A new direction for world trade?

The World Trade Organisation is to have its first Latin American boss – a sign of the global shift towards developing nations, says Simon Wilson. But is it sliding towards irrelevance?

The World Trade Organisation is to have its first Latin American boss a sign of the global shift towards developing nations, says Simon Wilson. But is it already sliding toward irrelevance?

What is the World Trade Organisation?

The World Trade Organisation (WTO) is an international institution with 159 member states. Its purpose is to settle disputes between members and promote free trade between nations.

Founded in 1995 and based in Geneva, it oversees international trade regulations, provides a forum for negotiating trade deals between more than two countries, resolves disputes between members, and enforces the rules where necessary.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Overall, the WTO (and its predecessor from 1947 onwards, the General Agreement on Tariffs and Trade, GATT) have arguably been successful. In 1950, international trade accounted for 8% of global GDP. Now it accounts for more than three times that figure. In real terms, the value of international trade has grown 26-fold over the same period.

So what's the problem?

Global trade is no longer driving growth. In 2009, after the financial crisis, global trade flows plunged by 12.5%, the sharpest drop since the 1930s. Since then, recovery has been steady but slow: trade hasn't collapsed, but it grew by just 2% in 2012, far below the two-decade average of 5.3%. The WTO system, according to some critics, including the US government, is in danger of becoming an irrelevance.

The latest troubled round of trade negotiations, the Doha Development Round, which began in 2001, finally stalled in 2008. Not much has happened since in part due to the greater determination of developing countries to flex their geopolitical muscles, and the West's resistance.

What's gone wrong?

The history of the WTO offers clues as to the limits of its power and the unsatisfactory, stop-start nature of its marathon negotiating rounds. In the aftermath of World War II, leading economic powers came together at Bretton Woods in New Hampshire to set out the ground rules for international economic and monetary relations, and to establish institutions to govern post-war reconstruction and development.

Out of those discussions grew the International Monetary Fund and the World Bank, and also a comparable institution for trade, the International Trade Organisation (ITO). This was a specialised UN agency designed to pull down trade barriers and promote free trade. If you've never heard of it, that's because much like Doha it never came to fruition.

Why not?

After complex negotiations lasting three years, an ITO Charter was eventually agreed at Havana in 1948. But the US, the leading power of the time, never ratified it, fearing that an international body for trade might be too restrictive and meddlesome.

Instead, the GATT treaty which was signed originally by eight countries (including the US and Britain) in 1947 and conceived as a workable stopgap until the ITO was finalised morphed into the de-facto forum for international co-operation on trade. Attempts in the 1950s and 1960s to establish an ITO failed, and it was not until 1995 that the WTO was born.

What does all that tell us?

That the case for free trade never seems as clear-cut to governments as it does to economic theorists; that ad-hoc adaptive arrangements are not always doomed to failure; and that international institutions are necessarily moulded by geopolitics (see below).

For example, Brazil's government is thrilled that its candidate, Roberto Azevedo, got the WTO job over his Mexican rival. But Brazil itself hardly champions free trade, frequently adopting protectionist stances in talks itself.

Moreover, behind closed doors, Brazil's government acknowledges that the WTO's main mission pushing global trade talks forward looks ever more like a lost cause. "Brazil made a bet on the WTO years ago," said an official, quoted by Alonso Soto of Reuters. "Now we see that the WTO is unlikely to advance any time soon so we need to move toward other deals."

What kind of deals?

The kind of bilateral and regional trade agreements that have flourished in recent years (the overall number has jumped from around 70 in 1990 to over 300 today). The US and European Union will shortly begin talks on a Transatlantic Trade and Investment Partnership with the aim of completing a deal next year; axeing non-tariff barriers between the two could boost output by up to 3%, reckons The Economist.

Meanwhile, 12 Pacific Rim nations and the US are working on a Trans-Pacific Partnership. As for the WTO and its new boss, the first big test will come in December in Bali, Indonesia.

Agreement there on the meeting's limited agenda concerning trade "facilitation" could prove a stepping-stone to bigger deals. Failure would confirm its slide towards irrelevance, and place a big question mark over its purpose and future.

New boss, new era?

The appointment of Roberto Azevedo a widely respected Brazilian diplomat who was supported by China but not by America or the EU as boss of the WTO reflects the ongoing shift in global trade clout, reckons Liam Halligan in The Sunday Telegraph.

"Having bought into the WTO's multilateral system, many increasingly powerful emerging markets are furious at what they see as continued Western intransigence." To avoid a scenario where developing nations cut bilateral trade deals that exclude us, Western leaders "should now bite the bullet and make whatever sector-specific sacrifices are needed to complete the Doha round. The reality is that, from our perspective, the terms can only get worse".

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.