Talking Trade blog
Weakening “Insurance” provided by old global trade rules and commitments
Published 24 March 2017
I have spent much of this week training on the rules of the World Trade Organization (WTO). This is the international organization that provides the bedrock framework of rules and structure that makes global trade possible for firms. It has been doing its work quietly and fairly efficiently for so long that most people simply take it for granted at this point.
But a review of the rulebook and commitments made by member states shows how complicated the WTO can be for companies to try to navigate and understand. It also shows how increasingly out of date the WTO rules and obligations have become. More and more, what matters to firms is being handled by free trade agreements (FTAs) and not by the global trade body.
The WTO mostly surfaces in the news only when members get involved in various trade disputes over specific issues.
This week, for example, South Korea threatened China over restrictions on Lotte department stores. The United States and the European Union have been battling for years over Boeing and Airbus aircraft. The list goes on and involves both developed and developing economies arguing over disputes both large and relatively small.
The organization made headlines recently for one positive development—the start of the Bali Trade Facilitation Agreement (TFA). While TFA can be quite important, particularly for developing countries and for companies, it remains basically the only completed negotiation for the WTO in 25 years.
The last substantial update of the global rulebook took place in 1995. Since then, officials have been unable to agree on a new framework. They gave it a serious effort, starting in 2001, but nothing much came of talks from the Doha Development Agenda (DDA).
In the meantime, the rules have been frozen in amber from the early 1990s. More important for many companies, the commitments made by various WTO member states have also been stuck since that time.
In some areas, this is not terribly problematic. Members started writing rules to govern market access for trade in goods in the 1940s and are fairly skilled at covering large swathes of products.
Other areas are much more challenging. Even in goods, changes in technology since 1995 have made WTO commitments obsolete. For instance, most of the internet and computer revolution were not covered by members in their market access schedules. Some updates have taken place as part of the Information Technology Agreement (ITA), but these remain relatively modest.
However, we still have no international rules for e-commerce and digital trade. Digital trade is global, and the risk of regulatory fragmentation is increasing in the absence of WTO rules and disciplines to structure trade.
Services are also deeply problematic. The extent and depth of services commitments at the WTO are mostly woeful. Even developed economies mostly gave limited concessions in the early 1990s since officials were uncertain about what the implications might be of making legally binding promises in the global context for services at the time.
These services commitments were supposed to be revised as part of the “built in agenda” of the next round, but the next round never happened. Hence services commitments have never been updated.
The contrast between what countries are able and willing to do in the context of free trade agreements (FTAs) and the WTO for services is quite breathtaking. In FTAs, members are happily scheduling all sorts of market opening and national treatment commitments, promising to open services and treat foreign services companies fairly and similarly to domestic services companies. But in the WTO, these pledges have not happened.
In part of course, this makes sense, as a commitment at the WTO automatically applies to all 164 members. An FTA promise only applies to the FTA partner. But to show how limited many WTO commitments were in practice, many WTO members refused to grant permission for their own citizens to travel abroad to use travel services like hotels or tour operators or to use foreign hospitals. [Keep in mind that governments always have the right to issue or refuse to issue visas and immigration paperwork for travel.]
The WTO also has no commitments—and no serious discussions about including—much of anything on investment at all. There are limited commitments to allow foreign service companies to set up in foreign markets (subject in most cases to strict conditions that can make it commercially impossible to operate). The WTO allows discrimination for services in both market access and national treatment, which means that foreign companies may not have easy access or fair treatment in the market. Once in the market, there are no protections for the investment or rules to help investors move money, profits, etc. out of the market.
WTO rules that might be assumed to assist firms often do not exist. Member states often give better access and protection to firms in practice than they are actually obligated to provide.
Rules like the WTO and FTAs should perhaps be regarded as an “insurance policy.” But, like an insurance policy, they matter an awful lot when things go wrong. The fine print is critically important in the event of a catastrophe.
It is at that moment that firms and governments might be shocked to discover how little is actually covered by the WTO or by various member states in their country-specific schedules. These schedules are hard to find, harder to decipher, and tricky to navigate. Launching a trade dispute over older and older rules is hard. More and more of the global economy is simply not covered by the WTO.
Members are currently planning the agenda for the next gathering of trade ministers to take place in Argentina in December. So far, the proposed content involves discussions (and maybe not rules yet) on e-commerce and fish. While perhaps important and welcome, neither may resolve the increasingly critical problems of older rules and thin commitments by member states. The global trade "insurance" policies are looking rather threadbare.
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