The cross-border flow of goods, investments, services, know-how, and people associated with international production networks – increasingly known as ‘global value chains‘ –has transformed the world (Gereffi and Lee, 2012). A recent report by the World Economic Forum, in collaboration with Bain & Company and the World Bank (WEF 2013), concludes that improving border management and transport and communications infrastructure and services could increase global GDP by up to six times more than removing all import tariffs. The changing face of global trade might leave multinational trade negotiators feeling, like Eugene McCarthy’s politicians , like a football coach: smart enough to understand the game and dumb enough to think it’s important. In fact, some prominent scholars are now arguing that these developments require the establishment of a new international organization – a ‘WTO 2.0’ (Baldwin, 2012).
However, the need for new rules governing the increasingly interconnected issues of trade, investment, intellectual property, and service should not lead to an underestimation of the relevance of ‘WTO 1.0’ since it is clear that both tariff and non-tariff measures can disadvantage foreign firms. And while it is true that after decades of negotiations, traditional tariff policies are no longer the principal obstacle to trade, it should not be forgotten that the very existence of multilateral commitments has helped to prevent the widespread adoption of ‘beggar-thy-neighbor’ (trade) policies, such as were seen during previous economic crises. In addition, even though border trade policies have been the major focus of recent multilateral negotiations, international trade law also has a significant impact on domestic policies through the national treatment principle prohibiting discrimination between imported and domestically produced goods with respect to internal taxation or other government regulation. Together with the Most-Favored-Nation clause, this national treatment principle is one of the cornerstones of WTO agreements (GATT, GATS, and TRIPS). Clearly, the WTO in its current form has served an important purpose.
The new WTO should, then, complement rather replace the existing organization. But we must also recognize that the new organization will likely deal with a completely different set of problems. For example, whereas tariffs can be eliminated with the stroke of a pen, reducing certain supply chain barriers – particularly those related to infrastructure – will require upfront investments. Recognizing that the projected gains from supply chain improvement are gross rather than net has a crucial implication: the benefits from any agreement will depend on prior investments that will have to be accommodated in national budgets, many of which are already becoming tighter and tighter.
Traditional trade policies can be likened to the famous “prisoner’s dilemma,” in which the individually “rational” decision to betray the other party actually leads to a less beneficial outcome than if both parties cooperated. Tariffs help the country instituting them, while harming other countries; thus, the end result of individually rational protection is collective folly. The GATT/WTO’s success has been based on an understanding of such natures’ policies, and on cooperation in trying to limit their use.
To properly tackle supply chain barriers, such cooperation must continue and expand. Trade policies will need to be based on dynamic and responsive procedures more in step with industrial practices, both nationally and globally. Keeping our game theory analogy, countries and trade negotiators should think less along the lines of the prisoner’s dilemma and more along the lines of the classical coordination game, in which all parties can realize mutual gains, but only by making mutually consistent decisions.
In this new environment focusing on global supply chains, economic policies are not necessarily the problem, as they have been in the case of trade barriers; in fact, in some circumstances, they could even provide solutions. While the WTO 2.0 cannot, and should not, replace the 1.0 version, if established and maintained correctly, it will play an important role in supplementing the original as a way to ensure proper global trade governance.
References
Baldwin, R. 2012. WTO 2.0: Global governance of supply-chain trade. CEPR Policy Insight No.64.
Gereffi, G. and J. Lee. 2012. “Why the World Suddenly Cares About Global Supply Chains.” Journal of Supply Chain Management 48(3): 24-32.
World Economic Forum, Bain & Co., and World Bank. 2013. Enabling Trade: Valuing Growth Opportunities . Geneva.