EVENTS

Date:	Tuesday, March 22, 2005
Time:	4:00 PM -- 5:45 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

March 2005

The Future of the World Trade Organization

A consultative board to the World Trade Organization director general issued a report calling for significant institutional and policy changes in the multilateral trade organization--including recommendations regarding preferential trade agreements, relations with NGOs, the dispute settlement system, transparency, and the decision-making process.  At a March 22 AEI conference, two leading members of the consultative board, Jagdish Bhagwati and John Jackson, explained the rationales behind the recommendations, and a panel of experts on the multilateral trading system assessed and commented on the recommendations.

John Jackson
Georgetown University School of Law

The WTO director general intended the consultative board to launch a discussion about the institutional structure of the organization. And that, I feel, is very important and has often been reasonably overlooked. I cannot cover all the issues, so I will select a few issues that relate more to the institutional side and leave Jagdish to discuss the preferential agreements.
 
Let me start first with the dispute settlement system. I would say all of the interventions that mentioned the dispute settlement system, except maybe two, were extraordinarily favorable to the present system. That is consistent with what I have experienced elsewhere in the world, that there is a great deal of satisfaction with the way that system works. Thus we felt it was very important that whatever we suggested should do no harm. We think that one of the harms that could be done is political intervention into a specific case, because it would lead the participants to begin to back off the advocacy based on reasoning and precedent. Dispute settlement has been a very troublesome issue of secrecy and non-transparency. We felt, and I have felt for some years, that the organization was getting an unnecessarily bad reputation on its lack of transparency. The WTO is many times more transparent than the GATT. The website is really quite remarkable, and reports are much more current and timely. The United States suggested having open hearings of the panel process.  We are suggesting a very modest experiment in that regard, which is to have a presumption that the hearing should be open but to allow closure on the basis of reasoning offered by a government.

Lastly, let me discuss the decision-making process in the WTO. This, for historical reasons--and worthwhile historical reasons, incidentally--has focused on the so-called consensus rule. Even where there is a vote provided for in the new WTO charter, there has been a tendency to gravitate toward consensus decision-making. The word "consensus" was never in the GATT, but GATT developed consensus over decades of practice and ad-hoc experimentation, largely because everyone knew that voting would not work. That remains the case today. Weighted voting, as you have in some of the financial institutions, could solve some of the problems, but there is no support for weighted voting anywhere.  As a result, we have again been very cautious in recommending a situation that is parallel to the experience in the European Community of what has been called the Luxembourg Compromise, where for some issues there is a requirement for a government that is going to break a consensus to give its reasons in writing and show that it is something that is contrary to its essential national interest.

Jagdish Bhagwati
Columbia University and the Council on Foreign Relations

I agree with what John said for the most part. On the role of the secretariat, it seems to me that the main problem is not what members do to it, but what has in fact been a totally emasculated secretariat that plays no effective role. One of the first things on which I think most of us would agree is that it needs to be given a budget, if you really mean business.
 
To address the dispute settlement system, I am generally in agreement with John. But I do disagree on the notion that one should not allow people to buy out of the system. I agree with the buyout if we are thinking of the dispute settlement as simply a legal decision that comes down and then has to be enforced, but I do not think we are there. Therefore, one has to think in terms of what a buy out does. My own view is that a buyout is essential, because otherwise we will freeze up the system.
 
There are two issues in which the economists were interested. One was the whole issue of nondiscrimination. This is at the heart of the original GATT, the Most Favored Nation (MFN) clause, that whatever I give to you should be available to everybody else. By my count there are five countries that enjoy the MFN clause. Everybody else has some special treatment, such as a lower tariff based on special and differential treatment and all kinds of reasons. Therefore we have a proliferation of discrimination. And we looked at many studies which show how this can be a problem for the countries themselves, not just for the trading system. But then we take a view which is actually very benign, which is to say this is going to go on, and there is nothing we can do about it other than know where it is going on in the system.
 
The second problem is this whole question of what are called non-trade issues, such as labor rights, environmental standards, and capital controls. There are a variety of issues which are tangential to trade itself, but which are therefore increasingly, through bilateral trade agreements, beginning to get into the trading system issue. The argument made has been to increase flexibility, allowing countries to do what they want. But this is really an issue that raises many questions, particularly vis-à-vis some of the developing countries. The issue is whether we should be able to impose standards on other countries. Should we let different countries do different things and have plurilateral agreements rather than universal agreements within the WTO? If a group of countries--Norway, EU, and the United States, for instance--wants labor standards in the WTO, then they should be allowed to do so with a certain majority. Can a group of countries, building a quorum by itself which we allow, be able to promote its own issues to make its own comfort level greater at the expense of other countries, designing interventions in tangentially trade-related issues in this way?
 
Hugo Paemen
Hogan and Hartson

I will try to follow the logic of the report in my comments today. I agree with most of the remarks which have been made. First of all, on the preferential trade agreements (PTAs), I am very happy that they are now called PTAs. There was a time when they were called regional trade agreements, but they have now lost all regional fig leaves and are not regional at all anymore. If there was somewhat more progress in the multilateral trade negotiations, there would probably be fewer preferential bilateral arrangements. The best remedy, as far as I am concerned, is to neutralize the negative impact by reducing the tariff as much as possible so there can no longer be preferences, at least as far as tariffs are concerned. It becomes a bit more difficult when you have non-tariffs. You will see that more and more bilateral agreements become non-tariff agreements. They go into the so-called non-trade issues, which complicates the situation even more.

As a trade negotiator, I would rather concentrate a little bit on the organizational aspects of the WTO. And I think it is very hard to deny that, for the moment, the WTO is in three crises: an institutional crisis, a crisis in terms of process, and a crisis of public opinion. Institutionally, it has already been mentioned that the position of the director general, of course, has been so degraded that the engine is no longer functioning as it functioned before.
 
My conclusion is that the WTO suffers from weak leadership and from weak constituency. Governments are not 100 percent enthusiastic or behind the process, and the business community does not believe in it anymore. They think that WTO has become too complicated and too unpredictable. When they have a problem the big ones go and settle it on their own, no longer counting on the multilateral system. And that is not a very good thing. I would also be very much in favor of a much greater decentralization of the negotiating process. There was a time when we needed this, but that time is now over.
 
Gary Horlick
Wilmer Cutler Pickering Hale and Dorr LLP

It is worth looking at how governments look at PTAs. Governments are going to do something that is the fastest and easiest alternative. And PTAs are easier, most governments think, than a WTO negotiation, as you are only dealing with one or two other countries. The key here, though, is they are easier to do because you ignore the WTO rules. This brings in a second phenomenon of government. International law, it was once explained to me, consists of elites in one government agreeing to let elites in another government do something because they may want to do it someday. The WTO is a prime example of this. No one has ever challenged any of these PTAs under the WTO rules. All governments live in glass houses; they want to do these things, so they do not challenge anyone else is doing them. PTAs are also faster. Very few trade ministers, interestingly, last as long as U.S. trade representatives. So if you want to accomplish something on your watch, you can go off and do a PTA in two years with your neighbor and cut some ribbons and have a party, or you can set things up for your successor twice removed to complete an agreement. 
 
So what do you do about it? One suggestion is to speed up the WTO process, as has been pointed out. Give the trade minister something to do more quickly. Secondly, you legislate in the WTO. Giving trade ministers something to do between rounds is another possibility. Do not let the dispute settlement body become the WTO. Then the third thing, as I mentioned, is to make it harder to do PTAs. And this is not altruism or hopefulness; every so often in a round, big countries get together and agree to do things like that. Going to a no-blocking dispute settlement system is a lot more radical than anything I have just discussed. So in short, the PTA problem is solvable with a modicum, not huge amounts, of political will.

Jay Smith
George Washington University

Let me start by applauding the guiding principle on dispute settlement that the board adopted, which was "do no harm." And I think that deserves applause, as does their conclusion that by and large the dispute settlement system has worked reasonably well in this first decade. I think that is something that, despite some creative proposals in the dispute settlement review, the member states themselves believe as well. Very few, if any, are promoting really radical reorientations.

The report suggests that the dispute settlement system may be at a crucial and perhaps somewhat delicate point today. One might point to a number of contemporaneous factors that suggest this is the case. I agree, but I do not think its position is any more delicate today than it has been for the last decade. The report, I think, points to the reason in passing in its discussion of dispute settlement, but it does refer to this basic imbalance between the rulemaking side and the dispute settlement side. I think it is a fundamental imbalance that poses certain risks, especially for the panels and appellate body members who have this unenviable position of having to resolve issues presented to them by member states with very little prospect of any political feedback, guidance, et cetera, in the form of decision-making or rulemaking from the member states.
 
Despite this, the system has worked very well by and large because the panels and the appellate body have handed down reasonably well-reasoned and fully documented reports. These reports have been somewhat sensitive to political considerations, giving explicit deference to member states by promoting collegiality among the appellate body members through openness to outside sources of information and broader participation for third parties at the appellate stage. It is also due in part to some restraint on the part of member states in not filing terribly sensitive disputes. All these things have worked, again with some notable exceptions, to lead to this reasonably good record of performance in the first decade. But because few of them are institutionalized, the situation remains delicate.

This do-no-harm principle in the board’s report reflects a correct sense that certain institutionalized reforms that have been proposed might end up doing more harm than good.
 
Daniel Tarullo
Georgetown University School of Law

One way to approach the report is to think about where it is situated politically. The authors of the report do not want to think of it as a political document, but whether they like it or not, it is, because it deals with a political issue, which is to say what happens to the WTO and the world trading system. And as I read the document, it seems to me that it is animated by an undercurrent of deep concern about the institutional attributes of the world trading system--a deep concern which I think is well justified.

The recommendations, though, I think are largely at the margin, maybe because the authors of the report are the sort of the elite of the traditional loyal GATT/ WTO culture which has produced the positive developments of the first half-century of the world trading system. The problem from my perspective is that too much has changed. And at this point, changes at the margin, whether I agree or disagree with the individual changes--and I am not unsympathetic to a number of them--are probably not going to respond ultimately to the challenges that the world trading system faces. Let me try to enumerate a few of those.

First, and this was alluded to earlier, support for the world trading system in the United States has fundamentally changed in just the last decade. The end of the Cold War, although this is not widely recognized, pulled away one of the factors that always used to push the United States in the direction of support of whatever was coming out of the GATT--for the same reason that we supported whatever came out of any international organization as part of a larger geopolitical struggle. Now, with the end of the Cold War and the growth and strength not only of the EU but of some other of the emerging market countries, there is a much greater tendency to look at this WTO as a forum within which a rivalry is being played out. That was always the case, but it is no longer balanced by some sense of overall commitment, as a political matter, to what is going on.

Second, within the United States, the old bipartisan trade coalition is gone and that has happened in just the last decade. As with almost everything else in Washington, partisanship is very high, and that makes it very difficult to forge a consistent, sustainable trade policy.

Third, the big companies have ceased to develop and articulate with a collective responsible voice the interests of business. The former structure was a process by which big business executives got together and were able to work out positions that did not reflect everything that their own companies wanted, and a number of CEOs spent a lot of time on public policy issues.
 
So I end, again from a political perspective rather than a scholarly perspective, in suggesting that the trading system, when we have dragged on past 2005, past 2006, past 2007, is going to need bolder thinking and bolder leadership from the United States, from the director general, from the European Commission, from developing countries who are now stepping out on their own if it is to adjust rather substantially and thereby prosper for another half-century.

AEI research assistant Jessica Browning prepared this summary.