25 years of WTO: Why Keynes would be a worried man!

Amol Agrawal

In the beginning of this century, if someone had told me that 20 years from now, the World Trade Organisation (WTO) will face an existential crisis, I would have laughed it off. How can such an international institution and that too dealing with trade, which is one of the pillars of economics, face an existential crisis?

Moreover, in the early 2000s, the WTO was at the centre of the world economy with highly charged trade negotiations between member economies. But back then, I was naïve. I  have learnt over the years that the history of economics goes in circles and what was once in demand may not remain so in future.

In 1944, a host of experts and government officials congregated in Bretton Woods, a town in Hampshire, US.  The talks were spearheaded by none other than John Maynard Keynes. The focus was on taking measures to resurrect the global economy from the destruction of two world wars and ensure future wars do not happen.

Three institutional gaps were identified. First was financing reconstruction which led to the World Bank -- originally called the Bank for Reconstruction and Development. Second was fostering international cooperation from the financial side, which led to the International Monetary Fund (IMF). The third was fostering international cooperation from the trade side which is the focus of this article.

To promote trade, Keynes advocated establishing an International Trade Organisation (ITO). The original ITO charter was broader and apart from world trade included rules on employment, commodity agreements, restrictive business practices, international investment, and services. This required discussions and negotiations both with internal polity and governments of other countries. The ITO was to be ratified in 1947 in Havana.

Meanwhile, 1945 onwards, 15 countries had agreed to foster international trade cooperation and initial negotiations affected $10 billion of trade. They did not want to repeat the mistake of protectionism of the 1930s which became one of the major factors of the Second World War. The group expanded to 23 countries by October 30, 1947, and it agreed to be part of the agreement named as the General Agreement on Tariffs and Trade (GATT).

In the Havana conference, the ITO charter could not go through as the US Congress did not agree to the trade deal.  The GATT signatories were visionary and had anticipated that the ITO might not be ratified and as a result, the GATT became the major instrument for world trade for nearly 50 years (1948-94). India became one of the earliest members of the GATT by signing on July 8, 1948.

The GATT agreements were achieved by trade rounds (See Table). These rounds involved negotiations with signatory countries over lowering tariffs and then gradually expanding to other areas such as anti-dumping measures, non-tariff measures and so on.

The GATT was based on a plurilateral approach, voluntary in nature, which is obviously a limitation as members can back out at will. The approach also takes a long time, given the voluntary nature. Thus, from the Uruguay Round onwards, the members started moving towards a multilateral approach in which all members are party to the agreement. Multilateral system also means one does not have to negotiate with multiple partners and an agreement applies to all with some reservations.

The Uruguay round eventually led to the WTO. The organisation structure of the WTO is different from the IMF and the World Bank. The WTO is run by all the member governments (164 as of July 2016) where decisions are taken via various councils and committees. The smaller economies have an equal say in matters as bigger countries. In the IMF and the WB, power is delegated to a board of directors and is basically a power equation between the US and Europe, with Europe dominating the IMF and the US dominating the WB.

The WTO taking the spirit of the GATT forward agrees to all trade developments via negotiations, which is no small task. The GATT covered goods whereas the WTO includes services and intellectual property rights. The organisation is headed by a Ministerial Conference (MC) which meets at least once every two years to take the trade negotiations forward. There have been 12 such MCs, with next slated in Kazakhstan in June 2020. The most significant moment for the WTO was China becoming a member in 2001. There were worries over China’s conduct in international trade, but those worries were unfounded.

In 2008 crisis, things suddenly changed for the WTO. In fact, the fortunes of the IMF and the WTO reversed, with former rising and the latter falling. Despite a sharp decline in world trade and trade finance, the WTO has mostly been sidelined. The multilateral trade agreements were based on the global cooperation/consensus, but the 2008 crisis turned the tide. The high inequality and weak recovery has led to rise of economic nationalism and populism in developed countries of all places.

The multilateralism has given way to bilateralism and regional trade agreements, negating years of progress. Shang-Jin Wei and Xinding Yu in a piece pointed out how WTO’s Dispute Settlement system, which was one of its biggest successes, is being killed as judges have not been appointed.  Once again, the US has been a spoilsport in much of these negotiations.

In 2019, the IMF completed its 75 years. IMF historian Atish Ghosh wrote a fascinating piece “bringing” Keynes to visit IMF headquarters. Ghosh wrote how Keynes would be surprised by changes in the world economy, particularly transition from fixed exchange rates to flexible exchange rates and proud that the IMF has adapted to the changes and remains relevant -- though some may not agree.

What would Keynes say of the WTO? He would be surprised that it took so long for the WTO to deliver, but still happy to note of the progress world economies have made under the GATT/WTO umbrella. He might show concern that post 2008 crisis, the world has increasingly turned protectionist. Some historians make references to how today’s times are similar to the end of the World War-I (1919), which would really worry Keynes (WW-3 was trending on Twitter recently). Keynes would say that it is exactly for such times that he had suggested creation of the ITO and unhappy that just in these times, the WTO has been sidelined!

Keynes would remind the current world polity to be aware of the fateful history and work in all possible ways to ensure this history is neither repeated nor rhymed.

Amol Agrawal is faculty at Ahmedabad University. Views are personal.