Tag Archives: WTO

Seals, Morality, and the WTO

REUTERS/Paul Darrow

REUTERS/Paul Darrow

I recently returned from a conference in which a coauthor and I presented some research on clubbing seals to death. No, not on the methodology of the ugly business; instead, we were looking at the economic and legal questions raised by a recent pair of decisions by the World Trade Organization’s dispute settlement mechanism. The case raises issues of morality, extraterritoriality, and the dangers of a global trading system adrift.

To set the scene, Canada and Norway both engage in commercial seal hunts. The hunters ultimately sell the seal skins and furs commercially. In part to preserve those skins and furs, the hunters club the seals in the head to stun them before killing them.

More than a few people find this process offensive. In 2009, the European Union adopted measures to ban the sale of seal products in most cases (Foreshadowing: the “most” ends up mattering a lot). This prompted a formal complaint at the WTO later that year. Canada and Norway claimed, in effect, that the European Union had reneged on past promises of trade liberalization. The premise was that when Canada and Norway signed agreements such as the Uruguay Round of trade talks in the early 1990s, they did so on the understanding that their products would gain access to foreign markets. When Europe closed its markets to these particular products, the value of the original deal was diminished in Canadian and Norwegian eyes.

The European Union, which contains 28 countries but negotiates with a single voice at the WTO, responded that it was within its rights. The central trade agreement in question offered a number of exceptions that countries could use to justify the imposition of trade barriers. The language reads, “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures…”—and then goes on to list the exceptions. Curiously, Europe did not opt for the one that concluded “…necessary to protect human, animal, or plant life or health.” Instead, Europe claimed that its seal trade barriers were “…necessary to protect public morals.”

The European Union recently ended up losing the case, both in front of the original panel and in front of the appellate body, though each used different reasoning. A key factor was the pliability of European moral concern. The original measures that banned seal product trade had, in fact, permitted it when hunts were performed by indigenous communities (e.g. Inuit) or when hunts were part of “marine resource management.” There was no evidence that these types of hunts were any more humane; they were just instances in which other European objectives (e.g. protecting indigenous communities) came into conflict with their expressed moral concerns.

A major challenge for the dispute panels was to figure out just how broad this “public morals” exception ought to be. Though it had appeared in trade agreements for a long time, it had not really been invoked much. Thus, its scope was ill-defined. This was what made the EU Seals case noteworthy; it grappled with a clause that, under an expansive interpretation, could blow an enormous hole in countries’ trade liberalization commitments. After all, countries are permitted to ban products that are dangerous or unhealthy, but there is a natural limitation to this license to block trade—one can test whether the products are, in fact, dangerous. But if countries can block products because they claim their citizenry has moral concerns about the way the product was produced, there are no such natural limits. As one of the conference participants had noted in previous work, a country could express moral concern about products made by trade partners who supported Israel or Taiwan. The intent of the original WTO agreement was clearly not to allow countries to reinstate protection whenever they felt like it. Yet the “moral concern” exception is there on the books. How to strike a balance?

The jurists decided that, at a minimum, the moral concern had to be pure. An abhorrence of seal clubbing, except when done by an Inuit, did not meet that test. This largely postponed the question. It served as a check against simple protectionist motives, in which moral concerns were put forward as an excuse for discriminating against imports. But it leaves open the extent to which countries can use their moral concern about the production methods, policies, and practices of other countries to justify barriers (which may, in turn, look a lot like sanctions).

The question is a difficult one. Judicial systems everywhere fill in blanks in the law when vague phrases demand interpretation. But they usually operate in conjunction with active legislatures, who can clarify the laws if they so choose. Further, justices often undergo careful selection and vetting procedures, as with the US Supreme Court, for which nominees are picked by the president and approved by the Senate. This process gives their interpretations some legitimacy (though, as this last week demonstrated, it hardly immunizes them against criticism).

The WTO dispute settlement mechanism does not enjoy either of these advantages. Global trade talks launched in 2001 have largely stalled and struggled to produce even modest results. The last two full global trade agreements concluded in 1994 and 1979. Policymakers have sometimes been tempted toward complacency about the lack of negotiation progress. The 1994 agreement strengthened dispute settlement; why not just let that system work and enjoy the benefits? The difficult questions of the EU Seals case show the dangers of such an approach. New political questions require new political agreements. Such an agreement at the WTO is long overdue.

Guest Commentary: Bali and Its Lessons

In late October, The Chicago Council and partners gathered some of the world’s leading experts on international trade to discuss what would come next in economic integration. Below, one of these experts, Uri Dadush, senior associate at the Carnegie Endowment for International Peace, offers his analysis of an important subsequent event–the limited global trade deal that was agreed in Bali in December. He notes the modest achievements of the Bali deal, but also draws lessons for how the World Trade Organization needs to change in the future.

At a time when US trade debates are about to heat up, a broad description of the outlook for global trade, drawing on the October gathering, is also now available here.

By Uri Dadush, Senior Associate, Carnegie Endowment for International Peace

The Bali agreement rescued the World Trade Organization (WTO) from oblivion, but it also underscored the severe limitations of multilateral negotiations and the need to reform the institution. Encouragingly, it also points the way to how the WTO can change.

In Bali, the WTO reaffirmed the importance of its development mandate, but only by reiterating the contents of prior agreements, adding little new. It also, however, took a significant step forward and one, smaller one, backward. The step forward was to establish trade facilitation—in this case essentially entailing the proper functioning of customs—as part and parcel of the WTO’s functioning, including the creation of a standing committee to oversee the implementation of the agreement.

The step backward was to allow (temporarily, but temporary easily becomes permanent in trade policy) India and other developing countries a major exception to limits on agricultural subsidies on account of food security. It is easy to imagine how such an exception will make it more difficult to make progress on eliminating all trade-distorting agricultural subsidies, traditionally a defensive agenda of advanced countries, and one on which the WTO supposedly plays a unique role. And failure to move on agricultural subsidies in the future will reduce the chances that advanced countries will obtain their long-sought quid pro quo, which is improved and more secure access to manufactures and service markets in developing countries.

But trade facilitation stood out as an exception on which many could agree. True, the significance of the trade facilitation agreement can be easily overstated, since in Bali it was whittled down to what is effectively a “best efforts” endeavor with an open-ended implementation schedule for developing countries. This includes freedom on their part to self-select what gets done faster, and what gets done on an indefinite schedule. Meanwhile, advanced countries and some developing countries have already largely implemented the good practices the agreement entails, such as prompt publication of changes in regulations, pre-shipping inspections where appropriate, redress procedures, and rapid processing times. But the importance of the trade facilitation agreement can also be understated, since extensive research has shown that the cost of custom delays can easily outstrip that of tariffs, and even a “best efforts” international agreement can strengthen the hands of reformers when the political will to improve exists.

Still, even the staunchest multilateralists will agree that Bali represents slim pickings for a wide-ranging negotiation that began in Doha 12 years before, and that negotiations involving 160 very diverse countries (Yemen being the latest addition) are very unlikely to yield anything other than minimum common denominator outcomes. Bali therefore underscores the need to move to a more efficient model for WTO negotiations, one that can involve a smaller, critical mass of players willing to engage on a narrow set of issues—so-called “plurilaterals”—rather than requiring that all countries agree on every aspect. There are illustrious precedents for this, including, for example, the government procurement agreement, the information technology agreement, and the agreement on financial services, all three of which are now the object of negotiation to be extended or deepened in various ways.

The problem with plurilaterals is not only that countries understandably resist any attempt to impose WTO disciplines on them if they have not been part of the negotiation, but they are also reluctant to let others negotiate agreements under the WTO aegis (including dispute settlement, etc.) that puts them at a disadvantage. Short of conducting the negotiations outside the WTO (as in the case currently of the negotiations on TISA—the Trade in Services Agreement), there are three complementary ways to square this circle: grant the excluded countries similar terms as the included ones, include them in the negotiations even if they ultimately opt out of the final deal, and side-payments.

The Bali package is billed as a multilateral deal since everyone was involved in its negotiation, but, given its narrow nature, it can equally be interpreted as a plurilateral deal on trade facilitation since, by allowing plenty of wiggle room in its provisions and allowing developing countries indefinite implementation periods, the trade facilitation agreement effectively bestows a near-free rider status on those that choose not to pursue it. In this light, the reaffirmation of the development mandate, especially for LDCs, and the food security exception for India were side payment for a rather limited agreement on trade facilitation.

The loose provisions in the trade facilitation deal are far from satisfactory from a narrow legal perspective. But from a development perspective, the picture is not as bleak: most countries want to undertake these reforms anyway, and given the complexities of carrying them out in a politicized environment, one can still see the agreement as a big step forward, since it establishes a roadmap and gives reforms a jolt, leaving open the possibility that more binding disciplines will be agreed in the future.

Thus, an important achievement of Bali—and one for which the new Director-General Roberto Azevêdo has to be recognized—is that it points the way to a more flexible modus operandi for the WTO, one that may allow for progress in other relatively narrow aspects of the Doha agenda in the future, or to go beyond Doha. Bali could also begin to shift the emphasis from the legalism for which the WTO and its predecessor, the GATT, are well known, onto the encouragement and support of trade reforms at a country’s own pace.

Moreover, everyone should recognize that progress in world trade does not depend only on the WTO, even though the institution continues to play a crucial role in keeping trade open and predictable. Regional agreements supplanted it long ago as the most active arena of international negotiations and will take on even greater prominence in the future as a number of mega-regional deals such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership take shape, even if some of them ultimately fail.

Furthermore, technology trends and the domestic pressure to enact reforms have always been the most important drivers of global trade by far, and will continue to be. With the growth of foreign direct investment and the proliferation of global value chains, foreign investment and trade have become an essential component of production, making self-sufficiency almost unthinkable. And the rise of an informed middle class in developing countries places new demands for access to quality products at a reasonable price.

Contrary to the dire predictions of trade pessimists, there is thus little reason to doubt that world trade will resume its rapid upward trajectory as the effects of the financial crisis recede. That, in turn, will raise the stakes on revitalizing the WTO as a central plank of post-war prosperity. Hopefully, Bali will be remembered as the first step in the institution’s long and hard journey of reform.

The TPP and Evel Knievel – Up in the Air

Last night, as part of the Chicago and the World Forum, Ian Bremmer proclaimed that the most important region of the world for US foreign policy was Asia. Further, he said, the most important US undertaking in Asia was the Trans-Pacific Partnership (TPP) trade agreement. At roughly the same time that he was speaking, TPP ministerial negotiations in Singapore were coming up short. The disappointment came on the heels of a successful weekend WTO deal in Bali that had led some to proclaim a Trade Renaissance.

The twelve assembled TPP ministers didn’t admit defeat, of course. They heralded “substantial progress.” In a briefing, USTR Michael Froman said, “If I had to describe the outcome of the meeting, I would say ‘great momentum.’”

No doubt progress was made. But it can be notoriously difficult to figure out just how much. Herewith, some points to consider:

  1. We’ve been here before. We haven’t been at this level of progress, with this set of participants, exactly. But in November 2011, the United States was hosting the APEC meetings in Hawaii, TPP negotiations had been active for almost two years, and there were serious hopes that the agreement among the nine participants would be concluded then and there. Participants knew that beyond those meetings lay a US election and few deadlines that would force tough choices. As it happened, the negotiations could not conclude and the leaders were left praising themselves for good progress.
  2. Are they 65% done? Japan’s Vice Economy Minister just gave that figure as the degree of agreement among TPP participants. But what does that mean? Appropriately cautious, Amb. Froman reminded that “the thing about trade negotiations…is that nothing is agreed to until everything is agreed to.” To see the issue, think of the late daredevil Evel Knievel. He would pull off stunts like jumping his motorcycle over 15 cars parked in a row. To do so, he would rev his motorcycle along a straight-away, ride up a ramp, then, if all went well, fly over the cars and land on the other side. For Knievel, would 65% done mean the straightaway, before he mounted the ramp? It was certainly important for him to pick up speed that way, and that would have been 2/3 of the measured distance. But it would hardly have counted as 2/3 of the difficulty of the task.
  3. Ambition vs. Conclusion. In 2011, there were nine participants in the TPP negotiations. Since then, Canada, Mexico, and Japan all joined, bringing the number to twelve. When Japan joined, one former USTR privately predicted that the negotiations would now not conclude during the Obama presidency. Reportedly, delegations in Singapore were upset with Japan’s limited offers of liberalization. The 2011 delay posed a dilemma, however. As long as the negotiations were to conclude soon, it was reasonable to ask allies like Canada, Mexico, and Japan to wait to join. As the talks dragged on, such a stiff-arm seemed undiplomatic. Further, the three countries’ admission undoubtedly raised the level of ambition of the talks and the potential economic impact of the TPP. But when they were allowed in, the talks became significantly harder to conclude.  Now, as a 2013 deadline passes, S. Korea has expressed interest in joining…
  4. This is level one of two. Robert Putnam helped clarify the difficulty of international negotiations by describing “two-level games.” International negotiators need to reach agreement among themselves, and among critical constituencies at home. So far, the Obama administration has neglected the consensus-building at home on trade. One indication of this is the domestic drumbeat for enforceable measures against ‘currency manipulation.’ There is no indication such measures are on the TPP agenda, nor would the other countries likely accept them.

None of this implies that TPP is a lost cause. However, it does imply that President Obama will need to make TPP a top priority for the new year and devote substantial time to the project if it is to have a chance. Given the centrality of TPP for Asian relations and the centrality of Asia in this administration’s foreign policy, that’s not an unreasonable prioritization.

Guest Commentary: TTIP – Views from Europe

By Fredrik Erixon, director and cofounder of the European Centre for International Political Economy (ECIPE), a world-economy think tank based in Brussels, and was the Convenor of the Transatlantic Task Force on Trade, a joint project of ECIPE and the German Marshall Fund of the US that spearheaded the TTIP negotiations. A fuller version of his analysis can be found here (PDF).

Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. But are they worth their salt? While the most outstanding feature of past FTAs is that they have not had impressive effects on growth in trade and Gross Domestic Product (GDP), the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) may change this verdict. Clearly, TTIP will be won or lost for its economic merits. And the pro-growth effects of TTIP are really what persuaded reluctant officials and politicians in Europe to join countries like Germany and Sweden in their efforts to push for a transatlantic FTA. Given Europe’s poor growth rates, trade agreements that could deliver higher economic growth have been given a new hearing.

Few would deny that TTIP has the capacity to deliver a sizeable contribution to GDP in Europe. The gains from this FTA would be bigger than from other FTAs for the reason that it involves two large economies. Simply, size matters. A “conservative” estimate by the Centre for Economic Policy Research in London suggests the TTIP gain for the EU to be in the tune of 0.3-0.5 percent of GDP (the GDP gains are slightly smaller for the US).

However, political scepticism of TTIP is less concerned with the bilateral economic gains (or losses) and more directed to its consequences on the World Trade Organisation as the central forum of trade negotiations. But perhaps surprisingly to some, the debate in Europe over TTIP has taken a different view. Generally, it has not thrived on the notion that TTIP should be an attempt to build a Fortress Atlantic – or that it is a strategy to gang up on China or other emerging powers competing with the US and Europe.

So while the strange acronym of TTIP is for some a code word for the death knell of the WTO, many trade observers in Europe would argue it is the substance that should be used to give global trade policy a needed shot in the arm.

TTIP, like the TPP, was not born out of deep and genuine beliefs in the principles of free markets or the classical school of free trade. Like any other trade agreement in the past years, these initiatives build on conditional views of free trade and free competition mixed up with soft mercantilism and a growing urgency to support economic growth. Yet it is the best available strategy to rejuvenate global efforts to liberalise trade.

In the past 15 years, the multilateral trading system has been a leaderless system with no clear direction that has unified the key members. The system itself benefited for several decades from the leadership by the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers to the US leadership, but none other than the US had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalisation has somewhat changed. Absent political leadership and direction, the Doha Round got stuck because the political instinct of many countries was to favour status quo rather than new liberalisation as long as there is no external pressure that prompts them to revisit that position.

Like many other things in economic life, trade liberalisation tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they stubbornly resist liberalisation. Despite all the success of trade-oriented models of growth, many countries have grown to think that they will not stand to benefit much from new trade liberalisation – and that they have no reason to fear failure.

TTIP may partly change this. It is a big initiative. And if the two biggest economies of the world go for a bilateral agreement, it means that there is a risk for other countries that stand outside that bilateral agreement and, which is important, other efforts to liberalise trade. That risk is mostly about not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is far less about loosing current trade access – but it is about the fear of not having as good access to trade that will be liberalised in the future. Consequently, if TTIP is the ‘real thing,’ if it achieves the promise of ushering the world into 21st Century trade policy, the response from the larger emerging economies cannot be no response at all. The political and economic opportunity costs of status quo would have been changed.

Global Trade enters Crunch Time

Those who enjoy sports will be familiar with the rhythm of a season. In the period before the first games are played, every squad is filled with ambition and whispers about exciting new players. Then there are the initial games when those hopes are put to the test. Ultimately, one reaches the point in a season when the team must either win a big game or forget thoughts of post-season glory for at least another year.

The global trade agenda is entering an analogous critical stage.  There was a joyous pre-season with calls for new, improved, 21st century trade agreements. There were predictions of fabulous trophies for the successful – hundreds of billions of dollars in economic growth, countless new jobs!

The analogy to sports gets a little strained in one particular dimension, though. Following the progress of trade undertakings like the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe, or the WTO talks differs from a sports season in that one doesn’t actually get to watch the games. Instead, it’s the equivalent of being kept on the outside of the stadia where the games are played and just hearing the occasional rumor – “That player took a big hit!”; “Someone just made an amazing play!”; “I hear cheering! That has to be a good sign.”

The negotiations themselves are conducted in secrecy – a tradition that has become a sore point with complaints about the lack of transparency. Devotees are left to parse the emanating rumors or to wait for an established deadline, when the players who have been battling out of sight will all emerge beaming and victorious, with their helmets raised above their heads – or they will stagger out looking battered and dejected.

We are just now reaching one such key deadline. Next week, trade luminaries are scheduled to gather in Bali for a World Trade Organization Ministerial meeting. Cheering for a WTO agreement has recently been as fulfilling as backing the Cubs for the World Series. Yet lately there has been legitimate cause for hope. Even though the grand ambitions of the Doha talks, launched in 2001, were stymied years back, there was a recent move afoot to try for a less ambitious package, one that would demonstrate that the WTO was still relevant. Not only that, but there was a new manager. The Brazilian Roberto Azevêdo took over the WTO this fall from the Frenchman Pascal Lamy.

At The Chicago Council’s recent conference on the Frontiers of Economic Integration, former US Trade Representative Susan Schwab highlighted the importance of the Bali meeting, to be held Dec. 3-6. She said that the potential for a modest package was as important as anything that had gone on in global negotiations for the last two decades. She showered Azevêdo with praise, stating that if anyone could pull off the difficult feat of bringing 150 countries together, he had the skills to do it.

But the latest news coming out of the negotiating arena sounds grim. The negotiators involved failed to agree on a text for ministers to take up at the ministerial next week. Azevêdo was quoted as saying that members had “stopped making the tough political calls.”

In the sporting world, a setback like this would invariably be followed by predictions of redoubled effort and renewed hope next season. But the opportunities on the global trading scene are fewer and farther between. Instead of such bromides, Azevêdo warned of dire consequences from a Bali failure, both for the multilateral trading system and the global economy.

It is an inauspicious start for the critical phase of the global trade season. The TPP talks were intended to conclude by the end of this year. Senate Finance Committee Chairman Max Baucus (D-MT) has been saying he would like to get agreement on US trade negotiating authority by the end of this year as well, though past deadlines have already been missed. And the TTIP talks are meant to wrap up before the European Commission turns over in late 2014. Trade fans will be listening, increasingly nervous, for hopeful news. They will take little consolation from suggestions to just “wait for next year.”