The following is an excerpt from the Simon J. Evenett’s article: Can the World Trade Organization Act as a Bulwark Against Deglobalization? from Asian Economic Policy Review published by John Wiley & Sons Australia, Ltd on behalf of Japan Center for Economic Research.
Whether existing multilateral trade commitments really deter larger trading nations from taking steps that further weaken cross-border commercial ties is assessed here. Evidence from salient commercial policy episodes of recent years is combined with information on the actual leeway available to G-20 members under extant World Trade Organization rules. The upshot is a bleak assessment of the capacity of the existing multilateral trade rule book to rein in any attempt by larger trading nations to “deglobalize” the world economy.
After the Global Financial Crisis analysts debated whether globalization – the ever-greater integration of national markets – was slowing down. Recently, the debate has shifted to whether the world economy has entered a phase of deglobalization. In light of growing geopolitical tensions and the so-called Polycrisis, some have gone so far as to argue that deglobalization – taken here to mean the conscious thinning of cross-border commercial ties through state action – is necessary.
My goal here is not to assess whether the world economy is or has been deglobalizing. Nor is my purpose to assess whether deglobalization is desirable or what its end point might be. Nor will I consider the factors that have triggered discussions of deglobalization. Here, I ask a different question: If a government contemplated trade policy measures that markedly thinned cross-border commercial ties, would the current corpus of multilateral trade rules prevent them from doing so? In short, I will examine what contemporary evidence reveals about the degree to which World Trade Organization (WTO) rules can really act as a bulwark against deglobalization.
The approach taken in this paper is not to assume or contend that existing multilateral trade rules have no bite. Demonstrating such a strong proposition is unnecessary given my research objective. Rather, I will marshal enough evidence on actual contemporary commercial policy decisions and on the leeway afforded to governments in current WTO accords that might give a reader inclined to believe that existing multilateral trade rules will act as an effective bulwark against deglobalization second thoughts. If this argument is correct then, as geopolitical rivalries intensify, we should moderate our expectations as to what WTO accords can deliver and look elsewhere for centripetal forces that might hold the world trading system together.
Assessment: Current WTO Rules cannot Contain Pressures to Deglobalize
The evidence presented in this paper implies that we should moderate our expectations as to the extent to which existing multilateral trade rules can limit state-induced deglobalization. Earlier, it was argued the WTO rule book is incomplete – for example, there are no rules on digital trade. Rules on foreign direct investment are patchy. Even where multilateral trade rules have been agreed, they allow many governments significant leeway to fragment markets (recall the size of the import tariff binding overhangs), or contain exceptions (recall the Article XI exceptions and those pertaining to national security) or they can be honored more in the breach (recall the evidence on the build-up of corporate subsidies) seemingly with impunity. Even when the rules were subject to dispute settlement, foundational principles – such as the MFN tariff treatment – have been simply ignored by major trading nations.
The best that can be said about the current multilateral trade rule book is that, to date, many governments (of mainly small- and medium-sized economies) have chosen not to openly violate their commitments. Pressures to favor national interests have been channeled away from transparent forms of trade discrimination (such as import tariffs) to less transparent forms of selective intervention (corporate subsidies, government procurement measures, export controls, and the like.) This shift toward harder to detect and less closely observed commercial policy intervention may have created the impression of a system capable of deterring government steps that fragment markets. If that was the case, the public revocation of MFN tariff treatment for most of China’s exports by the USA shattered that illusion. China’s retaliation and the enduring breach of the MFN principle have not been lost on observers either. Furthermore, the manner in which governments reacted to the crises of recent years and to intensifying geopolitical rivalry suggest little interest among the larger trading nations in returning to rules of the game agreed at the end of the Uruguay Round 30 years ago.
That multilateral trade rules are not likely to be an effective bulwark against conscious efforts to fragment markets or to offers of inducements to move factories across borders does not imply that these are desirable policy interventions. Indeed, that so many governments have chosen not to abandon the MFN principle, and that dozens of WTO members chose to lower trade barriers on medical goods and food during the crises of recent years, suggests that unilateral commercial policy is not always moving in a discriminatory direction. My conclusion here is that, for better or for worse, we have reached a point where governments have options that are no longer meaningfully constrained by multilateral trade rules. Of course, these findings make a mockery of the mantra that governments have insufficient policy space.
In principle, groups of like-minded nations could deter state-led deglobalization within the group – although that proposition ought to be evaluated on a case-by-case basis. Perhaps the expansion of membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) can secure an oasis of less-distorted trade among its members? But creating an oasis does not address the root causes of the growing impotence of multilateral trade rules evidenced in this paper. Still, should compliance with multinational trade rules weaken further, one option available to governments is to seek to substitute lost multilateral market access with an expanded and deeper network of regional trade agreements.
If multilateral trade rules cannot do the job of discouraging policy-induced deglobalization, what can? The decisive battles over unilateral policy will take place in national capitals. With intensifying geopolitical rivalry, we can reasonably expect that national security and foreign policy officials are likely to play a greater role in shaping commercial policymaking. Too many of the former cross-border commercial ties are said to be a source of risk, so little discouragement to deglobalize can be expected from that quarter. For these officials, trade policy is, at best, part of second order diplomacy, to be invoked symbolically and not because of any expectation that curbing trade will actually change a foreign government’s actions. One potential source of countervailing power comes from that part of the business community which has a significant stake in an open global trading system. Whether enough senior executives are willing to do so is an open question.
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