trade that is raising the loudest alarm bells. The recently unveiled World Trade Statistical Review, the annual assessment by the WTO, shows that in 2015 global merchandise exports declined by 14%, while the corresponding figure for imports shows a decline of 13%. This decline has occurred after a virtual stagnation of trade flows in the immediately preceding year. What should be of particular concern is that the growth of merchandise trade has remained severely depressed in the first half of the current decade. Until 2014, trade in commercial services grew at a fairly rapid pace. However, in 2015, it seems that the contagion has already hit the services sector as growth rates for the imports and exports of commercial services have both declined by 6%.

Among the key factors that have contributed to these dismal trade numbers is the continuing uncertainties about trade governance. In much of the post-war period, multilateral governance was seen as the magic bullet for eliminating all the uncertainties that had clouded the world of trade during the economic depression of the 1930s. Multilateralism was expected to develop a transparent and rules-based trading system, an important task of which was to ensure that the conduct of trade was not the end in itself but a contributor to the development of the lesser players in the global economy. But the institutional basis of multilateralism in international trade had remained weak until the establishment of the WTO in 1995, which gave the major powers ample opportunity to run the multilateral trading system from their backyard. By following democratic norms of engagement between sovereign states, this system, which in theory should have provided the ideal set of outcomes for governing global trade, turned out to be deeply flawed and in need of a comprehensive overhaul.

Developing countries, who had long remained bystanders to the machinations of major powers, found an opportunity to make some serious interventions to change the dynamics of the WTO in the early years of the previous decade. This opportunity presented itself when a group of emerging economies formed effective coalitions at the WTO for the first time and pushed for fundamental changes in the status quo, bringing back on to the table some of the major concerns that had emerged because of the undemocratic functioning of the multilateral trading system, including problems of food insecurity, rural development and public health concerns. At the same time, the developing countries also brought on to the discussion table some of the egregious policies put in place by the major economies to protect their entities – for instance, the high levels of farm subsidies used to unfairly dominate world agricultural markets. The developing countries’ plan to reform the WTO was encapsulated in the form of the Doha Development Agenda (DDA), which was agreed to in the Fourth WTO Ministerial Conference in the Qatari capital in 2001.

Negotiations to reform the multilateral trading system under the rubric of the DDA have remained inconclusive for fifteen years, principally because the major powers steadfastly worked towards maintaining their stranglehold on the global economy. All attempts by the developing countries to alter the global trade rules and to make them more development friendly were met with stiff resistance. Negotiations on the DDA came to a near standstill after the economic downturn in 2008 and finally, at the Tenth Ministerial Conference of the WTO held in Nairobi in December 2015, the major economies refused to give any further mandate for the negotiations under the DDA. As no consensus was reached on further negotiations on the DDA, the WTO has virtually been reduced to an organisation whose main function of negotiating multilateral trade rules has been left in a limbo since the beginning of this year.

The major economies orchestrated this move towards rendering the WTO’s rule-making arm irrelevant as they have clear designs to frame rules themselves without being challenged by the developing countries on the world stage. These designs have two facets: one, to hold negotiations for trade liberalisation in preferred areas with a carefully selected set of WTO members; and two, to promote free trade agreements with two key objectives – to develop a template for accelerated tariff reduction and to develop a set of rules that can then be imposed as global standards.

In WTO-speak, the first of these processes is called the plurilateral negotiations, which seems to be little more than discussions in a “club of the willing”. Three plurilateral negotiations have been conducted in the past few years, which include the second version of the Information Technology Agreement or, ITA–II (the first version of this agreement was finalised in 1996); Environment Goods Agreement (EGA) and Trade in Services Agreement (TiSA).

ITA-II eliminates tariffs on those information technology products that were excluded from ITA-I. The EGA seeks to eliminate tariffs on “environmental goods”, but an acceptable definition that can clearly identify such products is yet to be agreed upon. Finally, TiSA intends to liberalise services trade, but is likely to exclude a clutch of labour intensive services and the freedom of movement of individuals to take up a job for a limited duration. There is hardly any doubt that members of the ‘exclusive club’ would work out agreements that would benefit their commercial interests. India has wisely remained outside these clubs.

Free trade agreements (FTAs) have never been the best arrangements to promote trade, but have nonetheless emerged as effective counters to the multilateral trading system. The present day incarnations of the FTAs are the so-called mega-regional trade agreements, which include many more countries than conventional FTAs. Currently, three mega-regionals are on the anvil – the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership and the Regional Comprehensive Economic Partnership. While TPP negotiations have been concluded, the other two are still in the making. The common feature of these proposed mega-regionals is the objective to open markets of the member states at an accelerated pace. The outcome of this process is not difficult to predict – transnational corporations will make the most gains given their disproportionate size of operations and smaller producers from the developing countries amy find the challenge difficult to meet.

With so much of discordance in global trade governance, the G20 leaders were expected to send a strong political message about altering the existing dynamics. Unfortunately, they have ignored the source of the problems in the realm of trade governance – the serious undermining of the multilateral trading system. In their communiqué issued at the end of the Hangzhou Summit, the G20 leaders expressed their “commitment to shape the post-Nairobi work with development at its centre and commit to advancing negotiations on the remaining DDA issues as a matter of priority”. Further, they spoke of their “determination to ensure a rules-based, transparent, non-discriminatory, open and inclusive multilateral trading system with the World Trade Organisation playing the central role in today’s global trade”. However, given the existential crisis that the WTO faces after the Nairobi meeting in 2015, the G20 leaders’ statements on the need to advance the DDA, and the importance of the multilateral trading system, sound somewhat ironical.

Equally problematic, from the larger point of view of trade governance, are the G20 leaders’ statements on the plurilateral and FTAs. The collective view among the G20 countries is that “WTO-consistent plurilateral trade agreements with broad participation can play an important role in complementing global liberalisation initiatives”. Although the WTO allows plurilateral agreements, in essence these agreements undermine the spirit of multilateralism, as they exclude an overwhelming majority of the members of the organisation, and in so doing, they ignore the core concerns of those excluded. The FTAs, and the mega-regionals in particular, tend to be guided by the interests of either a dominant member or a group of members. These mega-regionals can, therefore, never imbibe the spirit of multilateralism grounded in fairness and equity.