Can the WTO still change the rules of trade?

In a series of three blog posts, Peter Draper, vice-chair of the Global Agenda Council on Trade, examines some of the key trends.

Current trade rules are based on the notion that firms in one nation sell things to customers in another nation. Hence, the rules framework concerns product-trade rather than process-trade. As such, they do not account for a range of policies and barriers that may not inhibit selling things, but do hinder moving things.

This problem afflicts the WTO in particular, which has struggled to advance beyond its traditional focus on market-access barriers. The nature of production chains that intermingle exports of services, goods, movement of capital and of specialized workers, and the role played in them by efficient trade logistics, all point to the importance of comprehensive multilateral disciplines to facilitate their operation.

The WTO’s contribution potentially spans services, intellectual property, trade facilitation and tariffs on imported inputs. Furthermore, trade and investment are two sides of the same economic coin – trade rules cannot work without investment rules, and vice versa.

Our global trade rules fall short of the 21st century, and global investment rules are, alas, non-existent.

Furthermore, value chains evolved historically as southern export platforms to service northern markets. Now we are seeing shifts in southern locations and increasing targeting of other southern markets.

Yet the Doha round is predicated on a North-South negotiating dynamic. As value chain relocation takes hold, driven by emerging market growth, so the new dynamics need to be reflected in how the WTO conducts its business.

How can WTO rules be advanced in the absence of a conclusion of the Doha round? Other approaches need to be explored, including plurilateral or small group negotiations under the auspices of the WTO. The politics of this approach are challenging, but the systemic implications of continued stasis in the WTO are arguably worse.

Two further implications relate to services trade and investment. First, trade rules should be updated to promote modal neutrality in services trade and investment. Specifically, modes 1 (cross-border trade) and 3 (cross-border investment) should be open and therefore facilitate modal switching. Second, regulators need to promote regulatory coherence across borders so as not to establish bottlenecks in the value chain creation process. This could be done through the adoption of general or sector-specific principles, or both.

Given the difficulties with updating WTO rules, more progress has been made in preferential trade arrangements (PTAs) and bilateral investment treaties. Production chains are even more intense at the regional level, and thus regional agreements can more easily respond to the challenge, complementing multilateral disciplines.

Nonetheless, PTAs could add to transactions costs. Also, PTA rules are based on an antiquated understanding of where goods are “from”, thus the Byzantine networks of “rules of origin”. But goods are now “from” everywhere because of global value chains.

So, we need new approaches to negotiating PTAs with a view to making them more compatible with actual global value chain operations and ultimately WTO disciplines. At the very least, this suggests an approach rooted in reducing transactions costs, not raising new barriers to trade.

A key question is how these bottom-up changes could be incorporated into the WTO’s architecture. This is a subject the Global Agenda Council on Trade has also previously considered, and the interested reader is referred to our recommendations in this regard.

Image: An employee looks at an assembly line at a Ford manufacturing plant in Chongqing municipality April 20, 2012. Shi Tou / REUTERS

Author: Peter Draper is vice-chair of the Global Agenda Council on Trade