e. prospects for multilateral trade cooperation · as well as the need for new approaches to trade...

world trade report 2013

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This section explores the relevance of current trade rules – as well as the need for new approaches to trade cooperation – in light of the forces that are currently re-shaping international trade. It suggests that the multilateral trading system will need to adjust to developments in trade and in the trading environment – as it has done repeatedly in the past – and reviews proposals for updating the WTO’s agenda and governance. The section starts with a short overview of key trade developments within the broader socio-economic context – especially the rise of global supply chains, the general shift of trade power away from the West and towards Asia and other emerging economies, as well as the changing nature, composition and direction of trade. It then highlights some of the main challenges facing the WTO and how they could be addressed.

E. Prospects for multilateral trade cooperation

II – Factors shapIng the Future oF world trade

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Contents 1 Maintrendsintrade 268

2 ChallengesfortheWTO 269

3 WhatcouldtheWTOdotoaddressthechallenges? 279

Some key facts and findings

• Some of the main trends which will affect world trade in the coming decades are the emergence of international supply chains, the rise of new forms of regionalism, the growth of trade in services, higher and more volatile commodity prices, the rise of emerging economies, and evolving perceptions about the link between trade, jobs and the environment.

• These trends will raise a number of challenges for the WTO. A considerable amount of trade opening is taking place outside of the WTO. Interdependence between trade in goods and trade in services is increasing. Frictions in natural resource markets expose some regulatory gaps. The emergence of new players affects global trade governance in ways that need to be better understood. Coherence between WTO rules and non-trade regulations in other multilateral fora needs to be maintained.

• Addressing these challenges will involve reviewing and possibly expanding the WTO agenda. Traditional market access issues will not disappear but new issues are emerging. Internal governance matters as well as the role of the WTO in global governance may need to be addressed. An important issue will be how to “multilateralize” the gains made in preferential trade agreements and to secure regulatory convergence.


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1. Maintrendsintrade

Thissub-sectionprovidesashortsummaryofsomeofthemainfindingsofSectionsB,CandDthatmayhaveimplicationsfortheWTO.

(a) Trendsinthenatureoftrade

A trend emphasized throughout this report and thathas a major impact on other developments is theemergence of global supply chains. Countries andproducers increasingly specialize in certain stages ofproduction depending on their particular comparativeadvantage. Section B stresses the importance andmagnitudeofthisdevelopmentfor internationaltrade.Inparticular, its impacton tradestatistics isanalysedin detail. In Section C, several important factorsinfluencing these supply chains are discussed.Transportandenergycosts, for instance,arereasonswhythesechainsremainmoreregionalthanglobal.

A related trend is thenewformof regionalism that issometimes referred toas “deep” integration (Baldwin,2012a). The need for firms to organize their supplychainsacrossdifferentcountrieshasledtoademandfor regional agreements that cover more thanpreferential tariffs. The harmonization of standardsand rules on investment, intellectual property andservices has become a standard part of new tradeagreements(WTO,2011a).

SectionBalsodiscussesthedifferencesamongfirmsinvolvedintrade.Thepicturethatarisesfromthetradeliterature and the data is that even if many firms areindirectly involved in trade-related activities, onlyrelatively few are exporting or importing and thesefirms tend to be larger and more productive thanothers. Such firms also have a role in technologyadvancement and the diffusion of know-how throughsupplychains.

(b) Trendsinthecompositionoftrade

Section B shows that trade in services has grownfaster than trade ingoodsover the last twodecades,whileSectionCdescribeshowadvancesininformationand communication technology have enabled a rapidexpansion of services trade. This trend might in thefuturebespurredbyrisingenergycosts.Moreover,theshare of services in both manufacturing firms’ inputsandoutputshasincreasedandthe“frontier”betweengoods and services is increasingly blurred.Digitalization and 3D printing are examples of theincreasing grey zone between goods and services.Whether they are classified as one or the other issignificantasdifferentregulatoryregimesmightapply.

Withregardtonaturalresources,SectionBshowsthattheir price has increased and that the price of foodproductshasbecomemorevolatile.SectionCexplores

in more detail the reasons behind the trends in theprice of energy. Section D discusses how higher andmore volatile agricultural commodity prices raiseconcerns regarding food security in developingcountries.

(c) Trendsinthegeographyoftrade

Anothermajortrendininternationaltradeistheriseofanumberofemergingeconomiesand theassociatedincrease in their shares in world trade. EspeciallyChina but also India and Brazil have transformed thebalance of power in the multilateral trading system.SectionBdescribes thegrowth in theshareofworldtrade of China and other emerging economies.Between1980and2011,forexample,China’sshareinworld merchandise exports and imports increasedtenfold,makingthecountrythelargestexporteroftheworld.

Section C finds that a comparable development hasoccurred in foreign direct investment. Inflows intodeveloping countries and outflows from thesecountriesnowrepresentamajorshareoftotalforeigndirect investment (FDI), and FDI between developingcountries is rapidly expanding. Related to thisdevelopment is the industrialization of developingcountries and de-industrialization of developedcountrieswhich,onceagain, iscloselyinterconnectedwith global supply chains. However, this growth islimitedtoonlyafeweconomies.Ithascausedgreaterdifferencesamongdevelopingcountries,withgrowingemerging economies and struggling least-developedcountries(LDCs).

(d) Trendsinthebroadersocio-economiccontext

Section D looks at trends in the broader socio-economic context within which trade takes place.Distributional effects of trade play an important rolehere. The section examines the extent to which therecent sharp increase in the unemployment rates ofdevelopedcountriesmaybe linked to tradeandwhatthis could mean for attitudes towards trade. Whilethereisnoconclusiveevidencethattradecontributessignificantly to changes in long-rununemploymentorin income inequality, public concerns about currentlevels of unemployment and income distribution in anumber of countries are likely to have a bearing ontradepolicy-making.

Anotherongoingtrendistheincreasingimportanceofconsumer concerns (regarding the environment orfood safety, for example) which has led to aproliferationofpublicpolicymeasuresthataffecttrade(WTO,2012b).Globalsupplychainsmightexacerbatethe issue when large firms impose private standardsthroughout their respective supply chains. A furthertrend is the fierce competition for scarce natural


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resourcesthatleadstoamorefrequentuseofexportrestrictions, as examined in the 2010 World Trade Report (WTO,2010).

2. ChallengesfortheWTO

A number of developments identified in this reportraise a transparency challenge for the multilateraltrading system. First, as explained in Section B, theexpansionofsupplychainsisdifficulttoquantifywiththe available trade statistics, which are collected ingross terms. Efforts are being made to generatestatistics on trade in value-added terms but moreinformationwillbeneededonvariousotheraspectsofsupplychains.Thekeyroleofservices,forexample,isnotadequatelycapturedbyexistingstatistics.Similarly,more and better information on FDI is needed toassesstheeffectofoffshoring.Secondly,asdiscussedin Section D, non-tariff measures (NTMs) related topublic policy, which have proliferated in recent years,are particularly opaque.1 This opaqueness raisesproblems not only for businesses but also for themultilateraltradingsystem.ExistingWTOtransparencymechanisms and efforts undertaken by otherinstitutionsshedsome light inanumberofareasbutmoreremainstobedone.

(a) Internationalizationofsupplychains

One major development that has substantiallytransformed–andis likelytocontinuetotransform–world tradeand theworldeconomyasawhole is theemergence and expansion of global supply chains.Accordingtosomeeconomists,thesignificanceofthisinternationalization of supply chains goes beyondincreasing trade in parts and components; in someways,itisthemostimportantdevelopmentintheworldeconomy since the beginnings of globalization(Baldwin,2012a).

The industrialization and spectacular growth ofemergingeconomies,togetherwiththefastexpansionofservicestradeandofFDI,areinextricablyrelatedtowhat Baldwin calls the “second unbundling” ofproduction.The focusherewillbeonhow the riseofglobalsupplychainshashadanimpactonthepoliticaleconomy of trade and countries’ motivations forcooperatingontradepolicies.Thereisboththeoryandevidencesuggestingthatparticipationinglobalsupplychains tends to strengthen anti-protectionist forces.These forces have helped to drive some multilateraltradeopeningintheWTO,bothinspecificsectoralaswellasinbroaderaccession-relatednegotiations(with32governments joiningtheWTOsince itscreation in1995). The main impact, however, has been onunilateral tariff reductions (mostly among developingcountries) and the proliferation of preferential tradeagreements (PTAs) and bilateral investment treaties(WTO,2011a).AconsiderableamountoftradeopeninghasthustakenplaceoutsidetheWTO.

(i) Unilateral tariff reductions

The internationalization of supply chains has openedup an alternative industrialization path for developingcountries (Baldwin, 2011a). Before the emergence ofsupplychains–andtheinformationandcommunicationtechnology (ICT) revolution that underpinned it –industrialization involved building a strong industrialbase often behind the protection of tariffs and otherNTMs. The unbundling of global production made itpossible for countries to industrialize by joininginternationalsupplychains.Thisprocessalsochangedthepoliticaleconomyoftradepolicy,creatinginmanydeveloping countries a strong incentive to undertakeunilateraltariffreductions.

Baldwin (2011a) identifies threemechanisms throughwhich production unbundling can lead to unilateraltariff reductions.First, theoffshoringofproduction islikely to alter lobbying over trade policy in the hostcountry. The relocation of production transformsimporters of the products concerned into exporters.Asaresult,lobbyinginfavourofimporttariffsonthesegoods decreases and pressure to reduce upstreamtariffsincreases.2Thiseffect,however,ismorelimitedincaseswheregovernmentssetupexportprocessingzones to exploit the growing industrializationopportunitiesofferedbysupplychains.

Secondly, a fall in coordination and communicationcostsmayalsohaveanimpactonlobbying.Withhigh“frictional” trade costs, producers of final productsmaysupportinfantindustryprotectionofintermediateproductsiftheybelievethatitcouldlowerthepriceofdomestically produced intermediate goods comparedwith imports. However, a fall in coordination andcommunication costs can break the coalition ofinterests behind high trade barriers, and leaddownstream producers to lobby against tariffs onintermediategoods.

Thirdly, offshoring improves the competitiveness ofdevelopedcountries’productsbyreducingtheircosts,thus undermining import substitution strategies indevelopingcountries.Developingcountrygovernmentsmay either respond by lowering the tariffs on finalgoods,or,alternatively,byloweringupstreamtariffstoimprovethecompetitivenessofdomesticfinalgoods.

Empirical evidence seems to confirm that lobbying isindeed an important determinant of trade policy(Gawandeetal.,2012).Inparticular,thereisevidencesuggesting that supply chains can explain why therecent financial crisis did not lead to significantprotectionismdespitethefactthatmanycountrieshad“water” in their applied tariffs, meaning they couldraise them without violating their “bound” WTOcommitments(Gawandeetal.,2011).

While unilateral tariff reductions have clearly been apositivestepinthedirectionofmoreopentrade,they


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may also have complicated multilateral, reciprocity-based tariff reductions in the WTO. Baldwin (2010a)argues that developing countries have alreadysignificantly reduced their applied tariffs, givingdeveloped country exporters less to fight for inmultilateralnegotiations.Developedcountryexportersalso see less value in asking developing countries tocommit to lower tariffs because they do not believethat developing country governments have strongincentives to raise them.3 In Baldwin’s view, becausemultilateraltariffreductionsaredrivenbytheexchangeof market access, the fact that developing countrieshave less to offer has weakened the logic of furthernegotiations.4

Blanchard (2010) makes a related point, arguing thatforeigninvestmentmayleadgovernmentstounilaterallyreduce tariffs, thereby lowering the incentive toexchange tariff reductions in the WTO. Existingtheoreticalworksuggests thatagovernment’soptimaltariff decreases when its constituents hold anownershipstakeinaforeignmarket,leavingitwithlessincentivetomanipulatethetermsoftrade.Extendingaterms-of-trade model of trade agreements to accountfor international ownership, Blanchard shows that byeroding large countries’ motives to improve terms oftradebyraisingtariffs,internationalownershipcanalsoreduce their incentive to sign trade agreements.Blanchardalsosuggeststhatcalculationsofreciprocityin tariff negotiations should consider patterns ofinternationalownershipaswellastradeflows.

Unilateral tariff reductions, in as much as they werenot bound in the WTO,5 have tended to increase thelevelof“water”indevelopingcountries’tariffs–i.e.thedifferencebetweenthelevelatwhichtariffsareboundandthelevelatwhichtheyareapplied–whichhasinturn complicated the Doha Development Agenda(DDA)non-agriculturalmarketaccessnegotiations. Inthe DDA’s early days, discussion focused on thequestionofwhetherandhowcreditshouldbegrantedforautonomoustradeopening(MattooandOlarreaga,2001). Even when WTO members “agreed” tonegotiate reductions of their bound, rather thanapplied, tariff rates, the underlying problem did notdisappear but merely reappeared under a differentguise.Membersstartedarguingaboutthevalueofso-called“papercuts”, i.e. reductionsofboundratesthatdonotimplyequivalentreductionsofthecorrespondingappliedrate.

(ii) Reciprocal trade opening

Thechangingdynamicsof tradepolicybroughtaboutby the internationalization of supply chains have notonly resulted inunilateral tariff reductionsbutalso innegotiated tariff reductions in the WTO (e.g. theInformation Technology Agreement) and, even moresignificantly, in fast-proliferating PTAs (WTO, 2011a).While inmanycases,particularly inAsia, thesePTAsareaimedat “deep” integrationand rule-making, they

typicallyalso includeatraditionaltariffcomponent. Inothercases,suchasPTAsinAfrica,tariffsarecentraltotheagreements.

Preferential tariffs raise several challenges for themultilateral trading system. One concern, extensivelydiscussed in theeconomic literature,on thesystemiceffects of preferential tariff reductions relates to thelinkages between discriminatory and non-discriminatorytariffreductions.6AnumberofdifferentmechanismshavebeenidentifiedthroughwhichPTAseitherfosterorhindermultilateraltradeopening.Whilethe evidence on the relative size of these effects isinconclusive,thereisasharedsenseamongobserversthatthecoherencebetweenPTAsandtheWTOneedstobeimproved(WTO,2011a).

(iii) Deep integration at the regional/ bilateral level

In order for international supply chains to operatesmoothly, certain national policies need to beharmonized – or rendered mutually compatible – tofacilitate business activities across borders.7 Thisgenerates a demand for deep forms of integration.8

Developed countries were the first to sign regionalagreementsaimedatprovidingrulestoaccommodateinternationallyfragmentedproduction.

Withtheexpansionofinternationalproductionsharing,developing countries too began to enter into deepintegration agreements, especially at the regionallevel.9 Both North-South agreements (betweendeveloped and developing countries), such as theNorth American Free Trade Agreement or the Euro-Mediterranean agreements, and South-Southagreements(betweendevelopingcountries),mostlyinAsia, include provisions that go beyond preferentialtariff reductions. As suggested by the current Trans-Pacific Partnership negotiations and the PacificAllianceinitiativeinLatinAmerica,thistrendisunlikelytochange.

The fact that governments respond to theinternationalization of supply chains by signing deepintegrationagreementsattheregionallevelisbroadlyconsistentwith the limitedamountof theoryavailableon this topic (WTO, 2012b). According to Antràs andStaiger, deep rather than shallow integrationagreementsandmore individualizedrulesareneededto address the policy problems associated with theinternationalization of supply chains (Antràs andStaiger,2012).Countriesintensivelyinvolvedinsupplychain trademayfind it increasinglydifficult to relyonbroad GATT/WTO principles alone to address theirtrade-relatedproblems,andmayturntomorenarrowlyfocused PTAs to achieve the deep and customizedbargainstheyneed.

Animportantresultoftheterms-of-tradetheoryisthatshallow integration, i.e. tariff commitments plus an


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effective “market access preservation rule”, canachieve internationally efficient policies (Bagwell andStaiger, 1999; 2001). However, Antràs and Staiger(2012) find that this result does not hold in thepresence of offshoring and, more generally, wheninternationalpricesaredeterminedthroughbargaining.If producers are locked into trade relationships withforeign firms – and prices are set via bargaining –thereareincentivestomanipulatethemarketsofboththe intermediate and the final product to shift thebargaining surplus. Governments might also try topursue redistributive goals via a trading partner’spolicies. Deep integration agreements are needed toresist these pressures. However, this in turn meansthatnegotiationsmustcoverawiderarrayofinternal/domestic measures than are typically covered in“shallow”tradeagreements.

Thus,theriseofoffshoringraisesbothadirectandanindirectchallengefortheWTO.ItputsdirectpressureontheWTOtoevolvetowardsdeeperintegrationandmore individualized agreements. It also puts indirectpressure on the WTO to evolve in this direction, asmember governments increasingly turn to PTAs tosolvetheirtrade-relatedproblems.Asaresult,Baldwin(2012b)arguesthattheWTOrunstheriskofbecomingirrelevant.

The2011World Trade Report (WTO,2011a)exploredthe effect of proliferating deep regional agreementson coherence in international trade governance. ItsuggestedthatnewinternationaltraderulesarebeingnegotiatedanddecidedoutsidetheWTOwherepowerdifferences are greater and where the principles ofnon-discrimination and reciprocity are absent. It alsoargued that PTAs are here to stay. Governments willneed to ensure that regional agreements and themultilateral trading system are complementary andthat multilateral disciplines minimize any negativeeffectsfromPTAs.

While the available literature suggests that deepintegration rules are often non-discriminatory – forinstance, provisions in the services or competitionpolicy areas are often extended to non-members10 –certainprovisions inregionalagreementscancontaindiscriminatoryaspects thatclashwith themultilateraltrading system. It has been shown that PTAs whichmake itmoredifficult toapply contingencymeasuresto PTA partners may divert protectionist measurestowards non-members (Prusa and Teh, 2010). Deepprovisionscanalsohaveanumberofadversesystemiceffects. For example, the “lock-in” effects of regionalregulatoryharmonizationcanmakeitmoredifficulttomultilateralize rules.PTAsmaynot include third-partymost-favoured nation (MFN) clauses, thus effectivelydiscriminating against other countries. Developedcountry exporters may view bilateral and regionalrather than multilateral agreements as faster andeasier routes for achieving their objectives, furtherweakeningtheprincipleofnon-discrimination.11

Withregardtoservicessupplychains,somearguethattheirgrowthcreatesanadditionalneedtore-examineand modernize current rules for services trade, astheserulesweredesignedforaworldwhereserviceswere exported as final products from national firms,not a world where multiple firms supply stages ofservices production from multiple locations(Stephenson, 2012). This argument is discussed inmoredetailinSectionE.2(b).

Recent research (see Box E.1) on how differences infirmshaveanimpactontradepoliciesrevealsarelatedconcern.12 Section B pointed out that a fewmultinationalfirmsareresponsibleforamajorshareofworld trade. On the one hand, these firms shouldsupport regulatory harmonization across differentPTAsinordertolowertradecosts.Ontheotherhand,theymightalsoresistharmonization–andencouragecertainnon-tariffmeasures– inorder topreventnewcompetitors from entering markets. This may partlyexplain thepersistenceof regulatorydivergence, andsuggests that the political economy of regulatoryconvergencemaybemorecomplexthanissometimessuggested.

(iv) Bilateral investment agreements

AsarguedbyBaldwin(2012b),theinternationalizationof supply chains has created a “trade-investment-service nexus” which requires new, more complexrules, including on investment. Rules regulating FDIare mainly embodied in bilateral investment treaties(BITs), which have proliferated since the mid-1980s,and more recently in preferential trade agreements(WTO, 2011a). There is significant variation amonginvestment treaties. For example, many include onlypost-establishment obligations and thus result inlimited trade opening. Another question is whetherbilateral and regional approaches are optimal forgoverning investment flows.13 While there is somepotential for third-party investment discriminationthroughBITsand regionalagreements (WTO,2011a),opinions regarding the benefits of, and the need for,multilateral cooperation seem to diverge.14 Since2003, when WTO members failed to achieve explicitconsensus on negotiating modalities for trade andinvestmentandtoconvertthemandatefromthe1996Ministerial Conference from a study process to anegotiatingone, tradeand investment isno longerontheWTOnegotiatingagenda.

(b) Servicesand“servicification”

Based on a study of the Swedish manufacturingsector, Kommerskollegium (2010a; 2010b) hasidentified a trend of the “servicification” ofmanufacturing. In particular, the study identifies twodevelopments.First,itnotesthatpurchasesofservicesaccount for an increasing share of a manufacturedproduct’s total cost. In other words, manufacturingcompaniesarepurchasingmoreandmoreservices.15


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BoxE.1: Firm heterogeneity and the political economy of NTMs

Firm-levelevidenceshows thata fewextremelysuccessfulmultinationalcompaniesaccount formostofacountry’strade(seeSectionB). Inaddition, there isconclusiveevidencethat largefirmslobbyharderthansmallandmedium-sizedenterprises(SMEs)becausetheycanmoreeasilyaccommodatethefixedcostsofpoliticalcontributionsandacquirethenecessary informationfordirectedcontributions(Bombardini,2008;Kerretal.,2011;SadriehandAnnavarjula,2005).Consequently,itisnecessarytolookatthepreferencesoflargefirmstodecidewhether“superstar”exporterscreatetensionsforthemultilateraltradingsystem.Sincethe early 2000s, the development of various firm models has made it possible to explore the effects ofdifferencesinfirmsonthepoliticaleconomyoftrade.

Trade opening has two opposing effects on domestic firms within the same industry. First, the cost ofexportingdecreases,whichallowsmorefirms toexport and increases thesalesofestablishedexporters.Secondly, competition increases, which harms domestic firms. Which of these channels dominates for anindividualfirmdependsonfirmcharacteristics,suchassize.Asaresult,lobbyingcompetitionarisesnotonlybetweensectorsbutalsowithinsectorsinwhichsomefirmsbenefitandsomeloseduetotrade.Thiseffectmightespeciallyariseinthecontextoffixedcostsbecausetheyraiseentrycostsandtherebyshieldexistingproducersorexportersfromcompetition.

Abel-Koch(2010)analysesdomesticnon-tariffmeasuresandtheireffectonthefixedcostsofexportingforforeignfirms.ShemakesadistinctionbetweenNTMswhichaffectonly foreigncompetitors (e.g.customsprocedures) and NTMs that affect all firms equally (e.g. labelling requirements). The former only reducecompetitionand, therefore,benefitalldomesticfirms.The latter reduceprofitsofallfirmsbutalsoprotectthe most productive firms from domestic and foreign competition. Consequentially, they are opposed bySMEsbutpromotedbylargefirmsandmightthereforebeintroduceddespitetheirwelfare-reducingimpactbecausetheselargefirmslobbymorethanSMEs.

Anumberoffactorsdeterminethedegreeoflobbyingcompetitionwithinanindustry.AccordingtoOsgood(2012),keydeterminantsarethedegreeofreciprocity,themodeoftradeopening(NTMvs.tariff),country-specific characteristics such as market size, and the degree of product differentiation. As in Abel-Koch(2010), he shows that the least and most productive firms oppose more open trade when it comes to areductionofNTMsbecause thecompetitioneffectoutweighs thesaleseffect. It is thefirmsclose to theexportcut-off,i.e.thosethatjustbreakeventakingintoaccountthecostsofexporting,whichbenefitfromtrade opening and support it. Osgood (2012) uses these results to explain a persistent feature of tradepolicy,namelythereluctancetoacceptopeningtradeinhomogeneousgoods.

Theemergenceofsupplychainsexacerbatestheissueandmightweakenreciprocityintradenegotiations.Gulotty (2012) states that as the largest firms are engaged in global production networks, they supportNTMstoprotecttheirforeignaffiliates.Themechanismissimilartotheonedescribedabove:multinationalaffiliateshavefewerproblemstoovercomefixedexportingcostscomparedwithlessproductivecompetitors.Hence, largefirmspromoteNTMsnotonly to reducedomesticcompetitionbutalso toshield their foreignaffiliatesfromexportcompetition.OneimplicationoftheargumentinGulotty(2012)isthatmarketaccessbased rules of reciprocity might be insufficient to address the distributional effects of NTMs becausereciprocaltariffconcessionscannotaccountforthem.

Overall,thesetheoreticalstudiessuggestthatwhilethelargestfirmsbenefitfromtariffreductions,theymaynotsupportthereductionofNTMsthathaveaneffectonfixedcosts.Largefirmscanmoreeasilypaythesunk costs of adapting products to different specifications and benefit afterwards from less competition.Trade opening in combination with firm heterogeneity amplifies this problem because it shifts even moreresourcestolargeproducersthatmightpromotetheuseofNTMs.

Secondly,thestudyfindsthatservicesaccountforanincreasing amount of manufacturing firms’ sales. Putdifferently, manufacturing firms are selling more andmoreservices.

According to Kommerskollegium (2010a; 2010b),these developments mean that trade in services andtrade in manufacturing are becoming moreinterdependent.Servicesnegotiationsandanimprovedregulatory environment are increasingly important to

manufacturers. More information on these inter-linkages as well as a better understanding of theposition of manufacturers in services negotiations isneeded.FromtheWTO’sperspective,thechallengeisto move away from the current situation in whichopening trade in services and goods are discussedseparately, with commitments in one area tradedagainst commitments in the other. Instead, thenegotiations should be viewed as a “package”,reflecting the increasing importance of services for


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themanufacturingsector.Finally, the studyargues infavourofpersuading themanufacturingsectorof theimportance of being more engaged in servicesnegotiations given how such negotiations can affecttheircompetitiveness.

Theinternationalizationofsupplychainsandtherapidadvanceoftechnology—especiallytheemergenceofthe internet — have brought important challenges intermsof thecoverageandapplicationof theGeneralAgreement on Trade in Services (GATS). First, in acontext where production-sharing arrangements areincreasingly internationalized, the consequences ofdefinitional uncertainties surrounding the status of“contract manufacturing” operations under thecurrently used classification system may increase inimportance (Adlung and Zhang, 2013). Suchuncertainties could prompt companies to (re-)definethe ownership conditions of otherwise identicalproduction activities, with a view to achieving coverundertheGATSratherthantheGATTdisciplines.

Secondly,asTuthillandRoy(2012)note,servicesthatonce could only be provided through a foreigncommercial presence (mode 3) can now be providedremotely. New services have also emerged thanks toadvances in technology. These developments havegivenrisetoquestionsabouthowcertainservicesareto be classified in WTO members’ schedules ofcommitments. Given that technological change isunlikely to slow down, this uncertainty is somethingthatwill continue toaffectGATScommitments in thefuture,betheypriorcommitmentsornewones.

Ithasbeensuggestedthattheprincipleof“technologyneutrality”appliesundertheGATS.Applicationofthisprinciplewouldmeanensuringalevelplayingfieldforall services irrespective of the technological platformused to deliver them (Weber and Burri, 2013). WTOdisputesettlementrulingsrelatingtotheGATSwouldseem to be consistent with the application of thisprinciple. In thecases “US–Gambling”and “China–AudiovisualServices”,GATScommitmentswerefoundto be applicable to electronically delivered services.Technological developments may also affect thecharacterization of a service. A new “integrated”service may be found to exist as a result of thebundlingofseveralservices,aswasthecasein“China– Electronic Payment Services”. Therefore,technological progress will continue to raisechallenges in relation to the GATS framework, eitherwith respect to the classification of a service or toothermattersthataffecttheagreement’scoverageorapplication.

(c) Naturalresources

Demandfornaturalresourcesisincreasing,leadingtofrictions in their markets (see Sections B.2 and C.4).Resource-poorcountrieswishtosecureaccesstotheresources they need, while resource-rich countries

restrict access to their resources – for example,through export taxes. WTO rules were not draftedspecifically to regulate international trade in naturalresources. This has arguably led in some cases toregulatorygaps,orattheveryleasttoalackofclarityabout how precisely the rules apply in the particularcircumstances that characterize natural resourcestrade.Thisraisesanumberofchallenges.

One challenge is to manage the regulatory failuresimplicitinbeggar-thy-neighbourpolicies.Asdiscussedin the 2010 World Trade Report (WTO, 2010), theeconomictheoryoftradeagreementsshowshowtwolarge countries acting non-cooperatively may restricttheir exports to each other and thereby end up in a“Prisoners’ Dilemma” situation, whereby acting inpursuitoftheirownbest interestsdoesnotultimatelyresultinthebestoutcome.16Becauseexporttaxesarethemirror imageoftariffs, it isnotsurprisingthatthesame terms-of-trade argument for internationalcooperation thatapplies to import tariffsalsoappliestoexporttaxes.Alargecountrycanimproveitstermsof trade at the expense of its trading partners byimposing export restrictions. The reduction in supplywillpushuptheworldprice.Asinthetariffcase,twolargecountries restricting theirexports toeachothercouldendup in a suboptimal situation if theydidnotcooperate. If this is the case, a trade agreement thatallows trading partners to commit to export taxreductionswouldbebeneficial.

Another set of challenges arises from growingconcernsoverthesustainabilityofthemanagementofcertain natural resources. Certain subsidies cansecure better management of a resource or ofenvironmental damage associated with its extractionanduse.Questionshavebeenraisedabouthowsuchsubsidies would be treated under WTO rules,particularlyinthelightofthedifferentrulesthatapplytoagriculturalandindustrialgoods.OtherareaswhereexistingWTOrulesinteractwithconservationpoliciesinclude domestic regulations and the design andimplementationofintellectualpropertyrights.

The 2010 World Trade Report (WTO, 2010) alsoexplainshowcertaindomesticandtrademeasuresaresubjecttodifferentdisciplines,eventhoughtheyhavethe same economic impact. Given the geographicalconcentration of natural resources – and hence thefactthatresource-scarcecountriesdependonimportsfor much of their supply and resource-rich countriesexportnearlyall theirproduction–casesarisewheretrade measures are close substitutes for domesticregulatory measures. In these cases, regulating thetrademeasure toachieveundistorted trade innaturalresources is anecessarybut not sufficient condition.For instance, a consumption tax in an importingcountry may be equivalent to an import tariff. Aproduction restriction in a resource-rich country mayhave the equivalent effect to an export restriction.Similarly, an export tax has effects comparable to a


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domestic subsidy in terms of the consumption of theresource.Inthepresenceofsuchequivalence,thereisno economic basis for regulating these policiesdifferently.

Anadditionalchallengeistoimprovetheregulationofbeggar-thyself policies. As noted in the 2010 World Trade Report (WTO, 2010), a measure might bebeneficial in the short run, possibly for politicaleconomyreasons,butmightcarrysignificantlong-runcosts. This would be the case, for example, with asubsidyprovidedinconnectionwiththeexploitationofa resource that has unrestricted access. Anotherexampleisthatintheabsenceofinternationalrulesoninvestment,resource-richcountriesmaybeexposedtothe “hold-up” problem, whereby parties do notcooperate for fear of losing their bargaining power.Improved investment disciplines could help thesecountries improve the credibility of their policiestowardsinvestmentsastheyunderwriteacommitmenttoagreed-uponrules.

The 2010 World Trade Report (WTO, 2010) alsohighlights that a narrow understanding of WTOobligations in the area of transit could exclude fromtheir scope transport via fixed infrastructure, such aspipelines, and create regulatory uncertainty. Thisuncertainty can have consequences for access tosuppliesofresources.

Finally, the 2010 World Trade Report (WTO, 2010)notes that many aspects of natural resources areregulated by international rules outside the WTO. Acontinuingandgrowing relianceonnatural resourcesin the world economy, the exhaustibility of thoseresources and the need to mitigate the negativespillover effects relating to their exploitation andconsumption are challenges that can only beeffectively confronted through internationalcooperationandbetterglobalgovernance.

Anotherissueinregardtoprimarycommoditiesrelatesto food prices and food security. Current WTOdisciplines on trade in agricultural products weredraftedatatimeofsurplusesanddecliningprices.Thefocuswasonreigninginthedomesticfarmpoliciesofindustrial countries. The last decade, in contrast, hasbeen characterized by growing demand and higherrealpricesformanyagriculturalcommodities.17Inthiscontext,mostdevelopedcountrieshavebeenreducingsupport and protection to their agricultural sectors,andmanyhavebeenshiftingtomoredecoupled, lessdistorting measures. Nevertheless, support remainssignificantandaconsiderableshareofitisdeliveredinwaysthatdistortcompetitionandtrade.

Agricultural prices have not risen smoothly andprogressively. Agricultural markets went throughseveral episodes of high and volatile prices. Theseepisodes raised serious concerns regarding foodsecurity in a number of food-importing developing

countries. These concerns were reinforced by thetradepolicyresponsesofanumberof foodexporterswho took measures to restrict their exports.Developingandemergingeconomiesseemtobelessconfident that trade is a reliable source of foodsupplies. This raises a challenge for the WTO.Confidence in trade as a mechanism that cancontributetofoodsecurityneedstobereinforced.Asexplained by Josling (2012), WTO rules allow policyresponseswhenpricesfallbutdonothelpmuchwhenprices are high. They constrain export subsidies andbind tariffs but do not limit export taxes. As withnatural resources, negotiations aimed at bindingexport taxes could deliver mutually beneficialoutcomes. In addition, there may be a need to adjustthe rules to ensure that the new measures taken bygovernmentstomitigatetherisksassociatedwithhighpricevolatilityarenotusedinaprotectionistmanner.

The emergence of new agricultural products such asbiomass for ethanol and biodiesel, one of the mostsignificant developments in agricultural trade, is alsoraising a number of challenges.18 Domestic biofuelsmarkets are often protected from internationalcompetition(Josling,2012).Ethanol,whichisclassifiedas an agricultural product, is subject to higher tariffsthan biodiesel and mineral fuels (Moreno Caiado,2011; Yanovich, 2011). Various subsidy programmesareinplaceprovidingsupporttoproducersofbiofuelsorconsumers(MorenoCaiado,2011).

Questions have also been raised concerning thedifferent subsidy rules applicable to agricultural andindustrial products. Concerns relate not only to thetrade-distorting potential of some of these subsidiesbutalsotothelackoftransparency(Josling,2012).Inaddition, the consistency with the national treatmentobligationandtheWTO’sSubsidiesandCountervailingMeasures Agreement of mandates requiring theblending of biofuels with mineral fuels has beenquestioned.19 Domestic policies incorporating lifecycleanalysishavegivenrisetodiscussionsabouttheappropriateness of differentiating products bymethodsofproduction(Josling,2012).

(d) Newplayersandsmallplayers

AsdiscussedinSectionE.1,amajordevelopmentthathas affected the world trading system is theemergenceofnewtradingpowers.Thequestionarisesastowhetherandhowtheadditionofnewcountriestotheworld tradingsystemasa resultofaccessions tothe WTO or the growing role of other countries as aresult of economic development may affect globaltrade governance. At the other end of the spectrum,thereissomeevidenceofanenduringmarginalizationof the smallest and poorest economies (see SectionB.2).Addressing thismarginalization isconsideredbymany as a key challenge for the multilateral tradingsystem.


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Understanding precisely how changes in thegeography of trade affect governance in this area isnot straightforward. Many commentators somewhatsuperficially establish links between changes in thenumberofWTOmembersortheirrelativesizeandthe“crisis”ofthemultilateraltradingsystem.However,fewstudies rely on an analytical framework to link aspecificcause,suchasthechangeinthegeographyoftrade,toaspecificproblemaffectingWTOgovernancewhich could explain the failure to conclude the DohaRound.Inthissub-section,effortsaremadetoembedthediscussionofthegovernancechallengesraisedbythe emergence of new trading powers and theenduringmarginalizationof thepoorestmembers inabroadanalyticalframework.

(i) New players

Several commentators have discussed the rise ofemergingeconomiesandtheevolutionoftheirrole inthe WTO. Most of them focus on China, India orBrazil.20Theyexaminethesecountries’conductintheGATT/WTOandon thisbasis try topredicthow theywill behave in the future. They document how anincrease in their share of trade has translated intoincreasedinfluenceintheWTOandconfirmthatthereare now more players at the table and that there isgreater variety among the major players. However,they do not shed much light on the effects of thesechangesontradegovernance.

Other commentators have focused their attention onthe reasons behind the stalemate of the WTOnegotiations.Whilemostofthemmentionthesizeandvariety of WTO membership as a possible factor thatcouldexplaindeadlocks, they typically find thatotherfactors have played a more important role. Odell(2009) examines the reasons that lay behind thedeadlockatthe1999MinisterialConferenceinSeattleand the breakthrough agreement at the 2001MinisterialConferenceinDoha.Hisanalysissuggeststhatthenegotiationprocessamongdelegationsplayedacrucial role. Inhisview, thedifferentstrategiesandtacticsemployedbynegotiatorsandmediatorsexplainthedifferenceinoutcomes.

Wolfe (2010) conducts a counterfactual analysis ofthevariousexplanationsthathavebeenofferedforthefailureoftheJuly2008ministerialmeetinginGeneva.Heconcludesthatemergingplayersdidnotcontributemuchtothe impassewhich, inhisview, resultedfromthe fact that the ministerial meeting was a failedattempttoacceleratethenegotiationsprocess(“sprintduringamarathon”).Othercontributionssuggest thattheproblemsoftheDDAandoftheWTOarepartofabroadersystemicmalaisewhichstems fromprofoundshiftsingeopolitics(DeJoncquières,2011).

The idea that the larger and more diverse WTOmembership challenges decision-making in the WTOisintuitivelyappealing,eveniftheprecisereasonswhy

this should be the case have not been spelled outclearly.AccordingtoLow(2011),forexample,theriseofnewpowershasplacedthe“practice”ofconsensusdecision-making under greater strain, and this isreflectedinthegrowingdifficultyofreachingdecisionsandclosingnegotiations.Theunderlying reasoning isthatconsensuscanbeinterpretedasahiddensystemofweightedvoting,sincelargercountriesfinditeasiertoinfluenceimplicitvotingoutcomesthansmallerones(Low, 2011). As has been argued by a number ofcommentators, some emerging economies haveacquired the status of de facto veto players, whilesome developing countries have improved theirnegotiatingcapacityandshownthattheycanexertaninfluence on decisions (Elsig and Cottier, 2011;Narlikar,2007;Odell,2007).

Theoretical approaches that provide a rationale fortrade agreements offer interesting insights into theimpact of emerging new trading powers. An earlycontribution in this area was made by Krasner (1976).Heanalysesthelinkagebetweenparticulardistributionsof potential economic power, defined by the size andlevel of development of individual states, and thestructureoftheinternationaltradingsystem,definedintermsofopenness.Hearguesthatwhileahegemonicsystem (in which one dominant player holds sway ofsmaller states) is likely to lead to an open tradingsystem, a system composed of a few very large butunequallydevelopedstates is likelyto leadtoaclosedstructure. Since Krasner, however, the open economypoliticsliteraturehasbeenlargelysilentonhowtheriseof emerging powers in the 21st century is affectinginternationaleconomicrelations(Lake,2009).

Ontheeconomicside,recentresearchbyBagwellandStaiger (2012) examines the conditions under whichmultilateraltradenegotiationscoulddelivertradegainstodevelopingcountriesinlightoftheeconomictheoryof trade agreements. If the problem being addressedby international trade negotiations is the terms-of-trade driven Prisoners’ Dilemma that arises whengovernments can shift a portion of the cost of theirtrade protection on to foreign trading partners bydepressing foreign exporter prices, then the mainbenefit from tradenegotiationsmayonlybeavailableto large countries. If this is the case, the growth ofsomedevelopingcountriesshouldnotraiseproblems;ratherthecontrary.

AsarguedbyBagwellandStaiger,however,theremaybe a problem with the increased participation ofemerging economies related not to size, numbers ordiversitybuttotiming,i.e.a“latecomers”problem.Overthelast60years,developedcountrieshavenegotiateddeep reductions in their tariff commitments onmanufacturedgoodswhile,asaresultoftheexceptionto the reciprocityprinciple thathasbeenextended tothemintheformof“specialanddifferentialtreatment”,developing countries have committed to fewer tariffcuts in multilateral negotiations.21 Special and


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differential treatment was meant to ensure thatdevelopingcountrieswouldfreerideontheMFNtariffcuts that developed countries negotiated with eachother.

Bagwell and Staiger (2012), however, show thatbecause a country’s own tariff cuts stimulate itsexports,whatyougetinatariffnegotiationiswhatyougive. This has two important implications. First, itmeans that without reciprocity, tariff negotiations didnot deliver meaningful trade gains to developingcountries – and are unlikely to do so now or in thefuture.Secondly,theWTOmaynowfacea“latecomers”problem as developed and emerging economiesattempt to negotiate further tariff cuts. Developedcountries may have preserved an inadequate amountofbargainingpowerwithwhichtoengagedevelopingcountries in reciprocalbargains. Inaddition,akindof“globalizationfatigue”maybepresentinthedevelopedworld, whereby the existing MFN tariff levels ofdeveloped countries may be too low for a world inwhichdevelopingcountriesarefullyintegratedintotheworld trading system. In other words, the politicallyoptimaltariffsofdevelopedcountriesmaybehigherintoday’s globalized world than they were in the early1980s.

(ii) Small players

A major challenge for the WTO, but one that is notnew, concerns differences in power and theparticipation of smaller and poorer developingcountries.22 A number of changes have already beenintroducedsincethecreationoftheWTO,withtheaimof improvingtherepresentationofsmallerandpoorerdeveloping countries. Views differ on whether suchchangeshavebeensufficient(Deere-Birkbeck,2011).Anumberofproposalsaimedatfurtherimprovingtherepresentation of smaller and poorer developingeconomiesintheWTOarediscussedinSectionE.3.

Aquestionthatarises iswhethertheemergenceofanumber of new large traders among developingcountriesandtheresultingincreaseindiversityamongthose countries have changed the situation of thesmallerandpoorercountries.Asexplainedabove,theeconomic theory of trade agreements suggests thatthe situation may have changed for emergingeconomies but not for small economies. The centralcomponent of the benefit of trade negotiations maynow be available to the former, especially if the“latecomers”problemcanbeaddressed.Accordingtothis theory, “what you get is what you give” and thelarge countries, because they are the ones whichadopt unilateral trade policies that are the mostinternationally inefficient, should negotiate the mostsubstantialtariffbindingsandgetthelargestbenefits.

For the developing countries that are truly “small” intheir relevant markets, however, the emergence ofsomenew largeplayersshouldnothavechangedthe

situation dramatically. Theory suggests that, with noinfluence on the terms of trade, they should not beexpected to offer tariff concessions in a tradeagreement; therefore, the central benefit fromnegotiations may not be available to them. AsexplainedbyStaiger(2006),inthelightofthetheory,their role in the WTO is essentially to prevent thebigger countries from discriminating against them asthesebiggercountriesuse theWTOtofindsolutionstotheirproblems.TheneedsandexpectationsofsmalldevelopingcountrieswithregardtotheWTOmaythusdiverge from those of the big developing countries.Thissuggeststhatthecurrenttreatmentofdevelopingcountriesasa singlegroup, notably in the context ofspecialanddifferentialtreatment,maynotbeoptimal.

(e) Developmentsinthepolicycontext

(i) Public policies

Higherincomes,togetherwithagrowingawarenessofhealth,safetyorenvironmental issues,have led toanincrease in the demand for regulations aimed atprotectingconsumers,orataddressingclimatechangeorthedepletionofnaturalresources.Atthesametime,non-tariffmeasuresrelatedtodomesticpublicpolicieshavebecomeamajorsourceofconcernforbothfirmsand governments, a trend that is likely to continue inthenearfuture.

The2012World Trade Report(WTO,2012b)discusseda number of challenges raised by the proliferation ofpublic policy related non-tariff measures. First, non-tariff measures raise a transparency issue. Thequantity and quality of information available on theprevalence of such measures and on their effects isinsufficient.FortheWTOmorespecifically,thepriorityis to improve the functioningofexisting transparencymechanisms.

Secondly,whileregulationsdonotnecessarilyrestricttrade, regulatory divergence can result in importanttrade frictions. This raises the question of how andwhereregulatoryconvergenceshouldtakeplace.Thisisachallengingdilemmagiven the trade-offbetweenrespecting differences in national preferences andexploiting the efficiency gains from regulatoryconvergence.FortheWTO,onequestionthatarisesiswhether the existing deeper integration provisions intheTechnicalBarriers toTrade(TBT)Agreementandthe Sanitary and Phytosanitary Measures (SPS)Agreement ensure sufficient regulatory convergenceto maximize the gains from trade while allowinggovernments to pursue their public policy objectives.There is tension, for instance, between encouragingthe use of international standards and respectingmembers’ fundamental right to adopt and implementtheir owndomestic standards.Choosingnot to adoptinternational standards, while legitimate, may reducethe incentive for international cooperation on, andnegotiationof,suchstandards.23


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A third challenge identified in the 2012 World Trade Report (WTO,2012b)isthedifficultyofdrawingalinebetween those measures that should be allowed andthose that should be forbidden. In particular, whatrelevanceandweightshouldbegiventotherationaleorpurposeofameasurewhenassessingtheextenttowhich it discriminates against the imported product.Finally,concernshavebeenraisedintheWTO–mainlyby developing countries – regarding the fact thatprivate standards are proliferating, that they aresometimes more stringent than governmentregulationsandthat there isnorecoursetodisciplinethem.Thegrowingpredominanceofprivatestandardsassystemsofgovernanceinglobalagri-foodsystemsinparticularisattractingconsiderableattention.24Thequestion thatarises iswhether there isa role for theWTOinaddressingtheseproblemsand,ifso,whatthisroleshouldbe.25

At the very least, the WTO may be called upon todecide whether a measure is a private standard or agovernmentregulationsubjecttotheTBTAgreement,as was the case in a recent dispute (“US – Tuna II(Mexico)”).Alongsimilar lines, regulationarising fromother international organizations, such as the WorldHealth Organization (WHO) which may advocatepolicies regulating food that is otherwise safe undertheSPSAgreement(e.g.toreduceobesity),raisestheissue of coherence. This will be discussed in moredetailbelow.

(ii) Distribution and labour-market related concerns

Asdiscussed inSectionD.1, inmanycountries, risinglabourmarkettensionsandgrowingincomeinequalityare adversely affecting public attitudes towardsglobalization and trade. If trade is perceived by amajority of voters as causing unemployment and/orincreasing inequality, governments could refrain frompursuing further trade opening and may even betempted by protectionism. This creates obviouschallengesfortheWTO.

With regard to increased pressure for protectionism,there is some evidence that the WTO has played asignificant role in recent years in preventing aprotectionist backlash (Wolfe, 2012). WTO rules andgovernments’ commitments, together with reinforcedmonitoringmechanisms,mayaccountatleastinpartforthe limited protectionist reactions to the crisis. Oneproblem that may arise in the future is if governmentsturn to measures that are currently undisciplined oruntestedbyWTOrules.PressureontheWTOtoimposeorapplydisciplinesinnewareaswouldincrease,asisthecase now with regard to exchange rate misalignments.Another possibility would be for governments to usemoreintensivelypublicpoliciesforprotectionistpurposes.For reasons discussed in the 2012 World Trade Report(WTO,2012b),thismayleadtoanincreaseinthenumberandthecomplexityofdisputes.

Withregardtotradenegotiations,focusingexclusivelyontheefficiencyeffectoftradeopeningmaynolongerbepossible.Distributionandlabour-marketeffectswillalso need to be considered and accompanyingmeasuresmayneedtobeproposedinordertowinthesupportofamajorityofvotersforopentrade.Althoughmostaccompanyingmeasuresfalloutsidetheremitofthe WTO, mechanisms available under the WTO tofacilitate adjustment, such as implementation periodsandflexibilities,mayhavearoletoplay.

(iii) Need for more coherence with other international institutions

Tradeinterfaceswithmanyotherpolicyareas,suchasmacroeconomic policy, intellectual property,environmental protection, health and employment. Insome of these policy areas, there are well-developedmultilateral regimes, while in other areas multilateralcooperation is more incipient and institutionalframeworksare lessdeveloped.Thechallenge facingtheWTO–andtheglobalcommunitymorebroadly–ismaintaining coherence between WTO traderegulations and initiatives and non-trade regulationsand initiatives in other multilateral fora. Although thefragmented,decentralizedandnon-hierarchicalnatureof the international system makes the pursuit ofcoherenceparticularlychallenging, fragmentationhasthe advantage of allowing for experimentation asdifferent policies can be tested at the bilateral,regionalandmultilaterallevels.

To the extent that the actors in other fora are statesthat are also members of the WTO, the risk ofincoherence should be low. Nevertheless, themembershipofothermultilateralforadoesnotalwayscoincide with the WTO’s membership. Furthermore,some multilateral fora also include participation bynon-state actors. Even when the membership is thesame, weak coordination at the domestic level canresultinincoherenceattheinternationallevel.

WTO Director-General Lamy (2012) observes thatattempts have been made to narrow the “coherencegap”thatcurrentlyexistsintheinternationalsystembyestablishing links between international regimes, yetthese remain weak. In the case of the WTO, hecontraststherelativelystronglinkswiththeintellectualpropertyregimeadministeredbytheWorldIntellectualProperty Organization (WIPO) and the weaker linksthat currently exist between the WTO and theenvironmental regime, the relatively outdated linkswith the International Monetary Fund (IMF) and thealmostnon-existentlinkswiththeInternationalLabourOrganisation(ILO).

Asdiscussed inSectionD.3,until thefinancialcrisesof the1990sand2000s, tradefinance,whichservesas the “grease” of the trading system, was taken forgranted. However, these crises created distortions inthe trade finance market which made policy


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interventions necessary. In this context, cooperationbetween multilateral institutions and otherstakeholders turned out to be of crucial importance.The joint effort to ensure continued access to tradefinance for all firms, large and small, in all countriesinvolved the IMF, the World Bank, the Bank ofInternational Settlements, regional developmentbanks, the International Chamber of CommerceBankingCommissionandothers.

AsexplainedinSectionD.3,persistentexchangeratemisalignmentsarea“systemicirritant”forinternationaltradebecausetheyfuelperceptionsofunfairmonetarycompetition and create pressure to use trade policymeasures to redressperceivedmonetary imbalances.Although this underscores the importance of aninternationalmonetarysystemthatpromotesexchangerate stability and adjustment, progress in monetarycooperationhasbeenuneven.Anumberofinstitutionsand policy processes are in place to enforce bettersurveillance of exchange rates and reduce globalimbalances (see Section D.3). However, the questionarises as to whether these will be used to set up amore cooperative system of exchange rates at theinternational level,andwhat role theWTOwillplay inthissystem.

The need to maintain coherence between the tradeand environmental regimes was recognized in the1994 WTO Decision on Trade and the Environmentandinanumberofenvironmentaldiscussions(e.g.the1992 Rio Declaration on Environment andDevelopment).Thisobjectivewasrecentlyreiteratedatthe 2012 Rio+20 Summit, where it was agreed thatgreen economy policies should “[not] constitute ameans of arbitrary or unjustifiable discrimination or adisguised restriction on international trade, avoidunilateral actions to deal with environmentalchallenges outside the jurisdiction of the importingcountry, and ensure that environmental measuresaddressing trans-boundary or global environmentalproblems, as far as possible, are based on aninternational consensus” (United Nations GeneralAssembly,2012:10).

Anotherareawhere there isagrowing interfacewiththeWTO is health regulation. For example, theWHOhas adopted a Framework Convention on TobaccoControlandpursuesanumberofotherrelatedtobaccocontrolpolicies.TheWHOisalsodevelopingaglobalstrategy to reduce the harmful use of alcohol (WHO,2010).DomesticmeasuresrelatingtotobaccocontrolarediscussedfrequentlyinWTOcommitteesandhavebeen the subject of dispute settlement proceedings.Similarly, domestic measures relating to alcoholicbeverages are increasingly being raised as specifictradeconcernsintheWTOTBTCommittee.

The WTO, WHO and WIPO recently released a jointstudy examining the interplay between public health,trade and intellectual property, and how these policy

domains affect medical innovation and access tomedical technologies (WHO-WIPO-WTO, 2013). AsLamy(2013)explains, the2001DohaDeclarationonthe Trade-related Aspects of Intellectual PropertyRights (TRIPs) Agreement and Public Health “helpedcatalyse the growing understanding that access tomedicines requires the right mix of health policies,intellectual property rules and trade policy settings,andinvolvesthejudiciousandinformeduseofarangeofmeasuresincludingcompetitionpolicy,procurementstrategies, attention to tariffsandother trade relateddrivers of cost, and choices within the IP system.”Sustainable solutionswill requirecoherencebetweentheserulesandpolicies.

WTOmembershaveacknowledgedtheimportanceofa set of internationally recognized “core” labourstandards–that is,freedomofassociation,noforcedlabour, no child labour and no discrimination at work(including gender discrimination) but have significantdisagreementsonestablishinglinkagesbetweentradeandlabourissuesintheWTO.Atthe1996SingaporeMinisterial Conference, WTO members defined theWTO’s role on this issue, identifying the ILO as thecompetent body to negotiate labour standards. WhilethereisnoworkonthissubjectintheWTO’scouncilsand committees, there is a mandate for collaborationand exchange of information between the WTO andILO secretariats. This mandate was reaffirmed at the2001 WTO Doha Ministerial Conference. In line withthis mandate, the WTO and ILO secretariats haveconductedseveralresearchprojects.Themostrecentis a joint study that examines the various channelsthroughwhichglobalizationaffectsjobsandwagesindeveloping and developed countries and discusseshowtradeandlabourmarketpoliciescanbedesignedto make globalization socially sustainable (BacchettaandJansen,2011).

The interface of the WTO and other multilateralregimesoftentouchesoncontentiousissuesonwhichcountries hold widely divergent views. The lack ofmultilateral consensus on such issues makescoordination more difficult. For example, BernsteinandHannah(2012)seefewprospectsforcoordinationbetween the WTO and the IMF on broadermacroeconomic policies given the disagreementbetweencountriesonexchangeratesandimbalances.The interface between the trade and environmentalregimes offers other examples. For instance, Cosbey(2012)worriesaboutthelackofagreementoverwhatis appropriate behaviour in the pursuit of a greeneconomy.

Asaresult,policy-makersfaceuncertaintiesaboutthelegalityofthepolicytoolsattheirdisposal.Countries’implementingmeasuresdonotconsidertheimpactofsuchmeasuresontheirtradingpartners,andcountriesresorttomeasuresthatmaybeinconsistentwiththeirWTOobligations.ThereareagrowingnumberofWTOdisputes involvingmeasures relating toenvironmental


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goods or policies. The challenge of securingagreementismademoreacutebytheneedtoresolvedifficultquestionsabouttheeffectivenessofdifferentpolicies and their impact on trading partners, theanswerstowhichdependonanumberoffactors,suchas the technology involved, the characteristics of thesectorandthemarketsatissue.

Fragmentation is not only horizontal but also vertical.Underamodelof “multi-levelgovernance”,whichwasoriginally developed in the context of Europeanintegration, policy-making can take place at manydifferent levels (international, national and varioussub-national levels) and involve diverse actors(includingnon-stateactors)(Cottieretal.,2011).Whilethese additional layers of governance – and theresultingpolicydispersion–canbettertargetpoliciesand encourage policy experimentation, they can alsomakecoordinationmoredifficult.

Peeletal. (2012)providean illustrationofmulti-levelgovernanceatwork in theenvironmentalcontextanddiscussthecoordinationchallengesthatitraises.Theynote that as multilateral discussions under theauspicesoftheUnitedNationsFrameworkConventionon Climate Change (UNFCCC) falter or progressslowly,environmentalpolicy issteadilyadvancing ina“bottom-up” approach. Such an approach is likely toresult in a wide, diverse and increasing array ofenvironmental policies being pursued at both thenational and sub-national levels. Some of thesemeasureswillhavean impactontrade.Withoutsomekind of agreement at the multilateral level, the tradeimpactofthesenationalordomesticmeasuresislikelyto lead to frictions between WTO members and mayeventually result in formal disputes being brought tothe WTO. Therefore, Peel et al. argue that somemechanismforcoordinationandevaluationofdifferentregulatorypolicies–most likelysituatedata “higher”level of governance – will be required if multi-levelgovernance in theenvironmental area is to realize itspotential.

3. WhatcouldtheWTOdotoaddressthechallenges?

Thissectionreviewsanumberofproposalsthatwouldaddressthechallengesidentifiedabove.Theproposalsare grouped under three headings: WTO agenda;governance and institutional reform; and the role oftheWTOinglobalgovernance.

(a) Review/expandtheagendaoftheWTO

Previous sections of this report have explained howthetradedebatehasmovedbeyondtraditionalmarketaccess issues – a shift that is likely to continue intothefuture.Overtheyears,theGATT/WTO’sreachhasprogressively extended beyond traditional borderconcerns to grapple with the trade effects of “inside

the border” measures.26 The following sub-sectionsdiscuss the traditional issues and the new issuesbeforeexaminingseveralproposalsforhowtheWTO’snegotiating function can be improved to make itpossibletomoveforwardmorequicklyonalloftheseconcerns.

(i) Multilateralizing preferential tariffs

There is broad agreement among commentators thatthe challenges arising from the growing number ofpreferential trade agreements must be high on theagenda of the WTO. Section E.2 made a distinctionbetween the issues raised by “deep” integrationagreements, which focus mostly on regulatoryconvergence, and those raised by shallow integrationagreements,whichfocusmostlyonpreferentialtariffs.This sub-section examines the latter while proposalsaddressing the former are discussed in subsequentsub-sections.

Thesuccessfulcompletionofanambitiousmultilateraltariff reduction package is often mentioned as themost effective means of overcoming any negativeeffects resulting from the proliferation of preferentialtariffs (Lamy,2009).The logicof this is thatasMFNtariffsapproachzero,therelevanceofanypreferentialtarifftreatmentdisappears(Suominenetal.,2007).

IntheabsenceofanagreementtofurtherreduceMFNtariffs,proposalshavefocusedonpreferentialrulesoforigin (i.e. laws, regulations and administrativeprocedures which determine a product’s country oforigin) which are often blamed for exacerbating the“spaghetti bowl” effect of preferential tradeagreements(PTAs).Adecisionbyacustomsauthorityon origin can determine whether a shipment fallswithin a quota limitation, qualifies for a preferentialtarifforisaffectedbyananti-dumpingduty.

Suominenetal.(2007)explainthattherearebasicallytwoconcernsover rulesoforigin: restrictivenessanddivergence. Rules of origin that are restrictive canresult in trade barriers between PTA members andnon-members.27DivergentrulesoforiginacrossPTAscanincreasetransactionscoststofirmswhichhavetoconform to different rules. Proposals to reduce thetrade distortive effects of preferential rules of origingenerally involve harmonization of the rules of origin,convergenceand/orsomekindofcumulation(BaldwinandThornton,2008;Suominenetal.,2007).

Harmonization is technically and politically difficult,and it could result in increased restrictiveness(Suominen et al., 2007). Convergence would implyunificationofPTAswithoverlappingmembership intoasinglecumulationzonewithcommonrulesoforigin.Achieving this would not only require negotiatingcommon rules of origin but also the elimination oftariffs for any bilateral relationships within the zonewhere this had not already taken place. The risk of


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convergence is that there is a natural tendency forlargecumulationzonestoerectmorerestrictiverulesoforigin(Suominenetal.,2007).Thiscouldleadtothesegmentationofmarkets.Inotherwords,convergencewould increase trade among the members of theexpandedcumulationzonebutreducetradewithnon-members.

The optimal approach, according to Suominen et al.(2007), would be what they call a “cap-con” strategythatcombinesconvergencewithmultilaterallimitations–or“caps”–onpreferentialrulesoforigin.Gasioreketal.(2007)proposeanalternativeapproachthatwouldinvolve using a value-added criterion for determiningorigin, combined with full cumulation. This approach,however, is not without difficulties. For one thing,variations in exchange rates could mean that animportedproductqualifies fororiginoneyearbutnotthenext.

Whilesomeoftheactionsforeseenintheseproposalswouldhavetotakeplaceat thePTAlevel (bottom-up),several proposals see the need for a complementarytop-down approach in which the WTO could have acentral role (Baldwin and Thornton, 2008). The WTOwould be a natural forum for the negotiation ofharmonizedpreferentialrulesoforiginifadecisionweremade to undertake such negotiations. The WTO’scurrent agenda already includes non-preferential rulesof origin, though admittedly these negotiations aretaking longer than originally agreed. The WTO wouldalsobethelogicalforumfordiscussionsofamultilateral“cap” on preferential rules of origin which wouldsupplement the convergence process foreseen inSuominen et al.’s (2007) “cap-con” proposal. SomeevenseearolefortheWTOguidingorencouragingtheconvergence process at the PTA level (Baldwin andThornton,2008).Theprocessultimatelycouldbetakenonestepfurther.TheWTOwouldserveastheforumforthefullharmonizationofPTArulesoforigin.28

(ii) Breaking the market access impasse

As explained in Section E.2(d), the emergence of anew group of large trading powers raises a“latecomers” problem. Bagwell and Staiger (2012)makesomesuggestionsonhow“latecomers”couldbeaccommodated and, more generally, how developingcountry members could be better integrated into theworldtradingsystem.Theyarguethatthe“latecomers”problem could be addressed through negotiatedreductions in agricultural export subsidies. Thisreductioncouldbeusedbothasabargainingchipbydeveloped countries and as a device to mitigate theoverall trade effects of integrating developingcountries into the world trading system by ensuringtradevolumegainsfordevelopingcountrymembers.

Moregenerally,BagwellandStaiger(2012)arguethatifdevelopingcountrieswant todrawanybenefit frommarket access negotiations, they need to move away

from their focus on achieving non-reciprocal specialand differential treatment. In markets where they arelarge players, they could benefit from reciprocalnegotiations with each other and with developedcountries.Onlyby“findingwaystoharnessreciprocityas a means to achieve meaningful market accesscommitments for emerging/developing economies”(BagwellandStaiger,2012:25)willnegotiatorsbreakthe current stalemate in the Doha Round and deliversubstantial trade gains for developing countries, thefundamental objective of the negotiations. This ideamay not be as incompatible as it seems with themajorityviewthatSDTiscrucialinachievingthegoalsoftheWTOmembershipasawholebutthatitneedsarevision(MitchellandVoon,2009).

When ministers launched the Doha Round in 2001,theymandateda reviewofall special anddifferentialtreatment provisions, “with a view to strengtheningthem and making them more precise, effective andoperational.”29 However, as explained in the WarwickCommissionReport(WarwickCommission,2007),oneof themain reasonswhy theseprovisionsneed tobeoperationalized is because they did not adequatelyreflectthedifferencesamongdevelopingcountries inthe WTO. Along the same lines, Pauwelyn (2013)argues that treating all developing countries as asingle group for all matters is neither effective norequitable.Inhisview,specialanddifferentialtreatmentprovisions do not say that all developing countriesmust be treated alike, even less that no developingcountry should ever shoulder any responsibility. Moredifferentiation among developing countries couldserve to advance the underlying objectives of theseprovisions.

Economic theory suggests that an importantdistinction should be drawn between small and largecountries, especially with regard to non-reciprocity.MitchellandVoon (2009) reviewsomekeyproposalsfromeconomicand legalscholarsforoperationalizingspecial and differential treatment provisions andassess members’ progress on this issue in the Dohanegotiations.Itisworthnotingthatthetradefacilitationnegotiations have moved beyond a traditional “one-size-fits-all” approach to special and differentialtreatment to consider a more tailor-made country-by-country opt-in approach with provisions for technicalassistance.

Another challenge is to ascertain the value of WTOtariff commitments when there is so much “water”between applied and bound tariff rates. Messerlinargues that “the real gold mine in the Dohanegotiationsistheincreasedcertaintythatwouldflowfrom large cuts to bound tariff rates” (Messerlin,2008). From this perspective, economists’ recenteffortstoassessthevalueoftariffbindings–andtherelatedcostsoftariff“uncertainty”–areencouraging(BacchettaandPiermartini,2011;Beshkaretal.,2012;PierceandSchott,2012).


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(iii) Responding to the proliferation of NTMs

As discussed in the 2012 World Trade Report (WTO,2012b), although a coordinated effort of allinternationalorganizationsactiveinthetradeareawillbeneeded toshedmore lightonnon-tariffmeasures(NTMs),theWTOshouldplayaleadroleinthiseffort.The efficiency of existing transparency mechanisms,andinparticularnotificationsbyWTOmembers,needsto be progressively enhanced. In the case ofnotifications, this means that both the quality of theinformationcollectedandcompliancewithnotificationrequirements need to be augmented. The key tosuccessmayinvolvechangingmembers’ incentivestoabide by their notification obligations. The WTO willalsoneed to refine the “tests” thatarecurrentlyusedto distinguish between legitimate and protectionistmeasures(WTO,2012b).

Addressing NTMs may also require deeper rulesamongcountries.Atthemultilaterallevel,onlytheSPSandTBTagreementsincludesuchprovisions,mostlyinthe form of strong encouragement to follow existinginternational standards, and even these can createtensions.The2012World Trade Report (WTO,2012b)discusses these tensions and explores the scope forexpanding multilateral cooperation on NTMs.Differencesinregulatorypreferencesamongcountries– together with differing capacities to influencedesired outcomes – has meant that regulatoryconvergence has so far largely taken place at theregionallevel.However,somedeepprovisionsinPTAscan be discriminatory and create conflicts with themultilateraltradingsystem.Intheyearstocome,WTOmembers may have to examine whether existingprovisions ensure the right balance betweeninternational commitments and domestic flexibility insetting NTMs, and whether there is a need formultilateral disciplines to ensure better regional andmultilateralconvergence.

A number of commentators have argued that theremay be scope for multilateralizing deeper PTAcommitmentstohelpensuretheircoherencewiththemultilateral trading system.30 Using a methodologydevelopedbyHornetal.(2009),the2011World Trade Report (WTO, 2011a) lists the commitments in deepPTAssignedbytheUnitedStates,theEuropeanUnionandJapan,makingadistinctionbetween,on theonehand, areas of deeper PTA commitments that fallunder the current WTO mandate (such as trade inservices, customs cooperation, TRIPS, trade-relatedinvestment measures (TRIMS) or governmentprocurement) and, on the other hand, areas that falloutside of the current WTO mandate (such ascompetitionpolicyor investmentrules).31Thedatasetalso indicates whether or not measures are legallybinding. Measures in the areas of services, TRIPS,TRIMS, customs cooperation, intellectual propertyrights, investment and the free movement of capitalaretheonesmostconsistentlyincludedintherelevant

PTAs.Baldwin(2012b)suggeststhatthesemeasures,whichcanbethoughtofasthosenecessaryforsupplychaintrade,shouldbeaddressedbytheWTO.Severaloftheseissuesarediscussedinmoredetailbelow.

The above list should certainly not be seen asexhaustive.Baldwin(2012b)suggeststhatgovernmentprocurement, visa requirements, labour andenvironmental issues – which only some outsourcingcountriesincludeintheiragreements–areamongtheissuesthattheWTOwillbeundergrowingpressuretoaddress. Plans currently under way for so-called“mega-regional” trade agreements also revealnegotiating priorities. According to press reports(Inside US Trade), the Trans-Pacific Partnershipnegotiations, for example, have produced a draftchapteron regulatorycoherence.Anotherproposal isto require parties to conduct regulatory impactassessments when developing new regulatorymeasures.Theseassessmentswouldexaminewhethera policy objective requires new regulations or can bemetbynon-regulatoryorvoluntarymeans.Theywouldalsoexaminethecostsandbenefitsofeachavailablealternative and provide an explanation of why oneapproachissuperiortoanother,includingthescientific,technical, economic or other grounds on which thedecision was based. While the draft chapter is anegotiatingdocumentthatmaynotreflecttheviewsofall participating countries, it has attracted significantpublic criticisms from a number of non-governmentalorganizations.

(iv) Services

The “servicification” of manufacturing (whereby thedistinction between services and manufacturing isbecoming blurred), the internationalization of supplychains and the proliferation of domestic servicesregulationallposechallengestotheWTO.Inordertobetter address servicification, it has been proposedthatmanufacturers’ interestsbetakenintoaccountinWTO services negotiations and that services andgoods negotiations should not take place alongseparate tracks, with trade opening commitments inoneareatradedagainstcommitmentsintheother.

Asregardstheinternationalizationofsupplychainsorthe proliferation of public policies, proposals havefocused on increasing transparency, limiting thediscrimination resulting from regional integration andensuring the appropriate level of regulatoryconvergence at the multilateral level (WTO, 2011a;2012b). As a first step towards greater regulatorycooperation, Hoekman and Mattoo (2011) proposedevelopinga“servicesknowledgeplatform”–thatis,aforumwhichwouldencourageasubstantive,evidence-baseddiscussionoftheimpactofdomesticregulationandidentifygoodpractices.

Regarding services value chains specifically, someobservers have called for a reform of the normative


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framework, thus providing a firmer basis for modalneutrality in the GATS and strong provisions oncompetition policy and regulatory coherence (Drake-BrockmanandStephenson,2012;Stephenson,2012).Another proposal is to adopt a “whole of the supplychain” approach (Hoekman, 2012), which wouldinvolve complementing the negotiations on tradefacilitation and regulatory convergence with newnegotiations on logistics, thus bringing together avariety of services sectors and subsectors that arerelevanttologistics.32

One issue that has gained prominence in the light ofproduction fragmentation is the cross-bordermovementofpeople.TheGATSincludescommitmentson market access and national treatment regardingthetemporarymovementofnaturalpersonsinservicessectors.Nonetheless,severalstudieshaveshownthatwhile all WTO members have undertaken suchcommitments,theyaretypicallyextremelyshallow(seeWTOdocumentS/C/W/301).

(v) Investment

Investment is not strictly speaking a new topic. Thelink between trade and investment has beenrecognizedforsometime.Tradeandinvestmentallowfirmstospecializeinproducingwhattheycanproducemostefficiently.Tradeallowsaneconomytospecializein production and then to exchange it for the goodsand services imports its nationals want to consume.Foreign direct investment allows capital andtechnology, including organizational, managerial andmarketingskills,tomovetowhereitcanbeusedmostefficiently(WTO,1996).

The original plans in the 1940s for an internationalinstitution for trade, to be known as the InternationalTrade Organization, foresaw the establishment ofmultilateral investmentdisciplines.SeveralWTOrules(such as the GATS, the TRIPS Agreement and theGovernmentProcurementAgreement)placeimportantobligations on governments with respect to thetreatment of foreign nationals or companies withintheir territories (WTO, 1996). The GATS mode3 commitments (foreign commercial presence) areoften described as obligations that address foreigninvestment in the services sector. A WTO WorkingGroup on Trade and Investment was established in1996. The Group undertook analytical work until2004,whenmembersdecidednot toproceedfurtherwith the topic of investment in the Doha Roundnegotiations. Efforts to negotiate multilateralinvestment disciplines were also undertaken in theOrganisation for Economic Co-operation andDevelopment(OECD).

The literature on global supply chains has brought arenewedfocusontheimportanceofthelinkbetweentrade and investment rules (Baldwin, 2011b).Furthermore,someoftheothertrendsidentifiedinthis

report are mirrored in the field of investment. Therehas been a diversification of the geography ofinvestment flows and investment law. Emergingeconomies have become capital exporters and flowsofinvestmentbetweendevelopingcountriesarerising(seeSectionC.2).Thenumberofbilateral investmenttreaties between developing countries has also beengrowinginrecentyears,especiallyinrelationtoChina,India and Japan (Schill and Jacob, 2013). Investmentrules,moreover,areincreasinglybeingincorporatedinpreferential trade agreements, and regional rule-makingisgainingimportance(UNCTAD,2012).

Thefragmentationandcomplexityofinvestmentrulesmeans that there are still calls for a multilateralinitiative that can promote coherence, although thisneed not necessarily take the form of binding rules(UNCTAD, 2009). Indeed, the “more pluralisticuniverse” of international investment agreementsreflects a desire for differentiated solutions while atthe same time reflecting recurrent principles and adegree of standardization (Schill and Jacob, 2013).Ultimately, there would appear to be a need for newresearchonhowsomeofthetrendsdiscussedinthisreport affect the case for multilateral rules oninvestmentandmorespecificallyforthenegotiationofsuchrulesintheWTO.

(vi) Competition policy

Like investment, discussions of the relationshipbetweencompetitionpolicyand tradegoback to thebirthofthemultilateraltradingsystemandweremostrecently the subject of analytical work in a workinggroupestablished in1996anddiscontinued in2004.SeveralprovisionsintheWTOagreementsreflecttheimportance of ensuring the competitive operation ofmarkets in what Anderson and Holmes (2002)describe as an “ad hoc integration” of competitionpolicy and concepts into the multilateral tradingsystem.Examplesofcompetition-relatedprovisions inWTO agreements include Article 11.3 of theAgreement on Safeguards, Article 40 of the TRIPSAgreementandtheReferencePaperadoptedaspartof the negotiations on basic telecommunicationsservices.

AndersonandHolmes(2002)summarizethecaseforandagainst incorporatingamultilateral frameworkoncompetition policy into the WTO. The case in favourtakes the view that competition policy and tradeopening pursue the common objectives of economicefficiency and consumer welfare, and that a lack ofcompetition can undermine the gains from tradeopening. The case against questions whethercompetition policy and trade opening can beapproached within the same operational framework,especially given the WTO’s focus on market access.However, Holmes and Anderson suggest that, justbefore WTO competition policy discussions werediscontinued,therewasashiftinproposalsawayfrom


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a “hard law” approach focused on developing aharmonized code of competition law towards a “softlaw” approach that would see WTO members adhereto certain core principles and modalities forcooperation.

As with investment, competition policy is frequentlycoveredin“deep”preferentialtradeagreements,albeitnotnecessarilythroughbindingrules(Baldwin,2012b;WTO, 2011a). Disciplines on competition policy havealso been mentioned in the trade literature as anexampleofthetypeofdisciplinesthatfacilitatesupplychaintrade(Baldwin,2012b).Thissuggestsaneedforfurther research on how current and future tradetrends identified in this report affect the case formultilateral rulesoncompetitionpolicy,andfor futurenegotiationsintheWTO.

(vii) Disciplining export duties

Another NTM-related issue identified for possibleinclusion in the WTO’s agenda is export restrictions.This issue has gained more prominence in recentyears because of concerns over food and naturalresources scarcity.33 As discussed in Section E.2,bindingWTOcommitmentsonexportdutiescouldbemutually beneficial. As with all trade negotiations,trade-offswouldbepossible inawidercontext–andnotonlyamongmembersapplyingsuchmeasures.Forexample, reductions in export taxes on naturalresourcescouldbeexchangedforreductionsinimporttariffs on higher value-added products, especiallywhenthese involve tariffescalation, i.e.higher importdutiesonincreasinglyprocessedgoods.

Asnotedinthe2010World Trade Report(WTO,2010),WTO rules prohibit the use of quantitative exportrestrictions (with some exceptions) but there are noequivalentrestrictionsonexportduties.WTOmembersare free to make binding commitments to reduceexporttaxesbutmosthavenot(severalcountrieshaverecently committed to “schedule”exportduties in thecontext of their WTO accession). Proposals todiscipline export taxes have been tabled in the Dohanegotiations although discussions of these proposalsshowed divergent interests among members. Exporttaxes have also been discussed in the Dohaagriculturalnegotiations.ThereisalsoaG20initiativeto limit export restrictionson food itemsdestined forfoodaid.Attheregionalorbilaterallevel,anumberofPTAsprohibit theapplicationofexport taxesorothermeasuresofequivalenteffects.

(viii) Energy and climate change

Concerns over climate change and environmentaldegradation more generally have moved to theforefrontofthemultilateralagendainrecentyearsandare expected to remain there for the foreseeablefuture. Cottier (2012) notes that until relativelyrecently, international law developed and operated

under the assumption that natural resources wereendlessandbountiful.Thatassumptionisnowviewedas manifestly incorrect. It is hardly surprising thatclimate change and environmental sustainability havegained greater prominence within WTO debates aswell.Ofparticularconcernaretradepoliciesrelatedtoenergysectorsandenergysecurity(WTO,2010).

Different approaches have been proposed to ensurecoherence between WTO rules and climate changemitigation measures. Under one approach, the WTOwould remain focused on trade measures, whilepoliciesrelatingtoclimatechangemitigationwouldbediscussed in the proper multilateral fora, such as theUnited Nations Climate Change Convention. Theproblemwiththisapproach isthat it isdifficult toseehow the WTO can avoid these issues, at least in themedium term. Whether adopted unilaterally ormultilaterally, members whose trade is affected byclimate change mitigation measures (for example,border tax adjustments or subsidies for renewableenergy)mayseektochallengethemintheWTO.IftheWTOwere to ruleagainstsuchmeasures, itcouldbecharacterizedasobstructingclimatechangesolutions.Similar issues could arise with other environmentalmeasures.

Others see a more positive and constructive role forthe WTO. Esty and Moffa (2012) emphasize theimportance of managing ecological interdependencealongside economic interdependence. For example,they see the WTO as playing a supporting rolealongside a new Global Environmental Organization,ensuring that gains from economic integration aremadeavailableonlytothosewhosharetheburdensofecological interdependence. For Esty and Moffa,incorporatingenvironmental issuesmorefully intotheinternational trading system is also the correctnormativeapproachbecauseeconomicefficiencyandenvironmental sustainability are mutually reinforcingand interdependent. Absent this approach, the WTOrisksabacklashagainstfurthereconomicintegration.

Cottieretal.(2011)arguethatexistingWTOrulesareinadequatetodealwiththechallengesspecifictotheenergysector,andthatanewcomprehensivesectoralagreement on energy is needed to promote energysecurity and climate change mitigation policies. Thissectoralagreementwouldinclude,amongotherthings,clarification of how WTO subsidy rules apply to theenergy sector. As a preliminary step, members wouldneedtocollectmoreinformationonsubsidiesprovidedto the energy sector by establishing a committeeresponsible for examining whether each member’senergysubsidynotificationssufficiently represent thelevel of support in the sector. Once reliable data arecollected, members would be given a deadline toprepareandsubmitanational roadmap inwhich theywould commit to phase out environmentally harmfulenergysubsidies.Thesubsidy-watchcommitteecouldplay a role in identifying environmentally harmful


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subsidies and time lines for phasing them out. Theproposed sectoral agreement would also resolve theproblem of fragmentation resulting from differentenergyactivitiesbeingclassifiedunderseparateGATSschedules.

Because the energy industry is a chain ofinterconnected activities, Cottier et al. (2011) arguethat service operators in the sector need a coherentsetofmarketaccess rights.Members should identifycore and related energy services to facilitate makingadditional commitments in the energy sector. Finally,the sectoral agreement would include somemodification of the Government ProcurementAgreementtomaketherecognitionofclimate-relatedmeasuresmoreexplicit. Insteadof amemberprovingthat itsenvironmentalpoliciesfallunderanexceptiontotheGovernmentProcurementAgreement,amemberchallengingthesepolicieswouldneedtodemonstratethat the policies were discriminatory or unrelated toclimatechange.34

(ix) Exchange rates and macroeconomic policies

Some commentators argue that undervaluedcurrencies have effects equivalent to both an importtaxandanexportsubsidy,andproposethattheWTOshould be used to regulate exchange rates. Mattooand Subramanian (2009b), for example, favourcreatingnewWTOrulesonexchangeratesthatwouldbe parallel to those on export subsidies and importtaxes.TheyproposeusingtheWTOdisputesettlementmechanism to enforce these rules, with the IMFproviding inputs on technical matters. Othersuggestions includeaWTOplurilateralagreementonexchange rates (including IMF participation), allowingparticipating members to file a complaint againstanothermember if the latter’scurrencywasseriouslyundervalued against a relevant basket of currenciesforaprolongedperiodof time (HufbauerandSchott,2012).Eventuallythiscouldleadtotariffretaliation.

As argued by Marchetti et al. (2012), addressing thechallenges raised by exchange rate misalignments andglobalimbalancesinvolvesaddressinga“coherencegap”in global governance. These authors argue that WTO-triggered trade actions should form part of a broadersolution but that trade rules alone cannot provide anefficient instrument tocompensate for theweaknessesininternationalcooperationinmacroeconomic,exchangerate and structural policies. They discuss the potentialrole for multilateral trade cooperation in the threetraditionalareasoftheWTO:marketaccessnegotiations,rule-makinganddisputesettlement.

As regards market access, Marchetti et al. (2012)suggest thatmarketopening inservices,particularly infinancial services, could reduce some of the policy-relateddistortionsandmarketimperfectionsthatleadtothebuild-upofunsustainable imbalances.With respect

to rule-making, they note that the first-best solution isinternationalcooperationonmacroeconomic,exchangerateandstructuralpolicies.Theyneverthelessrecognizethatsanctionscouldplayaroletodetercountriesfromeither free-riding or defecting from the cooperativeoutcome. However, they make clear that sanctionsshould apply to both surplus and deficit countries.Furthermore,theyconsiderthatotherpolicieswhichalsocontribute to imbalances would have to be subject tointernational scrutinyand suggest that penaltieswouldhavetogobeyondtradesanctions.Finally,inrelationtodispute settlement, Marchetti et al. underline thedifficulties in identifying currency manipulation and inestablishingthetradeeffectsofexchangerates.

(b) Governancereforms

SincethecreationoftheWTOin1995,debateontheneed to reform its governance has been intense(Hoekman, 2011), with proposals covering the“legislative”, “executive”and “judicial” functionsof theWTO. The arguments in favour of institutional reformare diverse – sometimes even contradictory –reflecting the wide range of objectives and concernsof the various stakeholders in the trade regime.Moreover, because of the Doha Round stalemate,proposals have increasingly focused on the WTO’slegislativefunction.Sincereviewingalltheseproposalsisclearlybeyondthescopeofthisreport, itexaminesinsteadsomeofthemainproposalsinthelightofthechallengesidentifiedinSectionE.2.

Ithasbeenarguedthattheriseofemergingeconomiesandthereforetheincreasingnumberofvetoplayersinthe WTO is straining the practice of consensusdecision-making(seeSectionE.2(d)).Manyproposalsfor reforming the WTO’s decision-making procedurefocusnotonabandoning theconsensusnormbutonreforming the way it operates.35 One group wants tokeepconsensusasthebasicprinciplebuttointroduceprocedural changes that would require blockingcountries to explain their actions (2004 SutherlandReport).Anothergroupwouldreplaceconsensuswithweighted voting (CottierandTakenoshita,2003)ora“critical mass” approach (Jackson, 2001).36 AnothergroupadvocatesanExecutiveBoardorCommitteetohelp steer the broader membership (Blackhurst andHartridge, 2004; Blackhurst, 2001; Steger, 2009).Finally,anumberofproposalsenvisageacombinationoftheabovemeasures(Elsig,2010).

Several of these proposals address not so much thechallenge posed by the increasing number of largeplayers in the system but the problem of a smallminority of members blocking decisions. While adiscussion of the strengths and weaknesses of eachproposal is beyond the scope of this report, it isimportant to note thatmost commentators are awareof theadvantagesofconsensusdecision-makingandbelieve that it should continue to apply in certaincircumstances.


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A number of the proposals for reforming the WTO’sdecision-making procedure have devoted specificattention to the decentralized, bottom-up, agenda-setting process of the WTO. These proposals aim ataddressing the “endless cycling dilemma” that arisesasaresultoftheabsenceofanyclearinstitutionalizedagenda setting (Elsig, 2010). As summarized in the2004 Sutherland Report, the WTO system suffersfrom“aproliferationofback-seatdrivers,eachseekingadifferentdestination,withnomapandnointentionofaskingtheway”(2004:76).Oneapproachtoaddressthis problem that has been proposed is to allocateagenda-setting power to an Executive Board orCommittee.

OtherproposalshavefocusedontheroleoftheWTOSecretariatinsupportingthedecision-makingprocess.The WTO Secretariat and Director-General havelimited power, and the idea would be to give themgreaterpowerofinitiativewithoutdilutingtheauthorityof themembership todecide.Astudyof the roleandpowers of the various secretariats and heads ofinternational organizations could help triggerdiscussionandreforminthisarea.37

Therearealsonumerousproposalswhichfocusontheso-called single undertaking approach38 – i.e. theconcept that “nothing is agreed until everything isagreed”inanegotiation–whichisanothercoreelementofWTOdecision-making.39AsHoekman(2011)notes,a single undertaking approach has the advantage ofcreating issue linkages but has the disadvantage ofcreatingahold-upproblem.Severalcommentatorshaveproposed abandoning the single undertaking andshifting to a variable geometry model (Jones, 2010;Lawrence, 2006a; Levy, 2006; Martin and Messerlin,2007;Messerlin,2010).Suchashift,whichcanalsobeseenasawaytorevisittheconsensusrule,wouldallowsub-groups of members to move forward on an issuewhile others abstain. One key issue is whether anagreement concluded under a variable geometryapproachwouldapplyonlytosignatoriesorbeextendedtootherWTOmembers through theapplicationof themost-favourednation(MFN)principle.

Variable geometry with MFN typically takes the formof the so-called critical mass approach whereby asufficientlylargesubsetoftheentireWTOmembershipagreestocooperate,allowingtheremainingmembersto free-ride. A critical mass approach was usedfor the post-Uruguay Round agreements on basictelecommunications and financial services as well asfor the Information Technology Agreement.Commentatorshavenotedthataformofcriticalmassapproach has typically been used for market accessnegotiationsintheGATT/WTO(Hoekman,2011;Low,2011). The proposal is to use the critical massapproachforthenegotiationofnewormodifiedrules.

As argued by Low (2011; 2012) and the 2011 World Trade Report (WTO, 2011a), a critical mass approach

couldalsobeusedtoaddressthechallengesraisedbypreferential trade agreements (see Section E.2(a)).When “deep” integration takes place at the regionallevel in the form of preferential trade agreements,international trade rules are being negotiated anddecided outside of the WTO in a setting wheredifferences in power are greater and the basicprinciples of non-discrimination and reciprocity areabsent. A critical mass approach would make itpossibletomultilateralizetraderuleswithoutinvolvingtheentireWTOmembership.Lowarguesthat“itcouldfacilitate the adoption of a forward-moving agenda,which under the right circumstances would notcompromise the integrity and coherence of themultilateral trading system” (2012: 311). A number ofcommentatorshaveraiseddoubtsabouttheadditionalscope for using a critical mass approach largelybecausetheydonotseemanyareaswhereitcouldbeapplied(Elsig,2010;Wolfe,2009).

VariablegeometrywithoutMFNcan take the formof“plurilateralagreements”– i.e. agreementsconcludedby a subset of WTO members whose obligations andbenefits are not extended to non-participants.40Hoekman(2011)observesthatashifttocriticalmasswith MFN does not really imply a change in modus operandi and suggests that if/where the non-discriminationconstraintcanbe relaxed,aplurilateralagreement provides an alternative. Hoekman andMavroidis (2012) make a comparative analysis of thecasefortradeopeningthroughplurilateralagreementsandpreferentialtradeagreements.Theyconcludethatfacilitating greater use of plurilateral agreementswould be a Pareto improvement (i.e. an action thatharms no one and helps at least one party) over thestatusquobecauseplurilateralagreementswouldfallundertheWTOumbrellaandwouldbesubjecttomoreWTOdisciplinesthanpreferentialtradeagreements.

Whileplurilateralagreementsunder theWTOmaybepreferabletopreferentialtradeagreementsoutsideofthe WTO, they clearly impose more stress on themultilateral system than thecriticalmassapproach.41The multiplication of such agreements may threatenthe integrity of the multilateral system and the corenon-discrimination principle. Moreover, once the“insiders” define the rules of the game in a specificarea, it will be harder for the “outsiders” to alter therulesifandwhentheydecidetoparticipate.

Aconcernwithmostoftheseproposalsisthateffortsto increase efficiency may come at the expense oflegitimacy. Smaller and poorer countries see theconsensus rule as protection against decisions thatmay be detrimental to their interests.42 Ismail andVickers (2011) argue that the consensus rule shouldnot be abandoned but rather strengthened. In theirview, consensus and the single undertaking are notresponsible for the stalemate of the Doha Round.Instead, they attribute the negotiations’ difficulties tothehangoverfromprevious imbalancesinnegotiating


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outcomes,substantivedivergencesofinterestsamongtrading partners, and domestic politics within majorplayers. To address the challenge of small and poorcountries’ participation, they propose improving therepresentation of developing country coalitions. Withregard to variable geometry and critical massproposals, Deere-Birkbeck (2011) notes that to date,only a few contributions to this debate seriouslyconsidertheirimplicationsforsmallandpoorcountries.

Akeyissuethatcutsthroughalloftheseproposalstoimprove WTO governance is transparency – and theneed to strengthen the functioning of existing WTOtransparency mechanisms. For example, there is abroadconsensusthatthenotificationsmechanismforWTO members, a core transparency tool, should beimproved–andthatthekeytoimprovingitstartswitha better understanding of its weaknesses.43 There isalso a broad consensus that the WTO’s trademonitoring exercise has been a success, and that itneedstobecontinuedandstrengthened.

With regard to WTO committee work, the role ofconsultations could be expanded, following theexampleofthespecifictradeconcernsmechanismofthe SPS and TBT committees (Wolfe, 2013).Reinforcing the WTO’s surveillance and monitoringfunctions may involve additional resources.44 Inparticular, as suggested in the 2004 SutherlandReport,theWTOSecretariatneedsstrongerresearch,analysis and dissemination capacity so it can be amajorsourceoftradeandtradepolicydata,andmoreeffectivelysupporttheobjectivesofthetradingsystem(Hoekman, 2011). Efforts already undertaken in thisareashouldbesustained.45

(c) WhatrolewilltheWTOplayinglobalgovernance?

Theexistinginternationalsystemisoftendescribedasfragmented, decentralized and non-hierarchical. Anumber of legal regimes co-exist, reflecting diverseattempts at finding cooperative solutions to commonproblems. The number of legal regimes is expandingandtheirdegreeofspecializationisincreasing.Statesremain prominent in the system but new actors arenowplayingimportantroles.Thesenewactorsincludeinternational organizations (such as the WTO), non-governmentalorganizations,multinationalcorporationsand individuals. Challenges are increasing incomplexityand,insomecases,urgency.

TheWTO,liketheGATTbeforeit,playsacentralroleinglobaltradegovernance.Formanyyears,therehasbeenan intensedebateaboutthepotentialchallengeto the WTO from an ever expanding number ofpreferentialtradeagreements(PTAs).Thisdebatehasintensified in recent years as the number of PTAs –and the number of members pursuing them – hasincreased, and as the new PTAs increasingly movebeyond preferential tariffs to focus on regulatory

cooperation. An interesting literature has emergedabout “multilateralizing” PTAs (both in terms ofpreferential tariffs and regulatory cooperation) andseveralproposalshavebeenputforwardtothiseffect.

One of the key trends identified in this report is theemergenceofglobalsupplychains.ThistrendhasledtocallsfortheWTOtofocusonissuesthataremorerelevanttosupplychaintrade,suchastradefacilitation,investment, competition policy or the movement ofpersons.ThefactthatWTOmembersareagreeingtonewdisciplinesontheseissuesinthecontextofdeepPTAs – and possibly “mega” PTAs covering a largeshare of global trade – has led some to raise alarmsaboutthegrowingriskoftheWTOlosingits“centricity”in trade governance. In particular, Baldwin (2012b)notesthatthenewrulesanddisciplinesthatunderpinsupplychaintradearebeingwrittenoutsidetheWTOindeepPTAs,bilateralinvestmentagreementsandaspart of autonomous reforms being carried out byemergingeconomies.Baldwinalsoidentifieseffortstoharmonizesomeofthesenewdisciplinesinthecontextof mega-regional or -bilateral PTAs that are beingnegotiatedorareunderdiscussion.

In the meantime, the WTO is unable to engage withthe new issues raised by supply chain trade becauseof the Doha Round’s lack of progress. In thesecircumstances, Baldwin predicts that multilateralismwill remain strong for traditional trade, butfragmentation and exclusion are the more likelyoutcomesforsupplychaintrade,whichhappenstobethemostdynamicsectorofinternationaltrade.BaldwinbelievesthatatpresenttheWTOisunabletoaddressthe current trend of fragmentation and exclusion.Therefore,heproposestheestablishmentofasecondtrade organization, which he calls “WTO 2.0”. Thisorganization would have a more limited membershipcomprised primarily of those countries involved insupplychains.Healsoproposesa listof issuestobecoveredbasedonareviewofdeepPTAs(seeSectionE.3(a)).

Baldwin does not explain how these new WTO 2.0rules would relate to members’ existing WTOobligationsorhowthepotentialpolicyfrictionsarisingfrom the additional layer of rules (applicable to someWTO members, but not all) would be mitigated. HealsoneglectsrecentprogressunderthecurrentWTOframework on the issue of government procurement,wherearevisedtextoftheAgreementonGovernmentProcurement has been negotiated and severalaccessionnegotiationsareactivelybeingpursued.

Baldwin’salarmovertheWTOlosing“centricity”isnotsharedbyeveryone.Lester (2013)argues thatglobalgovernancemaynotbenecessaryon thenewsupplychain issues that Baldwin proposes be addressed byWTO 2.0. Lester points to autonomous or unilateralreforms adopted by several WTO members andbelieves that leaving such new issues to domestic


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governmentsisaneffectivewayofencouraginggoodgovernance. The reason for this is that governmentsthat fail toattract investmentwillcopy thepoliciesofthose who succeed in attracting it. He also assertsthat the interest of the business community for moreinternationaldisciplineson thesenew issuesmustbeweighedagainst theopposition fromothersectorsofcivil society who are concerned about the higherdegreeofintrusionintodomesticregulatoryautonomythatinternationalrulesonsuchissueswouldentail.

Turningbacktothemultilateraltradingsystem,Lester(2013) observes that it may be that the WTO as itcurrentlystandsgetsthebalancerightbetweenglobaltrade governance and domestic regulatory autonomy.Consequently,therewouldnotbeaneedfortheWTOtocatchup.Instead,theWTOshouldcontinuetofocuson reducing protectionist trade barriers, whileregulation generally should be left to domesticgovernments.

Recent discussions about the WTO’s role in globaltradegovernancehavealsofocusedonexchangeratepolicies.TheuseofWTOprovisionstocounteracttheeffects of currency manipulation – and proposals togive the WTO a more active role with respect toexchange rate policies – are highly contentious andwilllikelyremainsointhecomingyears.

As the Doha Round negotiations have waned, otherfunctions of the WTO are receiving greater attentionand their value to global economic governance isgetting more recognition. These functions includedispute settlement, promoting transparency, trademonitoring and surveillance, conducting economicresearch, capacity building and technical assistancefor developing countries (see Section E.3(b)). WTODirector-GeneralLamyhasreferredtotheneedtofillin theWTO’s“missingmiddle”–that is, thesphereofactivity that lies between negotiations and disputesettlement.46ThisinvolvesscalinguptheWTO’stradesurveillance activities, capacity building and the day-to-day technical work that is critical to strengtheningthesystem’sfoundations.TheWTOtookanimportantstep in this direction when it implemented the trademonitoring mechanism in the wake of the globalfinancialandeconomiccrisisthatbeganin2008.

TheinformationcollectedandprovidedbytheWTOontrade measures and policy has long been recognizedasapublicgood.Yetforsome,itisapublicgoodthatiscurrentlyunder-provided,particularlywithrespecttonon-tariffmeasuresandmeasuresrelatingtoservices(Hoekman, 2012). As explained, efforts to enhancethe information supplied by the WTO would have toinclude stronger notification obligations for WTOmembers. It could also include giving the WTOSecretariatmorescopeforanalysisoftheinformationcollected. For example, it has been suggested thatmore could be done with the information collectedunder the PTA transparency mechanism. This

information could be used by members to learn fromeach other’s experiences with PTAs and to explorewaystoincorporateintothemultilateraltradingsystemthe trade opening achieved through PTAs (GMF/ECIPE,2012).

Current trends indicate that the WTO is likely tocontinuetoplayakeyrole in thepeacefulsettlementof trade disputes. While all PTAs have their owndispute settlement mechanism, there is little, if any,evidence that they are eroding the relevance of theWTO’sdisputesettlementmechanism.Onthecontrary,animportantshareofdisputesbroughttotheWTOarebetween PTA partners (WTO, 2011a). With a fewexceptions,PTAdisputesettlementmechanismsshowlittleusetodate.

Therearereasonstobelievethatnon-tariffmeasureswillmakeupan increasingshareofdisputesbroughtto theWTO,andagoodproportionof thosedisputeswill involve measures that touch on public policyissues, such as health, consumer safety and theenvironment (WTO, 2012b). As noted in Section E.2,distinguishing between measures that pursuelegitimate public policies and measures that areprotectionist is seldom straightforward. Thesemeasures,moreover,raisedifficultquestionsaboutthedegree to which the multilateral system should deferto members’ regulatory autonomy or regulatorypreferences. International consensus on properpolicies can both simplify and complicate matters.SomeWTOagreements,suchastheSPSAgreementand the TBT Agreement, assign a privileged role tointernational standards. However, in other contexts,therelianceoninternationalnormsagreedoutsidetheWTO is more contentious. This issue acquires anadditionallayerofcomplicationwhentheinternationalnorm is one to which not all WTO members haveconsented.

ItisunrealistictobelievethattheWTOcanstandalooffrom broader issues of global governance beyondtradeandeconomicpolicy.Manynon-trademeasureshavetradeeffectsand,forthatreason,canfallwithinthe purview of the WTO. At the same time, there arepressures to use trade policy to further non-tradegoals,suchastheprotectionoftheenvironmentorthepromotionoflabourstandards.

AfewcommentatorsseeamoreambitiousrolefortheWTOinframingthediscussionsonglobalgovernance.Chaisse and Matsushita (2013) propose using theTrade Policy Review Mechanism (TPRM) to collectinformation about, and to promote harmonization andcoordinationbetween,PTAs, topromoteconvergenceof climate mitigation measures, and to coordinatepolicies on other matters. They see advantages tousing the TPRM because its reports are non-bindingandbecause it couldoperate as an informal networkof government authorities. Chaisse and Matsushita,however,donotexplainwhysimilardiscussionscould


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not take place within the WTO committees dealingwith the specific subjects, namely the Committee onRegional Trade Agreements and the Committee onTradeandtheEnvironment.Theirpreferencemayhaveto do with the WTO Secretariat’s role preparingdetailedreportsforeachtradepolicyreview.

Messerlin (2012) would like to see members takeadvantage of the WTO’s institutional and substantivecapacityasaforumforabroaderdiscussionofglobalgovernance.Thesediscussionswouldgobeyondtradeand would cover other issues where multilateralcooperation is facing difficulties, such as climatechange, water and fisheries. Messerlin proposes thatthe WTO host a series of worldwide, “totally open-minded”conferencesonalloftheserelatedissues.Hesuggeststhatsuchconferenceswouldrevealthedeepsimilaritiesandtheconverging interestsamongthesevarious world communities struggling for functioningmultilateralgovernance.

Regardless of whether the WTO takes on a moreprominent role in global governance, its relationshipwithotherspecializedinternationalregimeswillremainakey issue inglobalgovernancedebates.Coherenceamongregimesisanelusiveobjective.Althoughthereisagrowing recognition that theWTOcannot remainoblivious todevelopments inother regimes, therearediverseviewsabouttheextenttowhichtheWTO(anditsrules)shouldinteractwiththoseregimes.


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1 Foradetaileddiscussion,seeWTO(2012b).

2 Asdiscussedelsewhereinthissub-section,Blanchard(2010)makesasimilarbutmoregeneralpoint.

3 Insomecases,PTAsdeepenedandlockedinunilateraltariffreductions,furtherreducingtheperceivedriskoffuturetariffincreases.

4 Notethatfromtheperspectiveoftheterms-of-tradetheoryoftradeagreements,unilateraltariffcutswouldmostlikelyleavetheterms-of-trademotivatedcomponentoftariffsinplaceandthereforewouldnotaffectthechancesofsuccessoffurthertariffnegotiations.

5 TariffreductionsinthecontextofWTOaccession,whichcanbeviewedasunilateral,arebound.

6 Seetheoverviewoftheliteratureinthe2011World Trade Report (WTO,2011a).

7 Areaswhereregulatoryconvergenceisneededincludeinvestment,capitalflows,intellectualpropertyprotection,competitionpolicy,servicestrade,andindustrialstandardsandregulations.Seethe2011World Trade Report(WTO,2011b).

8 Thepositiveassociationbetweendeepintegrationandproductionnetworksisconfirmedbyempiricalanalysis(WTO,2011a).

9 SeeOreficeandRocha(2011).

10 Note,however,thatalargenumberofPTAscontainso-called“GATS-minus”elementswhicharedisconnectedfromanddifficulttoreconcilewithWTOobligations(AdlungandMiroudot,2012).

11 SeethediscussioninWTO(2011a).

12 Ciuriaketal.(2011)pointatanotherdifferencebetweendeepintegrationattheregionalandatthemultilaterallevel.Whileheterogeneousfirmstrademodelssuggestthatmoreimportanceshouldbegrantedtoextensivethantointensivemarginresponsestotradeopening,thereisevidencesuggestingthatPTAshavepositiveeffectsattheintensivemarginandnegativeeffectsattheextensivemargin,whereastheoppositeistrueofopeninginthemultilateralcontext.

13 Notethatabouttwo-thirdsoftheworld’sFDIstockisinservicesandthatBITsarealreadycoveredbyGATSdisciplinesinsofarastheyaffecttradeinservicesandmeetthedefinitionofmode3.Consequently,therelevantprovisionsaremultilateralizedbyvirtueoftheMFNclauseinGATSArt.IIwheneverthememberconcernedhasnotlistedanMFNexemption(AdlungandSoprana,2012).

14 Proponentsofamultilateralinvestmentagreement(MIA)havearguedthatthespreadofBITshascreateduncertainty,hightransactioncostsanddistortionsduetodivergingsystemsofBITs(BrunnerandFolly,2007;Leal-Arcas,2009;Urban,2006).However,MFNclausesandotherfactorswithinthesetreatieshavecausedadegreeofcoherencethatalleviatesthisproblem(Chalamish,2009;Schill,2009)andreducespotentialgainsfromanMIA(BubbandRose-Ackerman,2007).Inaddition,ithasbeenpointedoutthatdespitetheallegeddivergenceofBITs,FDIisrisingfastandthatBITsallowsignificantlymoreflexibilitytoaccountfortheneedsofdevelopingcountries(e.g.HoekmanandSaggi,2000;Kennedy,2003;NunnenkampandPant,2003).

15 SeealsoFigureB.17inSectionB.2(e).

16 Italsoshowsthatsuchasituationmaysimilarlyariseasaresultofrent-shiftingbetweenexportersandimportersofnaturalresourceswhenthelatterusesconsumertaxesandtheformerusesproductionquotas.

17 Thistrendmaypersistinthelongerterminlightofdemographicdevelopmentsandconstraintsinthenaturalresourcessector.SeeSectionsC.1andC.4.

18 Morebroadly,concernshavebeenraisedabouttheimpactofbiofuelsonfoodpricesand,consequently,oneffortstofighthunger(UnitedNationsSpecialRapporteurontheRighttoFood,2011).

19 SeeMorenoCaiado(2011).SeealsothecomplaintbroughtbyArgentinaagainsttheEuropeanUnionandSpain,WT/DS443.

20 Anumberofpapersdiscusstheriseofemergingeconomiesinthemultilateralsystemovertime.SeeforexampleLawrence(2006),Arrighi(2007),Narlikar(2007),Jacques(2009),Hopewell(2010),Gao(2011),MattooandSubramanian(2011),Subramanian(2011).

21 Asdiscussedelsewhereinthisreport,however,developingcountrieshaveconsiderablyreducedtheirtariffsunilaterallyandinPTAsandtherehavealsobeensignificanttariffreductionsinthecontextofWTOaccessions,butnotonareciprocalbasis.

22 SeeforexamplethereportsbytheConsultativeBoardtotheDirector-GeneralSupachaiPanitchpakdi(2004)(theso-called“SutherlandReport”,namedafterChairmanPeterSutherland)andbytheWarwickCommission(2007).

23 ForadiscussionofthechallengesraisedbythedeepintegrationprovisionsoftheTBTandSPSAgreements,seethe2012World Trade Report (WTO,2012b).

24 SeeHensonandHumphrey(2008)andVonSchlippenbachandTeichmann(2012)forexample.

25 Josling(2012),forexample,askswhethertheSPSAgreementshouldbeamendedtoallowgovernmentregulationtorespondtoconsumerconcernsthathavenotbeenfoundtohavescientificmerit.WhilesomeexportingcountriesfearthatthiswouldmaketheSPSAgreementalesseffectiveconstraint,othersareconcernedthatintheabsenceofsolutiontheSPSAgreementmightincreasinglybecomeirrelevantforglobalfoodtradeasmoreuseismadeofprivatestandards.ItshouldbenotedthattheTBTAgreementallowsmemberstoadopttechnicalregulationstoaddressconsumerorenvironmentalconcerns.

26 The2007World Trade Report (WTO,2007)discussesthedeepeningofthemultilateraltradeagenda.

27 RestrictiverulesoforigincanalsocurbpreferentialtradeandendupnullifyingthetariffreductionbenefitsofthePTA.

28 TherehavebeeninitiativesinthepasttoharmonizerulesoforiginintheGATT/WTO.Anincipientinitiativewaspursuedin1982,althoughultimatelymembersagreedintheUruguayRoundonlytolaunchaworkprogrammeonnon-preferentialrulesoforigin.Memberswereunabletocompletetheworkprogrammebytheagreeddeadline.Morerecently,therehavebeendiscussionsinconnectionwithGeneralizedSystemofPreferences(GSP)schemesandduty-freequota-freetreatmentforLDCs.

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29 SeedocumentWT/MIN(01)/DEC/1,para44.

30 SeeBaldwinetal.(2009)andWTO(2011a).

31 AreasthatfallunderthecurrentWTOmandatearetypicallycalledWTO+areas,whileareasthatfalloutsideofthecurrentmandatearetermedWTO-Xareas.ForacomprehensivelistofWTO+andWTO-Xareas,seethe2011World Trade Report (WTO,2011a).

32 SomeprogressinthisdirectionhasbeenmadeintheTrans-PacificPartnershipnegotiations.

33 OECDhascompiledacomprehensiveinventoryofrestrictionsonexportsofrawmaterials.Seehttp://www.oecd.org/tad/benefitlib/exportrestrictionsonrawmaterials.htm.

34 ItshouldbenotedthatarevisedGovernmentProcurementAgreementwasnegotiatedaftertheseproposalsweremade.TherevisedGPA(andmorespecificallyArticleX:6)expresslystatesthatpartiesmayapplytechnicalspecificationstopromotetheconservationofnaturalresourcesorprotecttheenvironment.PartiestotherevisedGPAalsoagreedtoinitiateaWorkProgrammeonsustainableprocurement(GPA/113,AnnexE).

35 Foradiscussionoftheprosandconsoftheconsensusnorm,seeHoekman(2011)andthereferencestherein.

36 Thenotionofcriticalmassusedinthiscontextisdifferentfromtheonethatreferstotheadoptionofconsensusdecisionsthatinvolveasubsetoflargeplayerstakingonadditionalcommitments.

37 SeeKuijper(2009),Elsig(2010)andanaddressbyWTODirector-GeneralLamyatBilkentUniversity,Ankara,on15March2013,availableathttp://www.wto.org/english/news_e/sppl_e/sppl272_e.htm.Specifically,WTODirector-GeneralLamyobserves:“Inanumberofotherinternationalorganizations,theSecretariatplaysabiggerroleinleveragingitsexperiencewhileremainingneutral.Ithasa‘rightofinitiative’;inotherwords,thecapacitytotableproposalstofacilitatenegotiationsandtobrokercompromises.IntheWTO,thatroleisvirtuallynon-existent,andwhencoupledwiththeneedforconsensus,canmakeitsignificantlymoredifficulttogenerateexpertsolutionstoproblems”.

38 Manyproposalsaddressseveraldimensionsofthedecision-makingprocesssimultaneously.SeeElsigandCottier(2011),forexample,wholistfiveelements(includingconsensusandthesingleundertaking)whichtheythinkneedtobeaddressedsimultaneously.

39 Interpretationoftheconceptofthesingleundertakingcandifferbetweencommentators.Ithasbeeninterpretedvariouslyasthe“analoguetoconsensusinnegotiations”(Hoekman,2011),asasimpleproceduralruleinnegotiations(Low,2011),asonecorneroftheWTOdecisionmakingtriangle(ElsigandCottier,2011)orasaconstitutionalmetaphor(Wolfe,2009).

40 Onlytwosuchagreementsareineffect:theAgreementonGovernmentProcurementandtheAgreementonTradeinCivilAircraft.

41 SeethediscussioninHoekmanandMavroidis(2012).

42 SeethediscussionofthevalueofconsensustosmallerandpoorermembersinHoekman(2011).

43 SeeWolfe(2013);2012World Trade Report (WTO,2012b).

44 SeeHoekman(2011).

45 See2012World Trade Report(WTO,2012b).

46 Seeforexamplehis2010speechentitled“TheDohaRoundmarksatransitionfromtheoldgovernanceoftheoldtradeordertothenewgovernanceofanewtradeorder”http://www.wto.org/english/news_e/sppl_e/sppl173_e.htm.

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