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WTO reforms and future options for UK trade policy after Brexit

What can be done to save the WTO? The question was on the minds of officials from 13 countries – including Canada, the European Union, Australia, Switzerland, Brazil, Kenya and Mexico – meeting in Ottawa at the end of October. The meeting came on the heels of proposals put forward by Canada and the EU, and various pronouncements earlier this year, notably by French President Emmanuel Macron.

The reason for this flurry of activity is the sense that the WTO (now 23 years old) is under unprecedented stress.  The cycle of tariffs and retaliation instigated by the Trump administration earlier this year has led to an escalation of litigation.  Just the week before the 13 met, the WTO’s dispute settlement body received no fewer than 15 requests seeking to establish panels to rule on disputes.  The United States is the respondent in 7 of these, and the plaintiff in 4. But at the same time, and somewhat paradoxically, this escalation in litigation comes at a time when the dispute settlement function has been fragilized by the US’ persistent blocking of appointments to the Appellate Body, which if continued could paralyse the whole dispute settlement process after December 2019. The US is also considering imposing tariffs on the totality of Chinese imports, and new ones on automotive imports from other trade partners.

The health of the WTO is relevant to the UK. One of the working assumptions behind Brexit was that the WTO’s framework of commitments and rules provided a degree of security and predictability for the UK, as a medium-sized economy dependent on trade. While leaving the EU’s common commercial policy would allow the UK to develop its own voice in trade, making sure that voice was heard and that the UK could pursue its agenda without the collective clout of the EU requires stability in the governance of world trade. That stability is now fundamentally threatened.

Moreover, the UK is also facing difficulties in getting aspects of its WTO commitments notably in the areas of tariff-rate quotas in agriculture and in government procurement ratified by other members. The issue on tariff rate quotas was largely anticipated, and reflects the fact that key suppliers of agricultural commodities (such as Argentina, Australia, Canada, the US and New Zealand) are not happy with the process devised by the EU and UK of carving up existing Tariff Rate Quotas between them. They argue that replacing a quota valid for the whole of the EU-28 with a solution in which that quota is statistically apportioned in part to the EU-27 and in part to the UK does not provide equivalent access in commercial terms. This seems a reasonable argument: an exporter would lose the flexibility it previously had to allocate exports between the UK and the EU-27 depending on demand. Government Procurement should normally have presented less of an issue – the main issue being that the list of covered institutions should be updated – but the determination of the US and New Zealand to hold out on this may reflect their desire to create negotiating pressure on the UK in other areas such as agriculture.

Faced with this context, what could be the UK’s strategy in interacting with the WTO and how could that shape its trade policy?

Decisions, decisions.

One bundle of proposals considered by the coalition of reformers that met in Ottawa, and also addressed in written documents presented by the EU and Canada, has to do with the way the WTO makes decisions. Under WTO Article XI, decision-making happens by consensus. Specifically a decision is adopted unless a party formally objects. (For panel and appellate body reports, the principle of negative consensus prevails i.e. findings are deemed to be adopted unless there is consensus not to adopt it).

As the WTO membership has expanded to 164 members, many countries have deemed consensus to be an unwieldy way of making decisions, since it effectively gives a single country a right of veto. This stalling power has been blamed for the lack of substantial progress on multilateral negotiations since 2001. But infact, the issue is less with the decision making process per se and more to do with the lack of appetite of members of all stripes to seriously engage in further trade liberalisation or rule-writing. This is partly because their national political hang-ups on sensitive areas (say, agriculture in the EU or in India) are such that even the prospect of improved market access in other areas is not enough to coax commitments out of  negotiators.

But it is also because, as traditional trade barriers have come down,  regulatory issues have come to the fore. Regulation is much more difficult to fit into the bartering framework (I will lower tariffs on clothing if you lower them on computers), because good regulation is context-specific, and lowering regulation or even regulatory convergence may not be welfare enhancing.

One solution that has been advanced is the “plurilateral route”: subsets of interested WTO members negotiate rules and market access on specific issues without necessarily tying these to other negoiations. The agreement on Government Procurement and the Information Technology Agreement (ITA) are examples of these. An “open” plurilateral means that parties negotiate and agree rules, and then apply the results to all WTO members.

The plurilateral route is more useful if it is a stepping stone to a broader agreement. This means persuading countries to join. Quite often that may mean persuading countries to do what is in their best interest. Consider for example the ITA which abolished duties on information technology products. Three countries that did not sign up to it are Brazil, Indonesia and India.  Yet for these countries exports in IT-related sectors are considerably more reliant on foreign suppliers than are their exports generally, and specifically more reliant on foreign suppliers of IT products (see table 1). A refusal to liberalise imports is thus a tax on one’s own exports.

Table 1: Foreign sources of value added in exports (percent). Source: Calculations based on OECD/ WTO Trade in Value Added Database 2015.

But how can recalcitrant parties be persuaded to sign onto plurilateral initiatives? And more pointedly, how can they be persuaded to liberalise when their revealed preference seems to favour protectionism, even though that is self-defeating.

From Surveillance to Persuasion

The rationale for reciprocal liberalisation was that it helped to create political coalitions of exporters and domestic users/ consumers that overcame concentrated – and hence politically powerful – demanders of protectionism. But as the preceding discussion suggests, even the prospect of reciprocal liberalisation may not be enough of an incentive to get countries to participate.

This is where the third plank of the WTO – its review and surveillance mechanism – can come into play. The Trade Policy Review Mechanism (TPRM) arose out of the Uruguay Round negotiations because experts in trade policy and officials from particular countries, saw the potential for research and analysis into trade policy to shed light on the self-defeating aspects of protectionism. This would in turn place policy om a more liberal track. Such enthusiasm was never likely to be shared by trade negotiators themselves, who tend to oscillate between the wisdom of St. Augustine (“make me chaste, but not yet”), and the thought that reform is a great thing when it happens to others. Nevertheless, the WTO’s TPRM provide the organisation’s secretariat with the scope to scrutinise trade policies of members.

In its current state, it is however  under-resourced and under-equipped for its task. The TPRM was originally thought of as the WTO’s equivalent to the IMF’s Article IV process. But to mention that is to highlight the vast gulf between the two. Under the Article IV process, a country like Uganda or India can expect several visits a year from a team of IMF staff economists who will typically spend 2-3 weeks on site. Under the TPRM, Uganda, along with the entire East African Community, would be reviewed once every six years, with two visits of 3-4 working days by two WTO staff.  Member states also try to keep staff on a much tighter leash than their IMF counterparts. As a result of all these things, reports tend to be  descriptive and – with few exceptions  -rarely do what they claim to do: review policy.

The EU proposal on WTO reform contains some references to strengthening the TPRM process, but focuses mainly on the issue of notification of policy measures. Plainly, what would be in order is something more far-reaching. This includes devoting more resources to the process, and also a willingness to allow WTO staff to be more analytical in their work and their discussion of policy issues. Aiming to strengthen the process in this way would risk treading on some national toes, but that risk has not undermined the validity of the dispute settlement system.

At some point post-Brexit, the UK will be up for the its own WTO trade policy review for the very first time (reviews of EU trade policy do not typically focus on member states in detail). It should request a review at the earliest possible date. It  could use this opportunity to push for a reboot of the WTO’s review function. It could also model what a thorough review would look like. It could do this by using the review as an occasion to stimulate a full discussion of trade policy – warts and all – drawing not just on government institutions but on respected academic institutions such as the Centre for Economic Policy Research.

Not so special or different?

One of the vexed issues confronting the WTO, and on which the EU and Canadian proposals also focus, is the concept of special and differential treatment (S&DT) for developing countries. S&DT comes in various guises, but many developing countries interpret the notion as a way of securing exemptions from WTO rules and liberalisation commitments. The Uruguay Round of negotiations managed to reduce the scope for exemptions. But under the Doha round negotiations, many developing countries sought to revise this, couching their positions as requirements for “policy space” to pursue development objectives. That the original formal proponent of the “policy space” notion was Venezuela might shed some light on the various perils that go with this approach: policy space is often space to shoot yourself in the foot.  More generally, at a time when larger players such as the US and China (see below) seem keen to push the limits of existing rules, there seems to be little sense for developing countries to further loosen trade rules.

Both the EU and Canada proposals focus on revamping S&DT by focusing more on developing rules in a way that countries have the capacity to implement, and supporting them in this. This is an approach that the UK – which has long been at the forefront of discussion on aid to trade – is well placed to develop further.

The discussions surrounding S&DT have been complicated by the “China effect”. Developing country status in the WTO is largely a matter of self-selection – if I say I am a developing country, I am.  On this basis, in terms of GDP per head China counts as a developing country; but it is also the world’s biggest exporter of goods. The issue with China is less to do with S&DT – the terms of China’s accession to the WTO involved a much higher level of commitments than for countries at comparable levels of development – and more to do with the extent to which WTO rules generally deal with state intervention in the economy. The main sources of complaint – and in the case of the US, trade measures – are claims of subsidisation of non-commercial operations and forced technology transfer.

In late 2017, the US, the EU and Japan issued a statement that they would work jointly to eliminate distortions in the trading system. Though China was not specifically named, the list of issues – state owned enterprises, subsidies, forced technology transfer – left little doubt as to who was in the initiative’s line of sight. Again, reasoning from first principles, if China is truly following distortionary policies, the first casualty will be China itself. It will have an interest in rebalancing its growth strategy to focus more on the efficiency of resource use.  Punitive action (like the type taken by the US, or contemplated by the EU vis its approach to trade remedies) may prod some action, but is more likely self-defeating since it risks undermining the system of rules that countries are trying to get China to comply with the in the first place.

The UK for its part has the opportunity to consider closely whether it sticks to the more adversarial approach, or whether it sees an opportunity to act as an honest broker and rely more on softer approaches based on review and persuasion ( as described above).

Missing links

Data from the Global Trade Alert initiative suggest that the coalition of reformers gathered in Ottawa include some of the leading users of protectionism since 2009. The UK is not very different –  it implemented 460 interventions considered to be harmful versus 118 that were considered liberalising.  No amount of proposals for reform will amount to anything more than tinkering with the system unless countries are willing to put their money where their mouths are. When it comes to the WTO, there is wisdom in remembering the old adage that “what you get depends on what you put into it”.

Clearly, the how much the UK can put in will depend on how far it can navigate domestic political constraints. To return to the subject of tariff rate quotas in agriculture as an example, the UK could short-circuit the difficulties it currently faces ( and leave itself better off) by simply implementing a much more liberal import regime.  That would require tackling lobbies that favour such protection, through a broader plan to reform agriculture by relying less on trade measures and more on measures that deliver public goods. The current Agriculture Bill before parliament has already flagged that direction of travel on the matter of subsidies. The  central point is that, for the UK and for others, there is tight nexus between reforms to international institutions governing trade and domestic reforms. Working at both ends (but especially the latter) is a requirement. As the UK resumes responsibility for its trade policy, it has the chance to think closely on exactly how it will do that.


About the Author

Amar Breckenridge

Amar
Breckenridge

Amar Breckenridge is a manager in Frontier Economics' public policy practice, and leads its work on international trade policy.

Amar’s work on trade spans trade policy analysis and modelling, support to dispute settlement and litigation, and trade negotiations. Amar spent five years as a staff economist at the World Trade Organisation prior to joining Frontier.

He is also a member of the Experts Network at ICTSD.


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