The Evolution of the Trade Regime

Princeton University Press

Chapter One

1.1. Introduction

In 1995, with high hopes and great fanfare, the World Trade Organization (WTO) was established. Its champions extolled its many virtues. It was to be a global organization, not just a club of Western trading nations. It would be a legitimate multilateral institution, with formal legal status as an international organization and formal diplomatic status for its secretariat. Its detailed rules and automatic and binding dispute settlement mechanism would make it one of the most legalized international institutions in the world. Its rules were touted as covering "commerce" construed more broadly than ever-not just trade in goods, but also services, intellectual property, investment, unfair trade practices, and other economic issues. And its rules were largely liberal, promising to raise standards of living, welfare, and gross domestic product globally and in each member country. The institutional embodiment of global liberal trade had come of age.

Since then, the assessments of many have changed. Antiglobalization groups protested at the third WTO ministerial meeting in Seattle in 1999. Environmentalists from Europe, the United States, Australia, and elsewhere marched in the streets in opposition to the WTO and its rules. Labor unions were complaining that the WTO ignored their interests and was creating a "race toward the bottom" for labor standards. Members of the U.S. Congress, joined by activists and academics, demanded a solution to the "democratic deficit" in Geneva. Diplomats from developing countries stormed a ministerial caucus that was dominated by developed-country diplomats, complaining that the WTO legislative process was nontransparent and unfair. The "Group of 77," representing over a hundred developing countries, complained of an "imbalance" in WTO rules that favor the interests of the developed world. And by 2002, both the EC and the United States were failing to implement some significant WTO dispute settlement decisions. During U.S. congressional hearings in 2002 to consider renewed delegation of trade negotiating authority to the president, several witnesses and members of Congress complained about judicial "activism" in the dispute settlement system. While the Doha Round of trade negotiations was successfully launched, the negotiations almost immediately deadlocked along North-South lines. Measured by this political tension, WTO institutions have not been performing as hoped.

What explains these changing perceptions of the trade regime, and to what extent has increasing discontent undermined the purposes of the organization? We address this question in succeeding chapters, focusing on rising resistance to open trade and the extent to which the organization can be credited with both fostering and undermining the trade liberalization process. Although national leaders created the regime to facilitate the joint removal of national barriers to trade, their willingness to endorse rules that allowed the regime to make authoritative decisions has varied over time. In some periods, the regime moved to expand its authority and nations actively participated in the process of trade liberalization; at other times, the regime was impotent to effect behavioral changes in members.

This book argues that this "authoritative gap" reflects the regime's inability to recast its rules and norms of behavior in line with the changing interests and power of its members. Although the organization has not been stagnant and, in fact, went through a substantial reinstitutionalization in 1995, we argue that the regime's "contract" regularly falls out of step with the interests of members and the circumstances of international trade. It may be true that international regimes solve problems of cooperation through the creation of common rules and norms; however, it is also true that shifts in the nature of the interests of powerful domestic constituencies in member countries may make past "cooperative solutions" difficult to sustain. When the regime was created in 1947, its small size, cohesive membership, and shared vision meant that aspects of the trade agreement could be left underdefined. Members did not worry whether the decision-making system could accommodate fundamental differences in interests since the organization itself was a club of like-minded nations. In the early years of the General Agreement on Tariffs and Trade (GATT), this structure was a virtue. Ambiguity and exceptions allowed governments flexibility to deal with political issues at home. Nations were willing to enforce agreements because of shared norms.

The irony of the trading system is that many of the features that explain the early success of the regime later turned out to be its Achilles heel, creating demand for institutional change. Shifting patterns in both the direction and the type of world trade had unanticipated effects on the regime. While the existence of shared rules was a prerequisite for this expansion in world trade, the rules chosen in 1947 to open trade generated political challenges for the organization in the ensuing decades.

First, and most important, trade liberalization created a dynamic for the expansion of the organization's membership that could not be easily accommodated. The GATT/WTO has had network effects, whereby the addition of every new member makes the organization more valuable to members and more desirable to nonmembers. The diversion of trade and investment associated with exclusion from the regime generated global demand to join and led to an expansion of the GATT from a small club of nations into the WTO, with nearly 150 members. The growth of the number of members was accompanied by a second shift: U.S. dominance in world trade and production declined, and the EC shares increased. Both of these changes occurred with no resultant shift in the formal governance practice that had relied upon consensus decision-making since the late 1950s. As long as EC and U.S. interests were largely aligned, members were able to cooperate in using sources of power extrinsic to the consensus decision-making rule to drive outcomes they favored. But to the extent that the EC and United States have focused on internal politics, and EC-U.S. competition and tensions have intensified, transatlantic cooperation has proven more challenging and governance under consensus decision-making procedures has been more difficult.

Trade liberalization not only led to more and different trade relations among members but also brought new trade issues, such as intellectual property, and new actors, such as nonstate organizations, into the center of the regime. As international trade moved from manufactured items to services, and from commercial transactions to foreign direct investment, the interests of the membership began to separate along North-South lines. Attention to new trade issues, such as protection of intellectual property rights, exacerbated this divide since the developing world often was required to change its domestic rules and institutions. The expectation of compliance increased in the post-Cold War years since there was no Communist threat to counter the ideological fervor of those who supported free markets. At the same time, the reduction in trade barriers and the creation of global markets made salient the argument of "a race to the bottom," activating new groups who did not favor the regime's purpose. Labor and environment groups have been among the many nonstate actors whose self-declared purpose has been to constrain or undermine the integration project that was the ideological basis of the regime. Their activity has also required institutional change.

Second, while the GATT encouraged members to open up home markets to all members, the organization's rules made it acceptable for nations to join preferential regional trading groups. GATT Article XXIV permits the establishment of free trade areas and customs unions, despite their inconsistency with the GATT's most-favored nation (MFN) cornerstone. The result has been an explosion of such arrangements, even though the trade and investment diversion resulting from regionalization, and the political tension associated with it, often conflict with the goals of the multilateral regime. The GATT's founding members saw regionalism as akin to an "insurance policy" for the smaller nations; being a member of multiple trading organizations reequilibrated some of the asymmetries between large and small trading partners. But that flexible rule encouraged countries to find solutions to their trade problems in venues other than the multilateral regime. Such "exit options" may now make it more, and not less, difficult to conclude trade agreements.

The ambiguity of the original rules became a problem in the WTO structure for a third reason. In the GATT, imprecision in the "law" created space for countries to placate powerful domestic groups, when necessary, without endangering their general commitment to the regime. Disputes were most often settled without formal procedures, reflecting the fact that members shared a common vision of the purposes of the regime. Flexibility, however, granted new members, such as Japan and other Asian developing countries, license to ignore the spirit of the rules. Moreover, the EC and United States invented new vehicles of protection, such as voluntary export restraints and the Multi-Fiber Arrangement, which seemed to fall within shadows of the trade regime's rules. This led to increasingly complicated negotiations as the norms of MFN and national treatment became insufficient guides for behavior.

The response to this problem was to better specify the rules and procedures of the regime. Increased legalization led members to specify with greater detail aspects of the trade contract. Still, gaps and ambiguities remained, often a result of an inability to agree on details. This ambiguity posed a challenge to the new judicial system established in the WTO. Consistent with a view taken by many national judicial bodies, the WTO Appellate Body has seen its mandate as clarifying and ensuring the completeness of WTO law. The result has been a new judicial culture in the WTO that favors making law-a role for the Appellate Body far different from what was expected by its creators. In any individual case, law made by the Appellate Body may not accord with the interests of the powerful members of the organization-or with the negotiators' political compromises. However, on balance, the Appellate body has not fundamentally shifted the balance of WTO rights and responsibilities against the interests of powerful members.

In sum, a great transformation is under way in the global trade regime. We argue in the ensuing chapters that the GATT/WTO has succeeded politically to the extent that its rules, principles, practices, and norms have kept up with the politics of a deeper and geographically broader integration of world economies. Yet many aspects of the trade regime are not currently politically functional. Some institutional changes are bringing the regime into accord with its environment, but substantial political turbulence remains. As opposed to the early regime, in which membership made the opening of markets easier for decision makers, aspects of the regime may now make further liberalization more difficult.

This book focuses on the politics of institutional change in the GATT/WTO system. The central question we pose is whether GATT/WTO-related institutions have evolved in ways that match underlying material and ideational changes so as to maintain and rebuild constituencies for an increasingly open, global trading system. We argue that power politics, reflecting the interest of the United States (and later, the EC) as the largest market, fundamentally shaped the creation and evolution of the GATT/WTO system. Shifts in underlying material interests and ideas, and the challenges presented by expanding membership and preferential trade agreements, have applied pressure for the regime to change. We trace how the institution has evolved from flexible rules to greater legalization, and from liberalization of trade barriers to regulation of a much broader range of economic issues.

Chapter 2 offers the historical context in which the subsequent chapters evaluate the evolution of the regime. Chapter 3 looks at the WTO's legislative and judicial structures. Chapters 4 and 5 consider new problems and issue areas that have emerged over the course of GATT/WTO history: chapter 4 examines traditional border measures, while chapter 5 looks at newer domestic regulatory issues, suggesting why application of the older rules, principles, and processes to the newer missions may not work.

Chapter 6 evaluates the implications of increased diversity in the types of states and entities that participate in the GATT/WTO system, and suggests how WTO rules may bolster liberal reform efforts within member states. The chapter also considers the emergence and proliferation of regional trade agreements and their implications for the multilateral system. As new issue areas have emerged and the diversity of state membership has grown, new nonstate actors have begun to engage in trade politics. Chapter 7 considers institutional design and the entry of those new non-state actors into trade politics. Chapter 8 concludes with implications for analysis and policy.

1.2. Understanding the Political Economy of the GATT/WTO Regime

The GATT is a multilateral trade agreement among autonomous entities (not necessarily states) aimed at expanding international trade. As described in greater detail in chapter 2, the GATT was signed originally in 1947 as an interim agreement, and it became the key international agreement and institution concerned with global trade. In 1995, the GATT 1947 was replaced with the GATT 1994, which is substantively identical but a legally distinct instrument, and the WTO was created as an international organization to administer the GATT and related trade agreements.

Much about the international environment has changed since the GATT took effect in 1948. The United States remains the world's biggest market, but the EC, which now includes twenty-five members, has grown into a market almost as large as the United States; Japan and China have emerged as among the world's strongest economies, each with a national economic system structured in ways significantly different from those of the Western nations. Issues never given much consideration when the GATT was negotiated-such as multilateral environmental protection and intellectual property protection-are now central to trade negotiations. Yet the rules and principles of the regime-the central rules and principles that govern the world trading system-remain largely unchanged.

The world is far more integrated today than in the middle of the twentieth century, in part as a result of technological changes in the information, communications, and transportation sectors. One indicator, the declining cost of transatlantic phone calls, illustrates the magnitude of these changes. Table 1.1 shows how much the cost of a telephone call from the United States to the United Kingdom has fallen over the last seventy-five years, in contrast to a tenfold increase in the general price level in urban areas in the United States, suggesting how much more cheaply and rapidly ideas can flow across borders now.

Cross-border flows of capital are another measure of this growing economic interdependence. Figure 1.1 shows the sharp increase in foreign direct investment (FDI) over the past forty years-both in nominal terms and in terms of share of global output-indicating that capital flows more freely today than before. Trade in goods and services has also increased as a share of GDP. In the early postwar period, world GDP growth averaged 5 percent and international trade grew at 8 percent. Figure 1.2 shows that the rise in the value of global exports continued through the 1990s, rising from $4 trillion to $6 trillion (in current dollars) and now accounts for about 20 percent of economic activity in the WTO member countries.

Much of the international flow of capital and goods is within rather than between corporations, reflecting the development of cross-national networks as a central form of production in the global economy. Table 1.2 shows an absolute increase in intrafirm imports and exports during the last years of the twentieth century.

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Excerpted from The Evolution of the Trade Regimeby John H. Barton Judith L. Goldstein Timothy E. Josling Richard H. Steinberg Copyright © 2006 by Princeton University Press. Excerpted by permission.
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