Dawn of a New Sytem

• Author: Jagdish Bhagwati
• Position: University Professor of Economics, Law and International Affairs at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations.

Euphoria replaced despondency in 1995 when—after eight years of multilateral trade negotiations—the Uruguay Round was successfully closed and the General Agreement on Tariffs and Trade (GATT) became the World Trade Organization (WTO). After repeated, failed political attempts, its resolution was indeed cause for celebration. The GATT was an agreement on tariff reduction with an improvised set of arrangements on trade issues rather than the international trade organization many had wanted but failed to secure as the “third” element of the international superstructure designed at Bretton Woods. The WTO emerged as that missing institution.

The postwar multilateral trading system, by liberalizing trade, has played an important part in creating prosperity and, in turn, reducing global poverty, since growth both raises the incomes of those below the poverty line and generates revenue for social spending on health and education, which also helps the poor (Bhagwati and Panagariya, 2013). After much debate, this nexus between trade and growth, and in turn between growth and poverty reduction, is now widely accepted.

But failure to conclude the Doha Round of multilateral trade negotiations by the final November 2011 deadline—and the simultaneous emergence of bilateral and regional trade negotiations as the preferred option of major powers like the United States and the European Union—has cast a shadow over the future of the multilateral trading system. Lester Thurow, former Dean of the Massachusetts Institute of Technology Sloan School of Management, famously proclaimed at the 1989 Davos conference that “GATT is dead,” a declaration that seemed vastly exaggerated at best. Today the question might be “Is WTO dead?”

As action on trade liberalization has shifted from multilateral trade negotiations to bilateral and regional preferential trade agreements, the question before us is whether a role for the WTO can be salvaged. What are the prospects for the world trading system as it enters this problematic phase? And how can we make the best of the situation we now face.

What happened to Doha?

The Doha Round of multinational trade negotiations began in Qatar’s capital in 2001 and aims for major reform of the international trading system through the introduction of lower trade barriers, such as tariffs, and revised trade rules. It was seen by advanced economies as a response to those who opposed the international economic order, which included postwar trade liberalization. Developing economies, on the other hand, were convinced that their interests had been disregarded during the GATT trade talks and, under the so-called Doha Development Agenda, vowed not to let that happen in the Doha Round.

In fact, the GATT was intended to be biased in favor of—not against—developing economies, through special and differential treatment provisions. Developing economies enjoyed automatic extension of any tariff reductions without having to offer reciprocal trade concessions. The result was that, contrary to the common assertion that the world trading system was unfairly stacked against developing countries, the average manufacturing tariffs were higher there than in the advanced economies. Ironically, the fact that tariffs in advanced economies were generally lower for products of interest to themselves and higher for traditional exports of developing economies was the result of this ânonreciprocityâ enjoyed by the developing countries. Although aid is often given on an unrequited...