THE FUNCTIONING OF THE WORLD TRADE ORGANIZATION

Luis F. de la Calle

Public Strategies Inc.

[email protected]

Geneva, April 30, 2002

1. Mike Moore has shown significant leadership in helping all participants in the

process that successfully concluded in Doha. I thank him now for convening

this conference on the post-Doha work and the functioning of the WTO. Had

the last ministerial gone the way Seattle did, we would not be meeting to discuss

neither the development agenda nor the functioning of an institution that would

be doing significant soul searching instead.

2. It is an honor for me to share this panel with Arthur Dunkel, Clayton Yeutter,

and Stuart Harbinson whom is much to blame for showing us WTO can function

if the General Council is well led. I would like to use this opportunity to address

three issues related to the functioning of WTO and let others talk about the

financing of the institution. First of all, I will comment briefly on the

mercantilist nature of the institution and of trade policy in most countries; then, I

will share some thoughts on the decision making process in Geneva; and,

finally, I will touch upon on the debate surrounding democracy and WTO.
Mercantilism

3. When I first joined Mexico´s trade negotiating team in early 1991, the first

assignment given to me was to elaborate a document we could use to promote

the upcoming North American Free Trade Agreement (NAFTA) in the US as the

House of Representatives was getting ready to vote on the fast-track authority

needed for those negotiations. I listened in total disbelief as my boss told me I

should emphasize the beneficial impact of exports but to refrain from addressing

imports in any way. The argument that exports are good and imports are bad

was squarely contrary to what I had been teaching for years: that in an

economic transaction to buy something and thus derive a benefit, a cost had to

be paid by giving something up in exchange; in other words, that imports—

through which countries acquire merchandise—provide the benefit, while

exports are used to pay for the transaction and thus represent a cost. Little did I

know about the politics of international trade policy.

4. The political discourse used to promote international trade has done a significant

disservice to the understanding of how the benefits from trade derive. First, it

creates the impression that trade is a job creating strategy while we know that

trade rather than expanding employment it produces a reallocation that is

efficiency- and welfare-enhancing. Second, the formulation exports equals jobs

and jobs are good translates into the corollary: imports equals job destruction

and thus they are bad. Third, it leads to the evaluation of trade initiatives, be
 them bilateral or multilateral, in terms of deficits. If after trade opening the

country—for whatever macroeconomic reason—runs a trade deficit, the

initiative is instantly labeled a failure. Of course, nobody in that context pays

attention to the true underlying reasons for the deficit, but the trade initiative

gets blamed. In actuality, though, things are generally the reverse: good times

tend to be associated with deficits as consumers and firms have access to credit,

while recessions are often accompanied by large trade surpluses. In the case of

Mexico, the largest recorded surplus took place in 1995, when we had the

sharpest drop in GDP ever. Fourth, the political discourse minimizes the

extraordinarily large benefits accrued to consumers that are always overlooked

in trade policy discussions.

5. WTO negotiations are not, unfortunately, the exception to mercantilistic trade

policy. Negotiations in Geneva are often—or should I say, always—mercantilist

in nature. This, of course, means, in every decision taken, my gain is your loss.

This applies to everything: from procedural details in the General Council to the

trade offs in a round of negotiations. That is why old Geneva hands keep an

accurate tally of favors rendered and received. In my view, the functioning of

WTO and the public perception of international trade, deep down, will very

difficultly change for the better until we come to grips to selling the real thing

and forgetting about the export proxy: a. trade is not a zero-sum game, for if it

was little benefits would derive from it, while the overwhelming empirical

evidence is that trading nations do a lot better than others in the long term; and

b. trade opening improves peoples´ lives.

building countries would like to upgrade customs facilities to be able to apply

border measures, or to set up antidumping administrative units to better deal

with imports; asymmetric results are always the basic working assumption to

begin any potential negotiation; the selection of chairs for committees, working

groups and personnel for the secretariat often emphasizes a balanced regional

distribution rather than merit and professional performance.

7. GATT and WTO have made quite a large contribution to world trade through

the successive and successful rounds of negotiations. Nevertheless, now that

import duties are so much reduced for a large range of products in countries

representing a substantial proportion of total international trade, it is becoming

more complex to envision negotiations with trade-offs across sectors. Indeed, in

the free trade agreements we in Mexico negotiated, where import tariffs are not

only reduced but eliminated, the trade-offs in the end could only take place in

terms of phase out periods rather than sectors or specific goods. As import

duties become ever lower, this will be increasingly the case. In my view, these

facts will make it more difficult for negotiations to take place in the form of

rounds and the WTO will become more of a permanent negotiating body where

the concept of a single undertaking will be gradually eroded and dismissed and

where topics will be addressed at several speeds and countries will join and

negotiate market opening at differentiated time periods.

8. WTO carries out its two basic functions, serving as a negotiating forum and

providing a dispute resolution system, through what we could label a legislative

branch permanently represented by the General Council; a judicial branch

represented by the Dispute Settlement Body and the Appellate Body; and, by a

form of constitutional conventions that meet every few other years and that we

in Geneva know as “rounds”.

9. One of the first issues member countries will have to reflect upon is whether—I

would say how—to transit from round negotiations to a permanent negotiating

body. As I mentioned this implies that contrary to previous wisdom we will be

moving away from sufficiently broad based negotiations in a single undertaking

to take account of the interest of all members. I certainly do not expect the

abandonment of rounds to be part of the Doha agenda but rather a conclusion

from it; my expectation is that this round will end all rounds not thanks to the

creation of a new institution but rather because it will be more evident than ever

before that the way forward does not lie in the periodic re-founding of the WTO.

10. A second issue members will have to consider is the use of consensus for the

adoption of decisions at the General Council. This topic can not be treated

lightly as it goes to the heart and tradition of the institution. The possibilities

people have proposed, particularly, a weighted voting system do not appeal

much to me. I do not see how voting in proportion to international trade will
 make the decision making process more efficient, or more just. An alternative,

of course, would be that countries votes were proportional to the importance of

the issue at hand for their own development. This system might be more

balanced but utterly impractical as we would never agree on voting weights. It

strikes me that to facilitate the decision making process we should do a couple

of things: A. Narrow the scope of issues that need approval by the General

Council. Less important decisions could be delegated to committees or to the

Secretariat if they are of an administrative nature. B. Get ministerial

involvement on issues the General Council in Geneva fails to agree upon after a

certain number of attempts.

11. One of the permanent features of this organization is the perception—or reality

—that it is the Geneva way of doing things that prevents progress in many of the

fronts; that involvement from capitals is needed to assure the work program is

on track. I would approach this from a slightly different angle: Observing

WTO in the last years I came to realize that the owners of the institution, the

shareholders if you wish, are the trade ministers. They are the only group that

has the responsibility to make sure WTO works. Being them shareholders, they

should act accordingly and get involved when lower level people cannot agree

on a particular issue. I would propose a procedural rule were crafted to interject

ministerial involvement when Geneva ambassadors fail to reach consensus.

This would partially solve the principal-agent problem that supposedly exists

between ministers and ambassadors as it would internalize the cost to the

representatives in Geneva of frequently seeing ministers coming to town or,

ministerial involvement proved crucial in the way to Doha.

Democracy and WTO

12. The discussion of the NAFTA in 1993 in the US and Seattle have forever

changed the public´s consciousness about international trade. NAFTA was the

first large trade agreement that was widely debated and that voters knew about.

Never before Larry King had dedicated a full hour and a half of his prime time

to such an arcane topic. In the past, trade agreements were the purview of

specialists and the political elites, but not any more. Seattle brought into the day

light the implications and importance of trade agreements to everyday life,

unfortunately more often than not with inaccurate, or even misleading, views.

13. Democracy and WTO is something that has been addressed only in the last

years. We have to remember that WTO is an intergovernmental organization

where members are countries represented by governments; as such, the tradition

has been that the organization is answerable to its members only and that it does

not have to recognize individuals or the general public. The democratic deficit

criticism has generally covered three areas:

14. a. Lack of transparency with respect to dispute resolution. There is no question

that dispute settlement has approached the US style litigation system in past

years and I am sure that enhanced transparency will be accomplished in the not
 too distant future. A few words of caution are in order, however: transparency

benefits more those who have the ability and wherewithal to participate in the

proceeding. Opening hearings to the public or allowing Amicus Briefs will

increase the capabilities of large companies and richly endowed Non-

governmental organizations to influence the process while leaving behind small

and poorer countries; it will also increase the political pressures on panelists to

decide matters on concerns not necessarily technical but political. Given that

there is no legislative check—as yet—on dispute settlement body activism, we

should be very wary of the political pressures for the DSB to legislate: this

would be quite undemocratic.

15. b. WTO dispute resolutions undermine democracy as they can reverse

democratically taken measures at home. I should point out several clarifications

to this statement: 1. Undermining democracy appears to be a far worse offence

if the measure is against a developed country compared to the measures required

to developing countries by a multitude of international organizations. 2.

Neither the WTO nor faceless bureaucrats can challenge any democratically

decided domestic measure; rather it is other member countries that can bring the

measure before a WTO panel that is supposed to adjudicate only in the terms

and according to the disciplines voluntarily agreed by all members unanimously.

Most of the time the countries bringing cases are themselves well established

democracies. 3. Losing a case before a WTO panel does not mean that the

accused member must change the local measure that has been ruled—after a

lengthy procedure—contrary to its international trade obligations. It only means

that if the balance of the negotiations—remember the mercantilist logic—is

affected a compensation is in order to restore it. In this manner, countries can

chose laws and regulations of their liking but subject to reimbursement of

concessions granted to them in previous voluntary negotiations. 4. In the past,

GATT members could block the adoption of findings by dispute resolution

panels: this turned out to be a system that was abused by the developed

countries not to implement politically unpalatable decisions. The new dispute

settlement procedures have actually increased democracy as smaller countries

can now defend themselves on a more leveled playing field.

16. c. Not only WTO process is undemocratic but also its policies. This form of

criticism comes mainly for people that do not believe in the benefits that derive

from international trade. The World Trade Organization has one primary

objective and two functions: the objective is to promote freer trade.

Membership is not mandatory but increasingly countries see the enormous

benefits that can be obtained, and therefore want to join and share the freer trade

objective. The two functions are to serve as a negotiating forum in order to

pursue freer trade, and to handle dispute resolution to ensure that markets

remain open and international trade disciplines adhered to. Several other

comments come to mind on this score: 1. Accession and round negotiations

must be thoroughly discussed with all domestic interest groups and parliaments.

There is no international legitimacy if the domestic one is not validated. 2.

International democratic institutions are greatly strengthened by the rule of law.

In the WTO-democracy discussion scant attention is put on democratic behavior

among countries where the emphasis in my view should be put. 3. International

trade disciplines strengthen democracy at home as economic agents face rules of

the game that are more certain and cannot be changed by the whims of large

players or bureaucrats. Often times it is only the large firms that have access to

high level officials leaving small firms with the short end of the stick when trade

policy is implemented. International obligations make this manipulations a lot

less likely. WTO disciplines have introduced in many countries the obligation

to publish regulations for comments before they are implemented, this is a

highly democratic and equalizing discipline. 4. Trade opening functions as a

lever for development only if countries adopt the policies willingly. Force

feeding freer trade on countries is highly counterproductive in the process of

opening and modernizing an economy and generally leads to backtracking.

WTO should promote opening for those willing to embrace it, this is democratic

as they choose their own development policies, in a way their own future.

Conclusions

15. Mr. Chairman, I would like to conclude with some further reflections or

recommendations on the issues I have so briefly addressed:

16. Keep it simple: Before we begin discussing capacity building we should ask

ourselves if we could simplify international trade rules. Most of the subtle

details that make WTO so difficult to understand for smaller countries and the
 public at large come from arcane negotiating compromises. Negotiating group

chairmen should be instructed to always opt for the simpler option. This will

also help dispute resolution as panels would not have to guess constitutional

intent in every case brought before them. Dumping is an area where significant

progress can be made in simplifying procedures, not only to make them better

but more just.

17. Capacity building: Capacity building should focus on how to expand the

benefits of trade for member economies. We should judge the success of a trade

initiative by the integration of regions, sectors and firms to international trade

and investment flows. Capacity building should center on how to use present

and future trade agreements, rather than exclusively on how to negotiate

agreements, or put more bluntly, how to minimize giving concessions. The

work of international financial institutions should be one of developing export

capabilities in the different economies that need help, and not on giving advice

on trade negotiations.

18. Regional trade agreements: WTO should encourage RTA´s if they are

conducive to more trade opening. My personal opinion is that article XXIV

should strengthened by requiring that either free trade areas become customs

unions, without increasing MFN rates, or that the RTA´s eliminate drawback

schemes among themselves. The competition from RTA´s is salutary for WTO

´s health.

19. Keep it simple II: Allow plurilateralism for non-core issues in the Doha

Agenda, but make an effort to avoid non-trade issues at WTO.

governments, private sectors and workers are not convinced about the need to

modernize the economy and compete internationally. There is not better

capacity building on negotiating and on using trade agreements than the

domestic discussion that should take place when entering an ambitious opening

program.

21. Sell the real thing. Make a story case that trade is good, and that there is no

better contribution we can make in favor of development and poverty reduction

than opening borders for developing country goods. The future of the

international trading system is much more a function of the integration of poor

countries to the international trade rather than of the success of developed

countries. They succeed already.