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International Economic System: WTO & IMF.

Evolution of international economic system from Bretton Woods to WTO.

Liberal International Economic Order (LIEO) was established after 2nd World War. It was believed that LIEO is conducive for peace (14 points of Woodrow Wilson, golden arches theory).
However, USA established the order because USA’s prosperity is dependent on free trade. Up till 2nd WW, Britain was fulfilling the responsibility. After weakening of Britain, USA had to come forward to establish the order.
It is supported by hegemonic stability theory given by scholars like Robert Gilpin. According to theory, there is no invisible hand in international political economy, there is need of global policeman.
IMF, World Bank, GATT are the pillars of new international economic order.

Present status of global international liberal economy.

USA, which has built the liberal international economic order and has been the champion of globalization, free trade and economic interdependence has adopted an entirely opposite policy i.e. America first. America first is not only the feature of its strategic policy but also foreign trade policy released in 2018. Currently USA has initiated tariff war. Many of US decisions are unilateral. For example:
1] Utilizing the clause of import surge USA has imposed safeguard tariffs on solar cells & washing Machines
2] Using the national security clause, USA has imposed 25% tariff on steel and 10% tariff on Aluminum from all countries, though the national security clause is only meant for enemy countries.
3] Trade war between USA and China. We can say that it was triggered by USA 1st by increasing the tariffs on imports from China.
4] USA has also tried to undermine the platform of G7, APEC. USA has threatened to come out of NAFTA, calling it worst trade deal ever.
5] Trump also declared WTO also as the ‘worst trade deal ever made and if it does not shape up’, USA will withdraw from WTO.

There is a continuity in the policy of USA towards international economic order since Obama administration. Obama administration also has not done anything to end the deadlock on Doha or to bring significant reforms in IMF. Obama preferred to weaken multilateralism in trade by initiating the trade deals like TPP and TTIP. Trump has withdrawn from TPP, thus Trump is going back to the policy of isolationism followed by USA before the announcement of Truman doctrine. There is only a different of posture between Trump and Obama. Trump is more offensive in his approach. Tariffs, threats and twitter have become the hallmark of Trump’s approach to foreign policy.

Background of US actions.

US actions have to be seen in the background of the rising challenge of China to US hegemony. Up till now USA was thinking that China aims to challenge the hegemony but now USA is convinced that China aims to displace USA, determined to establish its own hegemony. Hence tougher actions are needed before it becomes too late. China will soon surpass USA as a world’s largest economy in nominal GDP terms. China’s integration with international economy will become too big that it will be difficult to avoid China. Hence it makes sense when USA not only weakens WTO as China has been the beneficiary, USA also has to pull out from the trade deals or to put strong terms and conditions because. China itself is a major trading partner of all of USA’s trading partners.

The future of liberal international economic order?

Though some scholars predict the end of globalization, but others suggest globalization 2.0. Since China have benefitted by globalization, it has a huge interest in maintaining liberal international economic order. At world economic forum in 2017, China proclaimed that it is ready to take the burden of leadership of globalization. We may expect China led international economic order. Pax Americana giving way to Pax Sinica. Other countries of the world are not interested in the retreat of globalization e.g. Canada, France, Germany, BRICS countries, have opposed USA’s protectionist approach. Countries are also coming closer to China.
But it is extremely doubtful if China can replace USA. China cannot provide such a huge market to rest of the world like USA. China’s growth is export oriented and it is also China’s compulsion. It has become the manufacturing hub because of the lower wages. If China has to increase its internal demands, it has to increase wages. Once it increases wages, it will loose its competitiveness.


WTO – World Trade Organization

Purpose of WTO.

WTO establishes the rule of law in international trade. It replaces GATT. GATT was limited to trade in goods (manufactured goods) but over a period of time, there has been a growth in international trade in agriculture, services, new areas of international trade keep on emerging like IPRs, now e-commerce, fisheries and other areas.

Logic of WTO.

Aim of WTO is to establish free trade. The concept of free trade is based on Ricardo’s theory of comparative advantage. Comparative advantage creates win-win situation for all. Each country will have the entire world as a market. Hence the mantra is ‘trade rather than aid’ for poverty alleviation. Bigger market means bigger demand. It means more production which means more economic activities, which means more GDP, more resources and better way of poverty alleviation. This was the main logic, on the basis of which developed countries sold the idea of WTO to developing countries. Global trade has always been a cause of war among states. It has not been easy to communicate to the states, the benefits of cooperation. WTO was conceived in 1940s, WTO is a product of Uruguay round of talks and there were 8 round of talks. Present WTO treaties are based on Dunkel draft. WTO came into existence on 1st January 1995 at Marrakesh, Morocco.

WTO principles.

Since the objective of WTO is to establish free and fair trade rules, members agreed on following fundamental principles.
1] To make trade free. by reducing the tariff and non tariff barriers.
2] Adopt the principle of non-discrimination. This requires two principles: MFN status, national treatment.
3] Special and differential treatment. Developing countries will be given some exemptions to make the trade free.
4] Transparency and Predictability.

Argument of USA

According to USA, China has not adhered to the fundamental principles, it only takes the advantage without offering reciprocal benefits. China has denied market access to foreign companies. This is one of the reason why rest of the world has negative balance of trade with China. China has coerced American companies to transfer technology to the Chinese firms, thus violating IPR norms.
US has also mentioned that China, which is going to become the largest economy with huge surplus, does not deserve to be treated as developing country to take the advantage of the special and differential treatment.
Even with respect to transparency, China has not been transparent in its trade policy.

WTO BODIES

1] Ministerial council
Summit level body where ministers of trade and commerce meet.

2] General council
Administrative body/executive body.

3] Trade policy review board.
This will ensure the transparency and predictability by reviewing the trade policies of different countries. It will find out in case a member country is violating the norms.

4] Dispute settlement body (DSB)
The dispute settlement body has been one of the significant innovation of WTO so that countries can resolve their trade disputes in a peaceful manner. Appellate body is a part of DSB, consisting of 7 members which pronounces judgements on various disputes.

5] There are different councils like Council on Trade and Goods, IPR etc.

Current attitude of USA towards dispute settlement body.

Dispute settlement body (DSB) is meant for all the members but practically speaking, the dispute settlement process is extremely costly, hence even when developed countries violate the norms, developing countries could hardly afford to utilize the platform. It is not in their capacity to pay the lawyers to advance their case. Many WTO members of developing countries cannot even afford office in Geneva.
The platform has been used primarily by powerful countries. The maximum number of disputes has been between US and China, and US and India.
Since USA lost many cases, USA is bent on undermining the body. The appellate body in dispute settlement process of WTO consists of 7 members: The quorum is 3 members. At present only 2 members are serving. USA is blocking the process of appointment of the new members. Presently the body is defunct.
In WTO all countries posses Veto, hence USA has stopped the appointment. USA has accused the members of DSB for corruption. USA has huge concerns with overall WTO administration. According to USA there is lack of transparency, huge red tapism and corruption among officials.

Way out? As suggested by WTO secretariat, appointment can be done even without US consent. Consent of the countries is needed only on trade agreements and not on administrative matters. However USA does not accept this interpretation.

Read more about present crisis in DSB- Appellate body. Its implications and causes.

WTO round of talks.

Trade treaties are the dynamic treaties. It is not easy to establish complete free trade in a single go. Hence in 1996, 1st ministerial meeting took  place in Singapore. Developed countries brought new issues known as Singapore issues. It included trade facilitation, government procurements, competition policies, investments, IT agreement, environment and labour standards.
Developing countries opposed the inclusion of labour standards for which the ILO standard is adequate. Developing countries viewed it as an attempt to impose non tariff barriers.
Since then there is hardly any achievement of WTO. The last achievement was in 2013 at Bali ministerial, when countries agreed for trade facilitation.

2nd Ministerial meeting took place in Geneva in 1998 with no achievement.

3rd ministerial took place in Seattle.

There was huge protest by the members of civil society, especially from developing countries because the implementation of WTO agreements have increased poverty in developing countries. WTO policies resulted into more interstate and intra-state disparities.
 
4th ministerial 2001 at Doha

A non democratic country was chosen so that protests can be avoided and WTO meeting could take place. At Doha, developing countries presented a strong solidarity, forced developed countries to adopt ‘Doha development agenda’.
Adoption of Doha development agenda was a big victory for developing countries and since then USA had lost interest in WTO.

What in unique in Doha development agenda?

Priority to development over trade. Developing countries joined WTO in the hope that they will get resources for development, but it didn’t happened that way. Hence they imposed the priority of the development of the countries of South over the trading interest of the countries of North.
Since the main commodity traded by the developing world are agricultural goods, agricultural negotiations became the core agenda of Doha talks.
In Doha, countries agreed for the modality (method) of single undertaking. It means nothing is agreed till everything is agreed.
Doha development agenda contains the subjects which are of the interest to developing countries as well as developed countries. It should not happen that the issue of concern of developed countries is agreed, developed countries loose motivation to negotiate further.
The attitude of developed countries has been to ‘use the ladder to climb and then remove the ladder’. Developed countries had taken huge advantage because of first round of negotiations based on Dunkel draft. Now they do not want to leave the advantages. Developed countries are only interested in arriving at the agreements like trade facilitation, ecommerce, which favour them. They agreed to Doha development modalities in 2001 but now they are not in favour.
Why developed countries adopted/accepted the Doha agenda?
Against Sep 11 2001 terror attack, USA wanted to communicated the non state actors that the entire international community is together.

Major ongoing areas of negotiations.

Agreement on Agriculture. (AOA), NAMA (Non agricultural market access), Trade in services, TRIPS (Trade in Intellectual property rights, TRIMS ( Trade related investment measures), Trade in fisheries, e-commerce, IT, Gender issues. Agriculture has been contentious issue and is the major reason for deadlock. 

Posted in PSIR 2A

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Shantanu

It’s all 2018 SR notes. It’s great.

Pragati mishra

Isn’t complete?