The World Trading System Post-Seattle: Institutional Design, Governance and Ownership

A CEPR/ECARES/World Bank Conference Universit Libre de Bruxelles, Brussels, 14/15 July 2000

The WTO Trading Regime: Functioning, Equity and Democratic Legitimacy

by Paolo Guerrieri University of Rome 'La Sapienza' IAI Institute

E-mail: p.guerrieri@mclink.it

Preliminary notes for my presentation. Please, do not quote.

Introduction New problems are affecting the management of the world economy and the international trade regimes at the start of the second millennium. The rise in the multilateral trading system of the new trade issues has brought issues traditionally in the domain of national sovereignty in the global arena. So, new complexities are associated not only with matters of governance "at different levels" (national, regional, multilateral), but also with the involvement of state actors at different levels of development and, for the first time, of non-state actors. Economic and world trade issues are becoming increasingly complex and are slowly shifting to the field of non-trade issues, aggravating the risk of tension between jurisdictions and systems of governance. The failure at Seattle to launch a new round is a symptom of this complexity of the new international trading system and expresses the problems in searching new rules for better governance of the multilateral system. The challenge today is how to move beyond Seattle, both metaphorically and concretely. In ten years time Seattle could mean two very different things (Hufbauer, 1999): a temporary but enlightening standstill in the post-war course towards greater openness and international integration; or a dramatic turnaround sending the world economy back onto a long and impervious path of protectionism and fragmentation. To avoid this second scenario so to get the considerable benefits that remain to be reaped from further global integration, small adjustments do not suffice. Urgent deep reforms are needed to avert a system breakdown and keep the trading system going in the next years. The main reason is that the current international regime for trade encountered increasing difficulties to deal with the new challenges stemming from global integration What I want to do in this presentation is first to summarize the main structural weaknesses of current WTO trading regime and then highlight the most urgent changes and procedural reforms needed in the international trade governance system. Finally, I will draw very briefly some conclusive remarks

The structural weaknesses of the WTO trading regime For many decades the international trade regime of multilateral cooperation was able to promote very successfully a dramatic increase of international trade liberalization by both reducing the costs of making agreements, through established rules and practices, and by providing information about the implementation and functioning of the negotiating agreements. More recently the transformative changes in the trade and international system have gradually eroded the efficacy of the system by revealing a few structural weaknesses of the WTO regime. I have grouped these changes into four main categories. A first source of stress comes from the fact that the current phase of globalization has involved certain qualitative transformations of the international system, distinguishing it from other past experiences in internationalization processes. These radical transformations have produced embryonic forms of what has been defined as a process of "deeper integration" among formerly distinct national economies (Lawrence, 1996). Deeper integration, as we know, involves many issues related to virtually all non-border policies and practices. In the present global economy, various areas of policy and government intervention which were once considered domestic now have huge spillovers effects on the welfare of other countries. They have also increasingly been perceived as important determinants of the international competitiveness of firms. So in the trade regime, international negotiation was less and less centered on trade and increasingly on domestic regulation and legal systems. Globalization has also generated a proliferation of non-state agents, including NGOs - and this is the second transformative change - which has an increasing role in the multilateral trade negotiations. The MAI-OECD negotiations and the Seattle meeting proved that international negotiations are no longer matters reserved for a few adepts, by showing the variety of such organizations - from NGO coalitions to labor unions, business associations - and the strength of their voices. Non-governmental agents (Nga) has broadened further the agenda of WTO by introducing a large set of new links between trade and other issues, such as labor standards and environmental protection. They also demanded more direct access to the international trade negotiation system. Thus the problem is how to foster participation in the "civil society", and how to strengthen institutional concerted action on international level. The third change is that many new developing countries entered into the formerly restricted club of the trading countries. Developing countries include at present a large majority of the members of the WTO, four-fifths of the members, and cover a quite large and increasing share of world trade and investment. They express their own agendas for trade negotiations, quite different from that of rich

countries, and demand participation to the decision making process of the trading regime. In Seattle the developing countries felt completely excluded from the negotiation process, and the majority of them could not even enter the premises where the negotiation were taking place. A major task that lies ahead, therefore, is to involve these new actors in a pro-active role. It means reconciling the further promotion of open contestable markets at multilateral level with the goals of the developing world to follow effective independent growth strategies. Finally the entire international governance architecture, into which the WTO regime was inserted, has experienced long-term significant changes. The international system has found itself in what could be termed a "after-hegemonic" mode (Gilpin, 1987; Keohane, 1989). This can be defined as an oligopolistic international context in which no one country is able unilaterally to supply the public goods necessary to operate the international system; or, in other words, as a set of rules that would assure the orderly functioning of the system. Because the distribution of international power is no longer hegemonic, the supply capability of international public goods has remained constant or has even diminished. Parallel to this trend, the globalization of markets has led to an increasing demand for public goods; in other words, a demand for new "rules". The international system is thus in the midst of a situation of "institutional deficit" because of the excess demand for public goods. The difficult, tense and increasing conflictual economic relationship between the US and the EU - on which I will turn later - is both a reflect and a determining factor of this global governance problem. These four transformative changes of the international system have put increasing pressures to the trading regime in providing effective solutions - in terms of higher participation of the many actors involved, widening of the negotiating items in the Agenda, stronger linkages with other global issues - to the new challenges stemming from global integration. But the answers have not been adequate so far, revealing a series of structural weaknesses in the operation of the trading system. The list of these structural weaknesses is quite large and it contains many and heterogeneous items. I have grouped all them into three main categories: functioning, equity, and democratic deficit of the trading system. First there is the problem of the current structure of bargaining and negotiating of the WTO. The GATT decision-making system worked well because there were far fewer countries and the issues were less complex. It is clear that the WTO membership has become much more diverse and that the issues being addressed are increasingly complex. The failure of the Seattle Ministerial Conference to deliver the launch of a new multilateral Round has increased the attention of participants and external observers on the issue of the functioning of the WTO. There is no doubt that work needs to be done on this aspect, especially for improving the functioning of WTO and enhancing internal transparency. The demand for change comes not only from the new actors, such as the more powerful developing countries and the largely excluded poorer countries, but also from many advanced countries. The EU Trade Commissioner spoke of a

medieval process of decision making with regard to the WTO procedure. A more effective WTO functioning requires establishing a careful balance between effectiveness and transparency-participation. A number of proposals have been made in this area and some procedural changes have been put forward but with very scarce agreement among member countries so far. Second there is a growing perception that the trading system is not affording symmetrical and equitable shares of the overall costs and benefits among countries and between various groups within each country. As to developing countries, though there is no doubt that trade agreements have brought about benefits to them in terms of improved market access and more liberalization, it is also true that a large group of developing countries are quite disappointed with the formation and implementation of the WTO agreements. In the follow-up of the Uruguay round it is clear that developing countries have encountered huge problems to implement trade agreements and felt frustrated by the behaviors of developed countries that in many cases have evaded or even distorted the previous commitments. The widespread perception is that in some cases the trading system gives special prerogatives to the rich countries and does not take into account the real needs of the weaker countries. It was reinforced by the fact that the majority of developing countries were de facto excluded from the preparation and the procedure of the Seattle ministerial meeting. What is at stake in this case is the distribution of benefits of the trading system and the balance between efficiency and equity objectives. Greater attention to the needs of developing countries together with their strengthened capacity to deal with the WTO is required to avoid that most of these countries could go back to the old protectionist habits. But at stake at present is the democratic legitimacy in itself of the world trading system. In recent years the WTO agreements have brought in issues considered in the past to be in the domestic domain and not necessarily trade issues. Also the strengthened dispute settlement procedures has created more instances where domestic policies are challenged from the viewpoint of trade policy. All that has been viewed by many as an intrusion of WTO into domestic sovereignty. In particular the interest of civil society in WTO matters has grown as the WTO intrusion in domestic policies has become more evident. The most common reaction is to put into question the legitimacy of such interventions by assessing the undemocratic nature of the international institution that produces them. These critics have emphasized in particular three sets of issues: a lack of transparency in the WTO process; barriers to the participation of interested groups and civil society in general; the lack of effective mechanisms of democratic accountability of the WTO as international institution. Furthermore Seattle made very clear the difficulties that the activism by Nga can create for international trade negotiations. To be more sensitive and responsive to the legitimate concerns of civil society could help to restore the legitimacy of the world trading system as well as an increasing transparency and accountability of the WTO processes.

Deep changes and procedural reforms The weaknesses of the current trade regime related to its functioning, equity and democratic legitimacy are not temporary phenomena: they are reflections of the more basic changes of the world trading system mentioned above. These structural weaknesses make highly uncertain the future of the world trading system. This does not mean that the current trading regime must be entirely discarded, but it requires deep changes and urgent procedural reforms. Even more so since a further liberalization of world trade under an effective WTO discipline could provide substantial gains to both developed and developing countries in the next decade. There is no consensus on what strategy to be pursued. Some want the WTO to go back to more traditional trade issues and remain a closed shop governmental forum; while others demand that the WTO broaden its agenda to include the second generation of new trade issues and adopt more transparent procedures that afford participation to private-sector groups and NGOs. To highlight the most urgent changes and reforms needed to keep the system going is useful first of all to distinguish as done in what follows between issues of substance and issues of procedure in the three fundamental areas mentioned above: functioning, equity and democratic legitimacy of the trading regime. It is also important to distinguish between possible initiatives in the short and long run. Even more so since the steps to be taken in the short run should be necessarily compatible with the possibility of the relaunching of a multilateral Round. A new multilateral round in effect should remain a fundamental goal in the trade Agenda and can not be given up, although it could hardly determine - by itself and in the lack of necessary reforms - a new positive successful phase of the world trading system Functioning A number of steps could be rapidly taken to improve the functioning of WTO and to enhance its transparency. These could cover improvements in the preparation and organization of WTO ministerials; simplification of WTO working methods and notification requirements and enhanced transparency and consultations with member countries. For instance: (i) open-ended formal meetings to be convened after informal meetings; (ii) contents of the debate at informal consultations to be reported at open-ended meetings in which all members should be given an opportunity to express their views; (iii) the Director General and the Secretariat could be asked to present specific proposals to simplify existing notification requirements (while maintaining high standards of transparency) and working methods in WTO Committees and the Councils; (iv) immediate derestriction of

most WTO documents (such as Secretariat background papers, meeting minutes and agendas and panel reports) could be ensured, with a few limited exceptions. Progress in each of these fields would reinforce the WTO and facilitate the launch of a New Round of Trade negotiations. Progress can also be achieved without introducing changes of existing WTO rules and procedures. It is also important to further reflect on the best consultation procedures to foster consensus in a manner that is transparent and participatory, while ensuring effectiveness. Thus the idea of creating a consultative group could be advanced to improve the functioning of the WTO system. Other international organizations have executive committee with power to adopt decisions on a defined number of issues. In view of the nature of WTO decisions, it may be difficult to envisage the establishment of such an executive committee in the case of the WTO given the fact that national governments will accept only trade agreements that they approved and signed. The procedures established by article IX of the WTO agreement appear to be sound and the fundamental principles of consensus in WTO has not to be changed. So decision taking is better to remain based on consensus among all members. But informal consultations among major player within a smaller body with multi-country constituencies broadly representative of the WTO membership could be useful for effective and efficient decision-making. Such smaller bodies would have exploratory and preliminary roles. It could advise the Director General and, where appropriate, make recommendations to the General Council. A similar type of body, the Consultative Group of Eighteen (CG 18) was in function between 1975 and 1990, when the Director General suspended it. Its purpose was to provide a forum for senior officials from national capital to discuss policy issues. Thus the establishment of a consultative group could contribute towards ensuring greater involvement of senior level capital-based officials in the management of the WTO and promoting discussion of long term strategies of structural reforms. The composition of the group could be based on a mix of economic weight and regional representation so to establish a committee of reasonable size and rotating membership to ensure that all countries and regions would be members within a given time frame. At the same time, it is essential to repeat that such a group must not be a decision-making body and would not provide an alternative to informal processes aimed at facilitating consensus, in particular in the context of a negotiation. Finally the role of the Director General and the WTO Secretariat could be reviewed with a view to give them a more active role in the management of the WTO and in the negotiating process than in the past. However they must remain neutral in negotiations given the present state of relations between member countries.

Equity We have already outlined the frustrated feeling of most developing countries deriving from the implementation of the commitments of the Uruguay Agreements and the exclusion from the negotiation process in Seattle. This has led to the only partial or non-realization of the expected benefits to developing countries of their joining the WTO. The complaints of many of them is that the multilateral trading system in many cases seems to give special rights to the stronger countries and take poorly into account the real needs of the weaker ones. That seems even more paradoxical since during last year a number of statements were made by developed countries Ministers that the next round of multilateral trade negotiation should be a development round. It is thus clear that the possibility of a comprehensive round somewhere in the future should be seen as an opportunity to reconcile the further promotion of open trading system with the goals of the developing world to follow independent growth strategies. To achieve it the rich countries should increase their market access to products from developing countries and the issues to be addressed are first of all issues of substance directly related to the content of the trade negotiation Agenda. In this perspective a next Round should certainly include a relevant chapter on the elimination of remaining tariff and non-tariff border barriers. Are all topics where positive-sum games are predominant. Insofar they can influence the Agenda, developing countries have a considerable stake in further progress in this area, such as in the elimination of the very high tariffs on agricultural imports and many apparel and textile exports, even more so in the light of the significant weight of these sectors in their production and trade structures (Krueger, 1999). The Uruguay Round in this regard represented a major advance by converting agricultural quotas into tariffs, removing quota protection from textiles and apparel, and obtaining bindings of most duties. One major effort is to fully implement these outcomes and offer new important results on this ground. That means that quantitative barriers in the textiles and clothing must be removed by developed countries and not replaced by alternative restrictions. On the other hand in agriculture a substantial reduction in export subsidies of developed countries should be attainable, facilitated by the structure of commitments which emerged from the Uruguay Round. Developed countries, particularly the EU and Japan, should also reduce bound tariffs from the 50-150% to the 0-15% range that characterizes manufactures, thus providing substantial benefits to developing country suppliers. But the implementation issue contains also another set of problems that are related with the difficulties arising from the obligations of the developing countries themselves, including financial burdens in meeting the various procedural and enforcement obligations of the multilateral agreements as well as

the economic implications of adjustment of their domestic producers to new rules (such as in TRIMS, TRIPS). As some proposed, if future trade negotiations introduce agreements that require more difficult or more costly adjustments for developing countries, the latter should be fully recognized in terms of longer periods, more flexible rules, and in specific offers of technical assistance (Wang and Winters, 2000). Furthermore special and differential treatment might also be given to developing countries in negotiation on rules changes, by taking into consideration their different domestic environment (Finger and Hoekman, 1999). There are also the new trade issues, where negotiations are centered mostly on removing the obstacles stemming from domestic rules and policies that impede access of many products and services. The latter includes very sensitive matters in which divergences among developed and developing countries are more pronounced given the different extents and contents of the domestic social regulations of the two groups of countries (Mattoo 1999). Also in this case the greatest restrictions maintained by developed countries are precisely in those sectors in which developing countries have a comparative advantage, such as low- and high-skill labor-intensive activities that require either temporary entry or work permits. For example in the construction sector the problems are linked to the temporary nature of the work and the restrictions on the movement of natural persons. So developing countries are paying particular attention to the negotiations on the movement of natural persons, in which advanced countries have posed several limitations (in the "mode 4" of the GATS). Since the liberalization of the movement of persons is undoubtedly lagging behind that of the circulation of capital, greater symmetry of treatment in the WTO of the factors of production - capital and labor - is important, especially for low-labor-cost countries (Chanda, 1999). The protection of the environment and the link between labor standards and trade are very sensitive issues and risk generating a head-on battle with developing countries. In terms of the next Round I believe that labor and environmental standards should not be negotiated in the WTO (Guerrieri and Falautano, 2000). Instead the standards should be designed and adopted by other international forum (such as ILO), including ad hoc groups The strong hostility on the part of the developing countries is based on a number of arguments, particularly they assert that the request for minimum labor standards conceals protectionist intentions. The last suspicion is shared by a large part of the literature (Anderson, 1996; Maskus, 1997) and is also confirmed by the abuse of the anti-dumping measures in the recent time. However a first step, such as cooperation among the different international agencies and the ILO and WTO on the matter of social standards, should certainly be supported. Finally to bring the developing countries much more effectively into the trading system one should also deal with issues of procedure particularly by introducing mechanisms to reinforce participation in the life and management of

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the Wto. As the number of countries increases, mechanisms are needed to reinforce participation in the decision-making processes. It has been demonstrated that over 50 percent of the developing countries belonging to the WTO have serious difficulties in just taking part in the meetings or presenting their negotiating positions (Michaelopulos, 1998). The elaboration of trade strategies involves collecting information, coordinating domestic action, pinpointing priorities, analyzing costs and benefits and monitoring the effects of commitments. This is very costly, both in economic terms and for the human resources involved. However, the continued poor participation of developing countries is and will become a serious problem for the future of the WTO. If there is to be full participation of all members countries, alternative solutions are needed. These include: a) the activation of technical support mechanisms during both the accession and participation phases (but assistancedriven reforms have to be internalized and managed by recipient countries; b) cooperation with other international development assistance agencies (UNCTAD, World Bank); c) support for initiatives fostering a kind of common "representation" among like-minded countries or groups. Furthermore to avoid what happened after the UR when most of these promises have not been delivered the next Round should make promises of technical assistance binding and subject to retaliation. Democratic Legitimacy As already said the WTO agreements have brought in issues considered in the past to be in the domestic domain and the DSP has created more instances where domestic policies are challenged from the viewpoint of trade policy. The interest of civil society and non-state actors in WTO matters has grown as the WTO intrusion in domestic policies has also grown. The most common reaction was to put into question the legitimacy of such interventions and the democratic nature of the WTO, in terms of scarce participation and accountability in the WTO process. Thus the problem is how to increase the public legitimacy of the trading system by increasing external transparency and removing restrictions on participation of WTO process while maintaining the effectiveness of the system. It is clear that there is the need for a growing involvement of non-state actors, according to the WTO's definition of the "civil society: industrial and sectoral associations, trade unions and lobbies, but also non-governmental organizations. But the question of involvement is a very complex one and raises a number of issues concerning the WTO institutional design. The first request of non-state actors and NGOs is for more access to WTO documents and evidence. It is the easiest task since in this regard we have already outlined the great progress made on this front in recent years by WTO and the further significant steps that could be taken in this direction.

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A second request is for more participation in WTO activities, i.e. a seat at the table. The involvement of the "civil society" in a strict sense was initiated in Marrakech with informal dialogues. This was later institutionalized by the participation of non-governmental organizations (NGOs) in the Singapore Ministerial Conference of 1996, and the recent innovations of the General Council of 1998, launching an information and transparency policy. With regard to strengthen procedures for consultation with Nga there has been considerable discussion in the General Council and various initiatives to enhance consultations with civil society on different issues are considered with favor, such as: (i) the introduction of a formal accreditation system for NGOs, taking into account the experience in other international organizations; (ii) enhance contacts and exchange of information between the WTO Secretariat and accredited NGO's, by also reinforcing the WTO Secretariat budget (iii) ensure a more regular organization of other forms of informal dialogue with civil society on a broader range of WTO issues; (iv) hold an annual open meeting of the WTO to present and discuss a report on the activities of the WTO and significant policy issues affecting the trading system, as already envisaged earlier But there are other more difficult and controversial issue with regard to the demand for participation. Thus it seems to be excluded an involvement of the Nga into decision-making or adjudication process, nor even to give them the status of observers at the Council meetings. The WTO is an intergovernmental organization and most member countries want to maintain this status. It is very clear in effect that although diffusing power has the potential to increase legitimacy, it can also increase the public politicization of issues, and it often makes it harder to make any clear decisions. It is also highly doubtful if and to what extent the Nga should be allowed to participate to the DSP. They require the right to observer status and to present amicus curiae briefs before dispute settlement panels and the Appellate body. The US has been the strongest proponent of opening up the WTO DSP, but these proposals are strongly rejected by the Southern countries. On the other hand it is very clear that major efforts should be done to enhance transparency of the system, also by developing transparency mechanisms that are parallel to and independent of the WTO. One possibility would be for the private sector and the Nga to jointly establish a transparency body that would operate in parallel to the WTO process (Hoekman and Mavroidis, 1999). Although it should be stressed again that there are compelling reasons why governments should continue to have sole access to DSP

Conclusions: The WTO regime: Functioning, Equity and Legitimacy, (to be added)

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References Anderson K. (1996), The Intrusion of Environmental and Labor Standards into Trade Policy, in Martin W., Winters L.A., The Uruguay Round and the Developing Countries, Cambridge University Press, Cambridge Chanda R. (1999), Movement of natural persons and trade in services: liberalisting temporary movement of labor under the GATS , paper for the First Conference of the Global Development Network, promoted by the World Bank GDN99: Bridging Knowlegde and Policy , Bonn, 5-8 December 1999 EC Communication to the General Council (2000), Improving the functioning of the WTO: Suggestions for a way forward , Brussels, 25 January 2000, I.G.1 D(00), NOTE FOR THE ATTENTION OF THE 133 COMMITTEE, mimeo Falautano I., Guerrieri P. (2000), New Trade Issues, developing countries and the future of the WTO in The International Spectator, IAI, n.2/2000, Rome, p. 71-86 Finger J.M., Hoekman B. (1999), Developing Countries and the New Trade Round: lessons from recent research, The World Bank, Washington, mimeo Gilpin R. (1987), The Political Economy of International Relations, Princeton, N.J.: Princeton University Press Guerrieri, P., Padoan, P.C. (eds.) (1988), The Political Economy of International Co-operation, London, Croom Helm. Hoekman B. M. and Mavroidis P. C. (1999) WTO Dispute Settlement, Transparency and Surveillance, The World Bank, Washington, November 1999, mimeo Hoekman B., Messerlin P.A., Liberalizing Trade in Services: Reciprocal Negotiations and Regulatory Reform, in GATS 2000 New Directions in Services Trade Liberalization, edited by Sauv P., Stern R.M., The Brookings Institution, Washington Hufbauer G. C. (1999), World Trade After Seattle: Implications for the United States, International Economics Policy Brief n.99-10, Institute for International Economics, Washington D.C. Jackson J. H. (1998), "Reflections on and implications of the WTO constitution", in Jackson J. H. (ed.), The World Trade Organization Constitution and Jurisprudence, Chatham House Papers, The Royal Institute of International Affairs, Pinter, U.K. Khor M. (2000), Rethinking Liberalisation and Reshaping the WTO, paper resented at the panel on Market Openness Can we take open markets for granted? at the World Economic Forum, Davos, 28 January 2000

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Krueger A.O. (1999), The Developing Countries and the Next Round of Multilateral Trade Negotiations, The World Economy, vol.22, n.7, Blackwell Publishers, Oxfors, UK and Boston, Lawrence, R.Z. (1996), Regionalism, Multilateralism, and Deeper Integration, Washington, D.C.: The Brookings Institution. Maskus K.E. (1997), Should Core Labour Standards be Imposed Through International Trade Policy?, World Bank, Washington (Policy research Working Paper 1817), www. Worldbank.org/research/trade/pdf/wp1817.pdf Mattoo A (1999), Developing Countries in the New Round of GATS Negotiations: From a Defensive to a Pro-Active Role, World Bank-WTO Conference Developing Countries and the Millennium Round, Geneva, 20-21 September Michalopulos C. (1998), Developing Countries' Participation in the World Trade Organization, World Bank, Washington (Policy Research Working Paper 1906), www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps 1906/wps1906.pdf Rollo J., Winters A. (1999), Domestic Regulation and Trade: Subsidiarity and Governance Challenges for the WTO, Speech at the World Bank-WTO Conference Developing Countries and the Millennium Round, Geneva, 20-21 September Schott J.J., Watal J. (1999), Decision-making in the WTO, International Economics Policy Brief n. 00-2, Institute for International Economics, Washington D.C. Stiglitz J. E. (1999), Two Principles for the Next Round Or, How to Bring Developing Countries in from the Cold, Speech at the World Bank-WTO Conference Developing Countries and the Millennium Round, Geneva, 20-21 September Winters L.A. and Zhen Kun Wang (2000), Putting Humtpy Together Again Including Developing Countries in a Consensus for the WTO, CEPR Policy Paper No. 4, March 2000.

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