After Seattle

"In a recent editorial, we argued that it would be a mistake to start a new trade round this year. Right conclusion, wrong reasons, argues Jeffrey Schott in this invited reply."

Reprinted with permission from The Economist

Last month in Okinawa, the G7 leaders pledged to launch a new round of trade negotiations in the World Trade Organization (WTO) later this year. Too soon, argued The Economist ("The Merit of Trading Quietly", August 12th). Deferring trade talks until late 2001 does make better sense-but the analysis of the problems blocking progress in the WTO, and The Economist's policy prescriptions, are less persuasive.

In essence, The Economist argued that the WTO ministerial in Seattle failed because it tried to do too much. Building consensus among 135 countries on a broad agenda of issues was too complex. In addition, support for a new round by the developing countries was undercut by concerns that the richer countries were not lowering their trade barriers as promised in the previous Uruguay Round. So forget a new trade round for now, pursue ongoing talks on agriculture and services, and litigate problems through the dispute settlement process. Given a dose of unilateral liberalization by the industrial countries, maybe the developing countries would then sign on to a new round next year.

This is wrong. WTO talks need to have a broad agenda to accommodate the diverse interests of its member countries. Such a negotiation would obviously be more complicated, but would also be more likely to succeed in reducing the trade barriers that have withstood the attack of eight previous GATT rounds. The WTO ministerial collapsed not because of developing-country opposition to the rich countries' agenda but because the rich countries disagreed among themselves on the negotiating objectives. To be sure, North-South disputes also marred the Seattle proceedings, but they were not decisive in blocking new trade talks.

In brief, The Economist misinterprets the resistance of developing countries to a new round. First, as the weaker partners in the trading system, developing countries benefit the most when the major trading powers play by a common set of rules. The opposition to new trade talks heard from Geneva diplomats reflects, I believe, frustration that the United States, Europe, and Japan have not been able to agree on an agenda for those talks that would strengthen their own commitment to a rules-based multilateral system.

Second, The Economist confuses negotiating rhetoric with substance. Claims that new trade talks should await the realisation of past liberalisation commitments are not supported by fact. Industrial countries certainly could do more to lower their trade barriers, but they have generally followed the schedule of reforms negotiated in the Uruguay Round (which admittedly phase out most textile quotas only at the end of a ten-year transition period). Developing countries accepted that imperfect deal in return for commitments by the United States and Europe to accept dispute rulings and constraints on their unilateral trade actions.

Third, The Economist underestimates the problems with the WTO's dispute-settlement understanding (DSU) and its impact on support for a new round. Yes, the DSU has worked well overall, but in some important recent cases (bananas, beef hormones, and possibly the foreign sales corporation case), it has failed to promote compliance by its two most powerful participants. This impairs the integrity of WTO rules and diminishes the perceived value of negotiating new trade pacts.

To compound this misdiagnosis, The Economist proffers medicine that would do more harm than good. Make greater use of the DSU to "clarify vague rules". Forget that the dispute process is already overextended, underfunded, and in need of repair (notably, in the case of the compliance provisions of Articles 21 and 22). Support for a case-law approach to amplify WTO obligations, in lieu of new negotiations, is dangerous. Further empowering panellists broadly to interpret WTO rules would raise sovereignty issues that could undercut support for existing trade pacts as well as future negotiations. Ultimately, trade officials must negotiate solutions to disputes arising from vague WTO provisions. Rulemaking by litigation will only amplify trade friction.

Preparing for a new round

What should be done to strengthen the WTO and prepare for new trade talks, hopefully next year? The Economist is in good company in arguing for unilateral reforms to benefit the trade of the poorest countries: "alms for the poor" is the cry of every Sabbath preacher and G7 summiteer. Industrial countries should indeed be criticised for their miserly offerings. International financial institutions should also be directed to co-ordinate their efforts more closely with the WTO to enable developing countries to take better advantage of the opportunities created by trade pacts; there have been many hortatory declarations in support of such policy coherence, but so far little action.

Extending trade preferences to the poorest countries is also commendable, even though such measures usually offer only marginal and temporary support. As a rule, the benefits are diluted for key products to assuage domestic lobbies and can be revoked without contravening WTO obligations. Moreover, gains for some poor countries come at the expense of losses for others.

If the United States and the European Union want a new round of trade negotiations, they will have to lead by example. First, by adhering loyally to the trading rules (including dispute-panel rulings). Second, by fixing the flaws in WTO provisions so that the trading rules are implemented fully and equitably. Third, by working together to build a consensus on an agenda for new trade talks that commits them to reform their long-standing trade barriers in the context of a balanced and broad-ranging accord. Such actions, unlike the hollow words of summit declarations, would give the developing countries good reasons to support a new round.