Commentary

How Much Global Trade Governance Should There Be?

Trade agreements seem to be getting deeper, intruding on policy areas that were traditionally viewed as matters of purely national concern (WTO 2011, 2012). This differs considerably from the WTO’s original focus on protectionism.

Global trade rules that focus on protectionist trade barriers are limited and targeted, addressing a specific problem: protectionism. In doing so, they maintain a balance between international oversight of domestic policies on the one hand, and domestic regulatory autonomy on the other. Countries are free to take whatever actions they want, as long as they are not being protectionist.

By contrast, many trade disciplines go beyond this traditional focus on protectionism and intrude deeply into domestic policymaking. Countries vary considerably in relation to their views on issues such as the proper scope of intellectual property protection, the idea of regulatory expropriation, and obligations akin to due process such as ‘fair and equitable treatment’ for foreign investors. A set of international rules establishing a uniform framework for these issues prevents governments and citizens from developing their own approaches and experimenting with different policies. When global trade governance moves into these areas, it limits domestic policy autonomy greatly.

Expanding global trade governance in this way holds significant risks for the trading system and has been criticised from both sides of the political spectrum (Rodrik 2011, Barfield 2001). There is certainly a push by business groups for these new rules, but ordinary people are not sold. In recent years there have been some high profile rejections of international initiatives of this sort, such as the Anti-Counterfeiting Trade Agreement. It may be that this kind of global trade governance simply goes further than what can currently be achieved, even though some aspects of it may be beneficial.

One line of thinking, however, suggests that the balance between national and international governance should be revisited in the light of so-called ‘global value chains’.

Do supply chains need governance?

Baldwin (2012a), for example, argues that the rise of supply-chain trade means that the WTO needs to expand its global governance role, beyond its traditional focus on protectionist trade barriers. For Baldwin, supply-chain trade refers to an international network of production in which tangible and intangible assets are sent offshore, partly to take advantage of low-wage labour. Goods, services, people and capital must then be able to move freely between the production, innovation, and sales facilities. This is in contrast to the more traditional trading pattern of producing in one country and selling in another.

He argues that there needs to be an understanding between companies and governments: companies will offshore factories and technologies if governments provide assurances that tangible and intangible assets will be protected.

He suggests that these assurances have been provided through deep regional trade agreements (known as RTAs), bilateral investment treaties (known as BITs), and autonomous reforms. By contrast, the WTO has not been very active in this area. To keep the WTO relevant in today’s trading world he calls for a ‘WTO 2.0’ that will take on these issues. Specifically, he calls for “deeper disciplines on the WTO-covered areas of services, TRIPs, TRIMs, and customs cooperation, and beyond-WTO disciplines on IPR, investment assurances, and the free movement of capital”.

But reading his explanation closely tells us that global governance may actually not be necessary on these issues. The specifics of how supply chain governance evolved outside of the WTO provides its own alternative to a proposal for more global governance: ‘autonomous’ or ‘unilateral’ reforms. In essence, many governments have reformed their domestic regimes on their own in order to give investors more confidence that assets will be protected.

The WTO should focus on what it does best: that is, reducing protectionist trade barriers.”

The fact that governments have behaved this way should not be surprising. They have an incentive to do so. In a world where nations compete for investment, those countries with the most stable regulatory frameworks are likely to be the most appealing to companies looking to set up operations. Governments have a natural incentive to act on their own to provide the assurances that companies seek, such as the protection of intellectual property and clear domestic rules regarding expropriation and fair treatment.

Thus, international governance of these issues may not be needed. Leaving these issues to national governments is likely to be an effective way to encourage good governance, as the best domestic regimes will attract the most investment. Losers in this contest for investment will have an incentive to copy the winners.

Conclusions

Concern about the future of the WTO is understandable. Negotiations have long been stalled, and many have been questioning its role in trade governance. The centre of gravity in trade negotiations seems to have moved to bilateral and regional trade agreements, which have gone beyond WTO disciplines. Baldwin interprets these developments as a sign that the WTO should catch up with the times and turn its attention to these same issues.

But let me suggest an alternative interpretation. These bilateral and regional agreements have developed because that’s where business groups want the rules to go. The rules in these new areas are in their interest and they would like to see them spread. Unfortunately, business demands do not necessarily lead to a sustainable vision of global trade governance. What business wants is not necessarily in the broader interests of society, although in some cases it may be. The push-back against these new rules has been very strong and it is not clear that the current regional trade agreements and bilateral investment treaties model can really work in the long run. It may be that the WTO as it stands now actually gets the balance between global trade governance and domestic regulatory autonomy about right.

Under this interpretation, the WTO does not need to catch up. Rather, the WTO should focus on what it does best: that is, reducing protectionist trade barriers. Broader issues, such as intellectual property and regulatory expropriation, should be left to governments to deal with on their own. Those who handle these issues well will be the winners in the new world of supply-chain trade.

Simon Lester is a trade policy analyst with Cato’s Herbert A. Stiefel Center for Trade Policy Studies.