Future of the world trading system

Future of the world trading system

The relative dynamism of emerging economies over the past several years has meant that these countries, many of them in Asia, have come to play an ever-growing role in the world and to account for a larger share of economic activity.

Adjusting politically and organisationally to shifts in economic power takes time. As we work towards a new equilibrium in international cooperation, new relationships and leadership patterns will inevitably emerge, just as they have throughout history.

While this transformation is in progress, multilateralism is going through a difficult time. It is not just about trade. Climate change,  financial regulation, and macroeconomic coordination are also effected. A core challenge of our time is managing change in a manner that avoids conflict.

In trade matters, we need to address competing views among governments as to what constitutes a fair distribution of rights and obligations within the trading system. Before the World Trade Organisation (WTO) was established in 1995 there was, in broad terms, an arrangement whereby developed countries agreed to open their markets, while more emphasis was placed on special and differential treatment for developing countries.

Substantial manner
Developing countries were not called upon to open their markets in a substantial manner. This arrangement reflected basic differences in development levels and capacities. Over time, the differences between developed and at least some developing countries have narrowed. As developing-country growth has outstripped developed-country growth and the gap between them has narrowed, it is becoming harder to find a balance that is regarded as legitimate and fair in the eyes of all parties concerned.

Underlying all this is the question of what constitutes reciprocity. For some, the emerging economies have attained a level of competitiveness and efficiency in key sectors that warrants treating reciprocity as parity in obligations.

Others emphasise that emerging economies still face formidable development challenges in many areas and are still far from enjoying the income levels and standard of living of industrialised economies. In this world, it is argued, treating reciprocity as equality of obligations is not appropriate, fails to meet a fairness standard, and handicaps development policies.

While it is not my role as WTO director-general to take a position on this issue, in many ways it has made it impossible for the Doha Round to reach agreement on a big package of new regulations of world trade. The second challenge to the trading system relates to the way technology and transport costs, backed by open trade and investment policies, have changed production structures.

A vast and growing amount of international trade involves global supply chains in which parts cross many borders as production is spread across many locations. This production sharing is very different from the traditional way of working, where a single country would import the necessary parts, add local inputs plus labour and capital, and then export final goods.

The third challenge was the explosion of regionalism and its impact on multilateral trade arrangements. More than 300 preferential trade agreements are in effect around the world. The World Trade Report for 2011 argues that a good deal of activity, especially in Asia, is driven by a desire to create conditions favouring supply chain production, where there is a premium on eliminating tariffs and creating a friendly regulatory environment.

This is not problematic as far as it goes. But it also highlights that, with regulations and behind-the-border policy regimes becoming so important in preferential agreements, we run the risk of regulatory divergence and a resulting fragmentation of markets. Regarding the Doha Round of world trade negotiations, it is no secret that governments are finding agreement elusive and that in ten years we have not been able to complete the negotiations.

The challenges I have referred to above partly explain this -governments are struggling to agree upon how to balance rights and obligations among dissimilar nations.  We will be ill-equipped to address this situation if we cannot break the stalemate. I do not believe we can afford to add further burdens to the world economy or to undermine the authority of international institutions. I therefore hope that all WTO members and, in particular, those with greater influence than others, seek common cause with their trading partners in order to move the trade agenda along.

(The writer is director-general of the WTO)