Restoring the G20's credibility on trade: Plan B and the WTO trade talks

Richard Baldwin, Simon Evenett 13 December 2008

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Reputations rise and fall faster than ever. It took 25 years for the G7 to demonstrate its annual meetings were little more than a vacuous photo-op. It has taken just 25 days for the G20’s commitments to be proven hollow.

At their 15 November summit, G20 leaders pledged to get “modalities” done in 2008 and promised to instruct their trade ministers accordingly. They pledged to “… reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome.”

The G20 trade ministers, however, did not show the flexibility necessary to fulfill the this commitment. Despite intensive negotiating efforts since late November, the WTO Director General, Pascal Lamy, announced that he would not convene ministers to Geneva this year as agreement on modalities is not possible this year.

Loss of G20 credibility? Loss of business confidence?

Yesterday’s announcement is a serious blow to the credibility of G20 leaders. The Doha pledge was the only thing in the G20’s November 15th statement that was specific both in terms of its content and its deadline. Without something to restore confidence in the G20, its future pronouncements ought to be subjected to a "Doha Discount," as a blunt reminder of the G20's first step on the road to becoming yet another vacuous photo-op for world leaders.

The G20’s key role in this crisis has been to bolster confidence globally; to reassure the private sector that governments can get their arms around this crisis and keep it from spiraling out of control. In this light, the Doha failure could not come at a worse time. Private sector confidence is at its nadir, investment and consumption plans are being postponed, and international trade is tumbling at an alarming rate. The Doha Round is not dead, and it is possible that progress can be made with the new US Administration after India’s elections take some pressure off the Indian government, but in terms of the global economic crisis, this is not the right time to let the WTO drift.

What can be done? Plan B

G20 leaders could undo the damage by embracing alternative confidence building initiatives – a Plan B. There are other steps that could help the global trade system that have not been discussed because they were not part of the Doha Round negotiating agenda. To paraphrase an old American saying, the time has come for trade policymakers to “walk and chew gum at the same time”. They could adopt a Plan B – complementary initiatives at the WTO – that would signal the seriousness of their support for the WTO system while Doha is on hold.  

Three initiatives to restore the G20's credibility on trade

Finalise and implement provisionally a multilateral accord on trade facilitation.

As a demonstration of nations' commitment to promote trade as a vehicle of economic recovery, the WTO's current trade facilitation negotiations could be wrapped up and implemented on a provisional basis.

The on-going negotiations on trade facilitations have been very constructive (they deal principally with practical ways of boosting trade by cutting red-tape and delays at border crossings). Finalising them would require an extra push but should be do-able. In addition to implementing this accord on a provisional basis, every six months during the crisis each WTO member would be asked to identify a specified number of red-tape reductions that they intend on implementing at that time.

As part of the provisional implementation of this agreement industrialised countries would create a fund to assist the poorest developing countries meet the provisions of a new accord and any further attempts on the latter's part to cut red-tape and delays at customs houses. An international organisation or company would be charged with producing monthly reports and scorecards on progress made; subtle peer pressure would shame laggards into action.

Finally, the multilateral accord would not become legally binding until the Doha Round is completed or whenever WTO members choose to make it so. The mere agreement, however, would do much to restore the G20’s credibility. 

Develop a Global Safeguard Mechanism.

This would establish rules for disciplining the protection that we all know will occur during this crisis regardless of what national leaders say in their press communiqués. This mechanism would require WTO members to report weekly all increases in import and investment protection to the WTO Secretariat. This would cover WTO-legal measures such as new antidumping duties (as is already the practice) and increases in applied rates that are currently below their bound level. It should also cover less transparent measures forms of protection. Along with the declaration to the WTO secretariat, the member should provide some justification and commit to remove the new protection within 2 years.

This mechanism would slow the protectionist snowball as everybody would know that everybody knows about the rising barriers. Nations would be forced to realise that they are not acting alone – that their protectionist moves are being matched by those of their trading partners.

While this sounds like sanctioning new protection, it would merely make explicit the “balance of threats” that underpins all WTO cooperation. New protection that benefits a nation’s import-competing industries would indirectly encourage protection abroad that harms its export industries. Surely some protection would occur, but not because nations thought they were getting it “for free.”

More importantly, the mechanism would establish an “exit strategy” from the crisis-induced protection. Since much of the crisis-induced protection will be WTO-legal, we must find a way to unwind the barriers after the crisis. When the world pulls out of the recession – say in 2010 – the mechanism would give leaders a list of the barriers to be dismantled. History suggests that this would be helpful. Much of the damage from the 1930s tariffs came well after the Great Depression passed as the tariffs stayed in place for decades.

Establish a temporary legally-binding standstill against protection during the crisis.

More ambitious would be a temporary binding commitment by the G20 and APEC nations not to raise their applied most-favored-nation tariffs, agricultural subsidies, and export taxes and restrictions above the levels that prevailed during November 2008, when their leaders spoke out so boldly on this matter. A commitment not to resort to discriminating against foreign investors and to implement bail-outs in a non-discriminatory manner could be part of a standstill too. This binding commitment would last so long as the world economy's growth rate fell below a certain level (say 4%-5%) and could be reviewed every 2 years (at subsequent WTO ministerial meetings.)

A realistic timetable going forward

With the worsening global economic downturn and the G20's credibility at stake, being seen to take steps in the very near term is imperative. The world cannot wait for an Obama administration to get its feet under the desk and hope the Americans will come riding to the rescue. Yet with only one working week before the end-of-year break, we must be realistic. Trade policymakers could agree to establish task forces for each of the three initiatives mentioned above, whose members are chosen to be representative of the entire WTO membership and yet serve in their individual capacities.

Each task force could be instructed to identify practical options and timetables for implementation by the end of January 2009. These options would then be discussed by WTO members in February 2009, providing further inputs to the task forces. Firm recommendations would be made by each task force in March 2009 to the WTO members and to G20 leaders, ahead of the forthcoming London summit in April 2009. The combination of a non-negotiating process plus the embarrassment of a further public failure provide both the means and the incentive by which the G20 can make it first tangible contribution to the world economy.

Conclusions

The world trade system is heading into a period of high stress. No one should be in any doubt about the growing resort to beggar-thy-neighbour measures – the past few weeks alone have seen currency devaluations, tariff hikes, export tax reductions, one-sided bail-outs, and more stringent investment protection. As monthly trade volumes drop and manufacturing jobs disappear, more is likely to come.

We are not advocating abandoning the Doha Round negotiations – just using the latest political reality check to argue that policymakers consider other steps that would help head off protectionist threats in the current global downturn. It is time for Plan B.

 

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Topics:  International trade

Tags:  WTO, G20 Summit, global crisis

Professor of International Economics at The Graduate Institute, Geneva; Founder & Editor-in-Chief of VoxEU.org; exPresident of CEPR

Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

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