Governing Global Trade

• Author: Uri Dadush/Julia Nielson
• Position: Director of the World Bank's International Trade Department/Senior Trade Specialist
• Pages: 22-25

Page 22

The multilateral system that has underpinned world trade for over 50 years is facing serious challenges

With the Doha Round negotiations of the World trade Organization (WTO) proving to be drawn out and difficult, WTO ministerial conferences plagued by discord inside negotiating rooms and violent protests outside, and preferential trade agreements growing at an unprecedented rate, has the multilateral system of rules that has governed international trade in the postwar era outlived its usefulness?

Our answer is no. But, as for much of the postwar international architecture, the strength of the multilateral trading system cannot be taken for granted. the system is facing significant challenges, and two issues lie at their core: the increased role of developing countries and the sensitivity of the unfinished liberalization agenda. the picture is further complicated by the proliferation of preferential trade agreements. how these challenges are met will determine whether international trade will continue to be governed by multilateral disciplines or characterized by competing trade blocs and escalating disputes.

Underpinnings of trade growth

Measured by actual trade flows, the multilateral trading system would appear to have been very successful. today, WTO members account for more than 90 percent of world trade in goods (including oil). trade grew, on average, almost twice as fast as GDP between 1990 and 2005 (World Bank, World Development indicators). Global trade is expected to hit about $16 trillion in 2007, equal to 31 percent of world GDP.

At the same time, stocks of foreign direct investment grew almost five times as fast as world GDP. the domestic sales of foreign affiliates are larger than world exports and rely critically on trade in intermediate goods, further underscoring the importance of trade integration in modern economic activity.

Falling transportation costs and other technological innovations have been key drivers of trade growth, but declining barriers to trade have also contributed. Between 1983 and 2003, average applied tariffs on manufacturing in developing countries dropped from slightly less than 30 percent to about 9 percent (World Bank, 2007). Some two-thirds of this liberalization was undertaken unilaterally, and about one-fourth through multilateral agreements.

The trading system embodied in the General Agreement on tariffs and trade (the GAtt, the WTO's predecessor) and now in the WTO has underpinned this liberalization in five important ways.

First, it has ensured that progress is locked in, guarding against backsliding, even as circumstances change. China's growing clout in the global economy has prompted calls for tariff increases in importing countries, but WTO rules have held increases in check. Lock-in matters: if Japan had bound its rice tariff in 1955 (bound tariffs, duty rates that countries commit to under the WTO, are difficult to raise), that tariff would still be 46 percent rather than more than 500 percent.

Second, the principle of nondiscrimination (most favored nation, MFN), which lies at the heart of the system, hasPage 23 helped ensure that new trade opportunities arising from tariff reductions under the GAtt/WTO have been available to all countries participating in the system and not just to a favored few.

Third, the system's predictability and transparency have encouraged reform because countries know the parameters within which their trading partners operate and because of demonstration effects. Multilateral negotiations center on bound and not applied tariffs (the duty actually levied on an imported good, generally lower than the bound tariff), allowing countries to liberalize at their own pace, knowing that they would not waste negotiating chips as they reduced their applied tariffs.

Fourth, WTO accession has permitted countries to negotiate MFN treatment in exchange for liberalization commitments. China's accession in 2001 underpinned far-reaching domestic reforms and helped China become the world's third largest exporter. Accession of such countries as Vietnam, Saudi Arabia, and, prospectively, Russia may imply less far-reaching commitments but has brought, or is expected to bring, almost 250 million people into the mainstream of world trade.

Fifth, the WTO's dispute-settlement mechanism has enabled smaller, poorer countries to achieve changes to trade policies in much larger and more powerful...