Needed: A new approach to reduce regulatory barriers to trade

Geza Feketekuty

19 June 2010

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As the WTO negotiations have moved from a focus on reducing tariffs to addressing barriers to trade, the traditional GATT mercantilist bargaining process has become less effective. This process proved highly successful in past rounds of multilateral trade negotiations in reducing tariffs because it enabled countries to obtain a double bargain. It expanded market access abroad for their exports in exchange for opening up their markets more widely for imports, and it increased economic efficiency and growth as a result of the increased competition (Hoekman and Kostecki 2009).

This model has become less effective as demonstrated by the lack of progress in the current Doha Round. There are many reasons for the difficulties the WTO has faced in moving these negotiations forward, but the shortcomings of the mercantilist model in framing a mutually acceptable multilateral agreement on the reform of complex and sensitive domestic policies is undoubtedly a major factor. When the topic involves the reform of domestic regulatory systems, for an outcome to be acceptable, participating governments must determine that:

  • the new market access offered offsets, or more than offsets, the expanded market access it grants other countries;
  • the wider economic benefits from the envisioned changes in policy measures are worthwhile;
  • the impact from the expected economic adjustments are socially and politically acceptable
  • their ability to achieve desired domestic policy and regulatory objectives remains intact; and
  • the changes are compatible with their particular legal, cultural, and institutional environment and level of development.

Tariffs versus regulatory barriers to trade

A major reason why negotiating the liberalisation of regulatory barriers to trade is more complex than negotiating on tariffs is that it is often difficult to separate the protectionist intent and effects of regulations from their purely domestic social objectives.

The sole purpose of a tariff is often to protect the domestic industry from foreign competition. The arguments for and against tariff protection and the economic impact of lowering tariffs are well understood. As a result, negotiations on reducing tariffs can proceed within a commonly accepted framework. In contrast, the principal objective of most domestic regulatory measures is to achieve specific social objectives.

Even where regulations openly discriminate against foreign services suppliers, it is often difficult to separate the domestic regulatory objectives from the protectionist intent. Extensive analysis of the issues and potential links between trade and regulatory provisions is needed to prepare the ground for negotiations. The mercantilist model is difficult to apply to such negotiations in the absence of agreed reference points and objectives. Regulatory measures that create barriers to trade without openly discriminating against foreigners are even more difficult to address through a mercantilist bargaining model.

Efforts by officials to reduce the trade distortions created by domestic regulations and policies take place against the backdrop of a complex mosaic of international arrangements and agreements, informal and formal, among regulatory agencies and officials. International consultations, coordination, and in some case, collective action among regulators has expanded as globalisation limits the efficacy of purely national approaches. Regulators for specific policy areas/sectors meet regularly, sometimes also with industry leaders. The main focus of this tends to be the achievement of regulatory objectives – not trade liberalisation – but the resulting sectoral regulatory arrangements need to be factored into the trade negotiating options.

Involving the wider regulatory community

The mercantilist model facilitates domestic efforts to overcome vested-interests’ opposition to worthwhile reforms but is not very useful in addressing the concerns of the regulatory community. Regulators will focus on the substantive rationale for reform – the mercantilist bargain is of much less importance to them.

It is critical to involve the wider regulatory community in efforts to lower regulatory trade barriers, as regulators will seek validation of any proposed or negotiated reforms. Objective analysis and reflection on the possible effects of alternative options is needed – something that is difficult to arrange in the pressurised atmosphere of mercantilist-driven trade negotiations.

Regulatory reform is easier outside the WTO

Reform of domestic policies can yield very substantial benefits, whether undertaken unilaterally for purely domestic motives or as part of trade agreements. What is different about the reforms undertaken unilaterally, through bilateral agreements and those taken in multilateral talks? Assessing the economic benefits as well as the political, legal, cultural and institutional consequences of complex reforms is difficult and time consuming. The space for such assessment is simply not available in a mercantilist bargaining process among 150 countries.

Unilateral reforms, by contrast, can be based on a country’s own carefully considered assessment of their effects. Moreover, the consequences of reforms negotiated in bilateral free trade agreements are easier to assess, the payoff is more immediate, and the winners are easier to identify.

This is not to say the mercantilist model has no value. As the political economy literature highlights, even a small group of stakeholders fearing losses can block reforms that will benefit the majority – especially if the benefits are diffuse and the losses are concentrated (Olson 1965). The mercantilist model enables governments interested in implementing a particular reform to mobilise the export-oriented stakeholders who stand to gain from expanded access to foreign markets. The validity of this political dynamic has been demonstrated by the major domestic reforms undertaken by a number of countries as part of their accession to the WTO, including China (Mattoo 2004).

Modifying the mercantilist model

While still useful, the effectiveness of the mercantilist model is flagging. What can be done to modify it? The world trading system needs a forum where countries can think through the issues before they engage in the give and take of mercantilist bargaining, or in some cases in parallel with the mercantilist bargaining.

The WTO has a process for exploring issues, as did the GATT before it, in the form of working parties, study groups or consultations among interested parties. That process has built in limitations because many countries believe that any discussion in the GATT/WTO is part of the negotiating process. Moreover, in the case of the Doha Round it would appear that not much consensus was built on the economic benefits of possible reforms and on the ability of governments to pursue what they consider essential social objectives after the implementation of possible reforms.

Lessons from the Uruguay Round

The Uruguay Round of negotiations were extensively prepared and supported. Policy oriented discussions took place in informal gatherings of stakeholders at the invitation of individual governments, foundations, and think tanks. An example of the importance of preparation is the Agreement on Basic Telecommunications, which was made possible by extensive policy dialogue involving a wide network of stakeholders outside the WTO. For reasons that are unclear, it appears that far fewer such gatherings have taken place in the context of the Doha Round.

Discussions in the WTO need to be better prepared and supported by an inclusive forum that analyses options, best practices, institutional requirements, and economic benefits. Sceptics might well argue that it is impossible to get countries to talk openly about policy reforms in an exploratory manner when they know that such reforms could be or currently are the topic of negotiations in the WTO. The candid discussions about policy reforms carried out in regional organisations and in informal gatherings of stakeholders in parallel with the Uruguay Round negotiations demonstrates this is not the case.

Institutional issues

If one accepts the need for a forum for thinking through the complex domestic policies and regulations covered by WTO negotiations, the question is whether an existing organisation could provide the setting for such discussions. Given the proliferation of international organisations and forums, any proposal for a new institution will inevitably meet resistance. However, it is hard to identify an existing institution that does not bring with it historical baggage that would make it unacceptable to one group of countries or another, and that would bias its work in the eyes of some participants.

A forum of the type envisaged should:

  • Be informally linked to the WTO, but not part of the WTO.
  • Be close to Geneva, but perhaps not in Geneva itself to provide the necessary separation between thinking and bargaining.
  • Be grown organically through an evolutionary process and be institutionalised only gradually on the basis of its perceived utility to WTO members and their stakeholders.

The latter point stems from the fact that negotiations over the formal establishment of such an institution could easily itself bog down over suspicions of the ulterior motives of proponents, and jockeying over the mandate.

What is needed is an impartial institution with widespread credibility for objective analysis. Such an institution could take the initiative in organising, outside of its own institutional framework, a forum for the discussion of challenges faced by the global community in particular sectors and/or policy areas. This would prepare the ground for areas that are currently, or could become, topics of WTO negotiations. Initially, perhaps, only the most interested countries might attend, but if the initial sessions prove useful to the participants and word about the utility of the discussions spreads through the blogosphere, the number of participants would increase, and outside financial support for the activity would increase as well.

To build a new institution through organic growth would require very skilful management of the initial invitations. A careful choice of topics and discussion preparation would be critical. What might be initial candidates for such a discussion forum? It is probably easier to identify topics that should not be on the initial list of topics.

  • It should not involve agriculture, since that is the focus of the most heated negotiations and this subject has already been discussed at great length.
  • It should not be any of the Singapore issues since that may raise suspicions that the aim is insert these topics into the Doha Round.

Most likely, the greatest potential benefit could come from focusing on a sector or policy area in services. But the choice would need to be carefully explored with countries that might be most interested in participating in an analytical discussion of policy challenges and options, good practices, institutional requirements, and the impact of possible reforms on governance and economic benefits.

Conclusion

Opinions might differ on the extent to which the kind of discussion forum envisaged here could spur progress the Doha Round, and whether it could fit into the timetable for concluding the Round. On the other hand it may well prove impossible to conclude the Round without raising the comfort level of WTO member countries that the results of the Round will benefit their economic development. In any case, the need for the kind of forum envisaged here will be even more compelling for the ever more challenging agenda that is likely to become the focus of future rounds of WTO negotiations if the institution is to remain relevant in light of the broader set of trade related issues being negotiated actively in bilateral and regional trade agreements.

References

Hoekman, B and M Kostecki (2009), The Political Economy of the World Trading System, Oxford University Press.

Mattoo, A (2004), “The Services Dimension of China’s Accession to the WTO”, in D Bhattasali, S Li and W Martin (eds.), China and the WTO: Accession, Policy Reform and Poverty Reduction Strategies, World Bank.

Olson, M (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard University Press.

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Topics:  Global governance International trade

Tags:  WTO, Doha Round, international trade

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