Working Paper

An Empirical Analysis of Why the WTO is Broken and Cannot be Fixed - Yet

Daniel Drache Associate Director, Robarts Centre for Canadian Studies

Professor, Department of Political Science, York University

Marc D. Froese Research Associate, Robarts Centre for Canadian Studies

Doctoral Candidate, Department of Political Science, York University

Drache@yorku.ca or mfroese@yorku.ca

June 2006

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An Empirical Analysis of Why the WTO is Broken and Cannot be Fixed - Yet By Daniel Drache and Marc D. Froese1

Introduction

The WTO has acquired a huge expertise in negotiating complex agendas. But after five

years at the negotiating table, governments are running out of time to save the Doha

round of multilateral trade negotiations.2 The core problem is not that members are

opposed to open markets, but that the current agenda is too big and complex to craft a

deal.3 Susan Schwab, the US Trade Representative hit the nail on the head when she said

that a weak deal is worse than no deal at all – “if you do one of these once every

generation, and your objective is to liberalize trade, why would you settle for something

that doesn’t do a whole lot to liberalize trade?”4 So far Doha-lite has few supporters.

Institutionally, the WTO is caught between powerful competing interests and factions.

All governments wants greater access for its competitive industries, but each major

trading country is committed to protecting its uncompetitive domestic producers. (see

Table 1 below). Doha negotiations are a crazy quilt of offers, counter-offers, bluffs and

vetoes.

1 Special thanks to Sylvia Ostry for her valuable feedback and to Patricia Goff for a very stimulating conversation on international public law. For more WTO analysis and other research reports see www.yorku.ca/drache and www.robarts.yorku.ca. 2 Daniel Drache and Marc D. Froese. The Global Cultural Commons after Cancun: Identity, Diversity and Citizenship [PDF file]. Comparative Research in Law and Political Economy: A Research Network at Osgoode Hall Law School, June, 2005 [cited June 10th 2006]. Available from www.comparativeresearch.net. 3 Daniel Drache. Trade, Development and the Doha Round: A Sure Bet or a Train Wreck? [PDF file]. Robarts Centre for Canadian Studies, York University, 2005. Available from www.cigionline.org/publications/docs/Trade_Dev_Drache.pdf.

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Table 1:

The popular perception is that agricultural subsidies are the biggest roadblock to

successfully concluding Doha. In reality, the reason why trade negotiations are going

nowhere is that WTO’s rules and processes are inadequate to the Herculean task it has set

for itself. In the ‘medieval’ processes of trade liberalization, the WTO is not only

hamstrung by special interests, as much as by the realities of global politics which have

roughly intruded on the theory of trade liberalization. 5

The WTO grew from a proactive tariff reduction regime to a full-bodied trade

governance forum over the previous decade. Perception is that trade liberalization is still

4 Edward Alden and Alan Beattie. "Schwab to 'Think Big' on Market Access." Financial Times, June 12th 2006. 5 Robert Wolfe. "Decision-Making and Transparency in the 'Medieval' WTO: Does the Sutherland Report Have the Right Prescription?" Journal of International Economic Law 8, no. 3 (2005): 631-45.

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driven by developed countries. But growth of the WTO’s membership has significantly

changed the liberalization dynamic. WTO law is rooted in an American system of

common law and corporate regulation,6 but its institutional trajectory is increasingly

influenced by emerging economies. In China, India and Brazil, industrial capacity and an

emerging middle class are sparking growth rates which challenge the economic

superiority of North America and Europe. As a result, a new balance of power is

emerging in the heart of the organization.

This paper empirically examines the WTO’s dispute settlement performance over

the past decade. Dispute settlement is the most significant deliverable of WTO

governance and embodies all that is both problematic and progressive about the trade

institution. We analyze a number of important and unforeseen institutional consequences

of the shift from an informal GATT mechanism to the mandatory norms and processes of

WTO litigation. The rise to prominence of antidumping trade remedy action, a

retaliatory dynamic of dispute settlement and the continued dominance of developed

countries at the Dispute Settlement Mechanism (DSM) has contributed greatly to the

current negotiating deadlock.7

6 Joost Pauwelyn. "The Limits of Litigation: 'Americanization' and Negotiation in the Settlement of WTO Disputes." Ohio State Journal on Dispute Resolution 19, no. 121-140 (2003). 7 Nancy Birdsall, Dani Rodrik, and Arvind Subramanian. If Rich Governments Really Cared About Development [PDF file]. International Centre for Trade and Sustainable Development, 2005 [cited April 23rd 2006]. Available from www.ictsd.org/dlogue/2005-07-01/Docs/RODRIK-BRIDSALL_SUBRAMANIAN_what-rich-can-do_April2005.pdf; Sylvia Ostry. "Who Rules the Future? The Crisis of Governance and Prospects for Global Civil Society." Paper presented at the New Geographies of Dissent: Global Counter-Publics and Spheres of Power, Robarts Centre for Canadian Studies, York University, January 27-28 2006; Gerald K. Helleiner "Markets, Politics and Globalization: Can the Global Economy Be Civilized?" Geneva: United Nations Conference on Trade and Development, 2000.

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The WTO faces a representational crisis because many of its processes and

outcomes do not reflect the needs of a majority of its membership.8 This is a primary

reason the WTO system is breaking down. The fact is that 60% of the membership has

never used the DSM. After a decade in existence, WTO panels still operate according to

an hermetically sealed set of rules and processes, and take no interest in many emerging

developments in the international society of states beyond narrow trade parameters. New

instruments of public international law and the rapid growth of countervailing political

forces have scrambled the field of play. The balance of power is shifting but the WTO’s

political culture has been slow to respond. The new institutional arrangements agreed to

at the Uruguay have turned out to be an unstable platform for broadening. In the areas of

cultural diversity, human security and public health, there has been a proliferation of new

international instruments of public law that have been created to handle the challenges of

a smaller, more interdependent planet. The WTO is on the sidelines in this process. We

are not naïve about the role of power in the post-Westphalian system, but whatever the

shortcomings of the current state of public international law, the WTO remains a juridical

silo at a time when globalization requires broader and deeper links between international

governance mechanisms.9

Antidumping: The New Zero-Sum Game of Trade Multilateralism

8 Stiglitz, Joseph E., and Andrew Charlton. Aid for Trade: A Report for the Commonwealth Secretariat [PDF file]. United Nations Economic Commission for Africa, 2006 [cited June 8th 2006]. Available from www.uneca.org. 9 A. Clair Cutler. "Critical Reflections on the Westphalian Assumptions of International Law and Organization: A Crisis of Legitimacy." Review of International Studies 27, no. 2 (2001): 133-50.

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Dumping is the practice of exporting a product for less than the cost of producing it, or

for less than the ‘normal value’ of the product on the firm’s home market.10 Dumping is

a popular way to reduce a glut on one’s own market, and agricultural goods are

sometimes treated this way. Canadian dairy producers have been taken to the WTO for

this practice.11 Dumping is also a useful way to gain access to a foreign market

dominated by other firms. Chinese goods are often hit with antidumping duties for this

reason.12

In economic terms dumping is a rational, profit-maximizing action, with little or

no harm to global welfare.13 In many cases, dumping goods on foreign markets can even

improve consumer welfare by lowering prices. On the domestic market, producers

sometimes sell their goods below cost in an effort to clear inventory or break into a

market dominated by rival producers. However, in international trade, where countries

have very different factor endowments, selling goods for less than the cost of production

is considered by the WTO to be an unfair form of competition. Antidumping is a global

bad because it is frequently used by the global north against southern producers whose

primary comparative advantage is cheap labour. Global north countries use it against

each other to protect market share for domestic industries – needless to say, antidumping

measures are frequently subject to abuse, and reforming the rules that regulate them is

10 Department of Finance. Antidumping Information Paper [HTML document]. Department of Finance, Canada, November 17th, 2004, 2003 [cited October 21 2005]. Available from http://www.fin.gc.ca/activty/pubs/antidmp01_e.html. 11 Canada - Measures Affecting the Importation of Milk and Exportation of Dairy Products, WT/DS103 (1999). 12 David Livdahl and Yukiko Masuda. "Anti-Monopoly Law Edges Closer." Financial Times, October 26th 2005. 13 Gregory N. Mankiw and Philip L. Swagel. "Antidumping: The Third Rail of Trade Policy." Foreign Affairs 84, no. 4 (2005): 107-19.

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key to creating a fairer trading system. Nevertheless proactive state involvement in

competition is essential in an era of mounting economic question marks.14

Paradoxically, antidumping actions are now lower than historic highs in 1999 and

2001. But there were still more than 200 antidumping actions notified to the WTO in

2004 (see Figure 1). A mind-boggling 2637 antidumping initiations were reported to the

WTO in the ten years from 1995 to 2004. Only about 5% of these went to the panel

process, yet antidumping triggers a cycle of relentless trade politics that benefits the most

powerful traders – a fact the WTO has been quick to recognize and slow to rectify. This

bare-knuckle reliance on antidumping as a trade strategy has four steps: push hard for

concessions from trading partners during negotiations, concede less in return, exploit the

legal loopholes found in WTO governance, craft a deal and then withdraw the complaint.

This explains why so many antidumping actions are little more than a bargaining chip to

be used in the ongoing negotiating game of trade-roulette.

Governments rely on aggressive litigation strategies to shelter industries faced

with competitive pressure and cut costs up and down the production chain. Figure 1

includes both dispute settlement initiations as well as national trade remedy actions

reported as per the Agreement on Antidumping. The increased reliance on antidumping

measures is a perverse effect of the cost-cutting spree undertaken by the world’s largest

multinationals throughout the 1990s, which placed hundreds of thousands of northern

manufacturing jobs at risk and stirred the wrath of domestic publics. Governments could

not remain passive bystanders when entire sectors were thrown into chaos by structural

14 Linda, M. Young and John Wainio. "The Antidumping Negotiations: Proposals, Positions, and Antidumping Profiles." The Estey Centre Journal of International Law and Trade Policy 6, no. 1 (2005): 23-46. Brink Lindsey and Dan Ikenson. "Coming Home to Roost: Proliferating Antidumping Laws and the Growing Threat to U.S. Exporters." Cato Institute for Trade Policy Studies, 2001.

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adjustment. As is to be expected in these circumstances, antidumping filings are cyclical,

rising and falling with a predictable regularity. Antidumping actions peaked with the dot-

com bubble in 2001, and since then more than 200 antidumping complaints continue to

be filed annually.

Figure 1: Anti-dumping Initiations by Exporting Country 1995-2004

157224 243 256

354292

364311

233 213

050

100150200250300350400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Source: WTO online antidumping databases

Bourgeois and Messerlin examined European antidumping cases between 1980

and 1997. They found an inverse relationship between the height of the tariff wall

protecting domestic firms and the frequency of their involvement in antidumping cases.15

As tariffs fell, countries engaged more frequently in antidumping trade remedy actions.

Second, in this legal culture, the losers are small developing economies such as the

African, Caribbean and Pacific (ACP) nations. As Bown, Hoekman and Ozden have

shown, poor countries are most frequently the target of antidumping actions; they are less

15 Jacques H. J. Bourgeois and Patrick A. Messerlin. "The European Community's Experience." In Brookings Trade Forum 1998, edited by Robert Lawrence. Washington D.C.: Brookings Institution Press, 1998.

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likely to settle cases and more likely to face high dumping duties. They are also less

likely to bring their cases to the WTO.16

The case of China exemplifies the present policy quagmire surrounding

antidumping. China has been the single biggest target of antidumping remedies in recent

years because according to the WTO, it is a non-market economy (NME), a generalized

category left over from cold-war trade politics.17 In the past decade, China has lessened

government controls, strengthened private property rights and met the standards for WTO

accession. Ironically Russia, yet to qualify for WTO membership, has actually moved

backwards on economic reform but has already been recognized by the US and EU as a

market economy.

NME status is a magnet for antidumping violations. Imagine that a Chinese firm

produces handbags and sells them at home for $10 apiece and in foreign markets for the

same price. Handbag manufacturers in the US, who sell their product for $25 apiece,

complain to the Department of Commerce that Chinese manufacturers are dumping

handbags on the American market. Article 2.1 of the Antidumping Agreement states that

“a product is to be considered as being dumped, i.e. introduced into the commerce of

another country at less than its normal value, if the export price of the product exported

from one country to another is less than the comparable price, in the ordinary course of

trade, for the like product when destined for consumption in the exporting country.”

The usual test of dumping is a comparison of handbag prices on the domestic

market and their price in foreign markets. But China is a non-market economy according

to the WTO, which means that its industries are assumed to be heavily subsidized and

16 Chad P. Bown, Bernard Hoekman, and Caglar Ozden. "The Pattern of US Antidumping: The Path from Initial Filing to WTO Dispute Settlement." World Trade Review 2, no. 3 (2003): 349-71.

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this would drive down the price of handbags in the domestic market. So the WTO allows

complainants to use a proxy market to test domestic prices. If the Department of

Commerce examines the price of handbags on the Indian market, and finds that they are

sold for $15 apiece, antidumping duties may be levied against Chinese handbags. NME

status means that even if Chinese handbags are produced according to free market rules,

manufacturers may still face steep duties when selling in the US.

The real issue behind the use of these trade measures is a surge in cheap exports,

not unfair trade practices per se. Antidumping measures are a blunt instrument wielded

against China because northern manufacturing has been hard hit by China’s rise. The

export surges, in textiles for example, are unlike anything seen before. Between January

and June 2005, Chinese positions in European textile markets grew by up to 500%.

Europe negotiated quantitative restrictions, reverting to managed trade in this sensitive

sector where Chinese competition puts close to a half million jobs at risk. 18

China has been slapped with 338 antidumping measures since its accession five

years ago. 19 The most frequent complainants have been the EU, US and India, who

applied measures against Chinese chemicals, base metals and electronics. China,

however, has learned the value of antidumping measures for protecting domestic

producers as well. As one of the most active users of antidumping measures, China has

imposed dozens of measures on chemicals from the EU, steel from Japan, and paper from

17 Guy de Jonquieres. "Chinese Market Economy Puzzle." Financial Times of London, May 1 2006. 18 EU Textile Imports from China: Some Important Points [HTML file]. European Union Trade Commission, 2005 [cited May 25th 2006]. Available from http://ec.europa.eu/comm/trade/issues/sectoral/industry/textile/memo120905_en.htm. 19 Antidumping statistics are available from the WTO, and can be found at www.wto.org/english/tratop_e/adp_e/adp_e.htm.

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the United States and Korea, as the list of the top ten antidumping remedy initiators

shows below (see Figure 2 below).

Figure 2 The Top 10 Users of Anti-dumping Action at the WTO

399

354

303

192

174

172

133

116

99

89

0 50 100 150 200 250 300 350 400 450

India

United States

European Communities

Argentina

South Africa

Australia

Canada

Brazil

China

Turkey

Source: WTO online antidumping databases

There is a bizarre convergence between North American, European, Latin

American and Asian economies which all use antidumping as part of their trade and

industrial policy tool boxes. In this super-competitive international environment, many

members view trade multilateralism as a gestalt. What was a rising tide lifting all boats is

now a zero-sum game. The WTO’s non-performance in this area has had a corrosive

effect on other areas of trade regulation, such as dispute settlement which we will discuss

below.

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The Evolution of Antidumping in the GATT/WTO System

The regulation of non-tariff protectionism is now an important part of any modern trade

regime because liberal antidumping laws at the transnational level often act as a stand-in

for an international competition policy.20 Competition policy is off the table in the Doha

round ensuring that antidumping remains an issue for the foreseeable future. Why is this?

A supranational competition policy is contentious and would require the global north to

implement many of the structural adjustment policies that have been foisted on the

developing world by international financial institutions21. In theory competition policy

allows countries the flexibility to reform Fordist mass-production industries faced with

cheap foreign imports.22 They are designed to manage structural adjustment when

needed. But antidumping remedies, when subject to US trade politics, frequently pander

to the lowest common denominator allowing political insiders to maintain market share at

great cost to consumers and tax payers.23

In a liberalized international environment, there are significant political and

economic implications for small members and WTO legitimacy.24 For one, small

members cannot afford the cost of subsidies, or for that matter, expensive antidumping

20 Mankiw and Swagel 2005. 21 Greg Anderson. "The Compromise of Embedded Liberalism, American Trade Remedy Law, and Canadian Softwood Lumber: Can't We All Just Get Along?" Canadian Foreign Policy 10, no. 2 (2003): 87-108. 22 The Byrd Amendment is the most recent example of the way that anti-dumping is used to protect mature industries that employ a large number of workers and carry on well-organized lobbying efforts and exert significant political influence domestically. American softwood lumber producers have pocketed more than $5 billion in punitive levies since 2001. Canada and the US have just crafted a compromise deal that imposes quantitative restrictions on Canadian softwood for the third time in the past twenty years. The deal allows US producers to keep $1 billion of the illegal duties collected. A significant reason for American success with trade remedy action is that the US Congress has a high degree of autonomy that has no equivalent elsewhere – a power which regional interests exploit very effectively. See www.dfait-maeci.gc.ca/eicb/softwood for a full account of the dispute. 23 Bruce Odessey. House Panel Approves Repeal of Byrd Amendment after Wto Ruling [HTML File]. Washington File, 2005 [cited May 10th 2006]. Available from www.usinfo.state.gov. 24 Anderson 2003

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remedies. Poor southern countries lack the ability to enforce compliance in the event that

they win against a larger developed country. For another, the WTO’s free trade ideal

takes a hit when its biggest proponents preach free trade while simultaneously

maintaining lucrative stop-gap measures for influential business insiders – as much true

in Europe and Asia as it is in the United States. Export credit agencies are but one of the

latest and most innovative uses of proactive industrial support to sweep the European

Union and Japan. They support domestic exporters who are trying to crack markets in

Turkey, Mexico, Iran and China. These agencies protect the investment of domestic

exporters, significantly lowering the risk of emerging markets for medium-sized industry

leaders.25 In 2004, EU governments spent $73 billion on state aid for industry. This is a

high-water mark; subsidies are higher today than they were five years ago.26 Many forms

of subsidization are illegal under EU law, but thanks to the many loopholes, the EU

commission is powerless to stop states from supporting their corporate sectors.

Making the Link Between Antidumping and Subsidies

Antidumping trade remedies are almost always linked to the charge of unfair

subsidization. US producers are way ahead of the pack because they have relied on

antidumping remedies as their preferred form of protectionism since the Smoot Hawley

Tariff Act was signed into law on June 17, 1930.27 To wit, the US practice of subsidising

and providing anti-dumping relief to their steel industry has already generated complaints

on 13 separate issues around US trade in steel products. Canada has also been targeted

25 Martin Wolf. "What India Must Do to Catch up with and Possibly Outpace China." The Financial Times, February 15th 2006. 26 Keith Marsden. Reforming WTO Subsidy Rules: A Better Deal for Taxpayers The TaxPayers' Alliance, 2005. Available from www.taxpayersalliance.com. 27 I. M. Destler. American Trade Politics. 4th ed. Washington, DC: Institute for International Economics, 2005.

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by the US and New Zealand for the subsidy/anti-dumping protectionism of its dairy

industry,28 its civilian aircraft by Brazil29 and its automotive sector by Japan and EC.30

India took the EC to the WTO regarding its anti-dumping protection of Europe’s textile

industries.31

In each of these leading cases, the WTO failed to impose its brand of regulatory

convergence, despite a show of compliance on the part of defendants. When states are

ordered to stop subsidizing domestic industry, they simply switch tracks or tweak policies

to remain in bounds according to the Agreement on Subsidies and Countervailing

Measures. One example of this commercial practice is Brazil’s subsidization of Embraer

and Canada’s financing deals with Bombardier. These firms remain global rivals and

both countries continue to pursue national interests in the lucrative market for regional

jets.32 Embraer and Bombardier hold a special status and continue to enjoy preferential

treatment from their respective governments. To ignore the large role of subsidies in

development is to overlook Krugman’s argument that trade competitiveness and hard-

won market access are inevitably the outcome of a high-powered and focused industrial

strategy, not the abstract principles of comparative advantage.33

Of course, not every country’s industrial policies will be forward-looking and

innovative. But what is indisputable is the fact that the state continues to have a large

role to play in shaping the trade advantages enjoyed by domestic industry. Globalization

28 Canada - Measures Affecting the Importation of Milk and Exportation of Dairy Products, WT/DS103 (1999). 29 Canada — Measures Affecting the Export of Civilian Aircraft, WT/DS70 (1997). 30 Canada — Certain Measures Affecting the Automotive Industry, WT/DS139, WT/DS142 (1998). 31 European Communities — Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India, WT/DS141 (1998). 32 Jaqueline D. Krikorian. "Planes, Trains, and Automobiles: The Impact of the WTO 'Court' on Canada in Its First Ten Years." Journal of International Economic Law 8, no. 4 (2005): 921-75. 33 Paul Krugman. Rethinking International Trade. Cambridge, MA: MIT Press, 1990.

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has not hollowed out state authority to anywhere near the degree many believe. Pundits

keep repeating this mantra, but the rise of China shows how misleading this idea is. State

controlled companies remain surprisingly resilient actors in a post-Washington

Consensus era. Despite market liberalization measures, state-owned enterprises still

account for 80% of China’s economic output. Unsurprising for a quasi-communist

authoritarian state, but what of Europe? For Finland, they account for just under 80% of

economic activity. The Netherlands, one of the most market-friendly jurisdictions, state

enterprises control about 50% of all corporate assets. For Sweden, Italy and France, the

number is closer to 30%.34

Even more importantly, in these jurisdictions the state is frequently the largest

employer, making Walmart’s 1.3 million workers appear to be a drop in the bucket.35

Washington Consensus rules should have been a red light for states, but they haven’t

stopped developed countries that are committed to export performance in an increasingly

competitive marketplace.36

The Dispute Settlement Gap

Global civil society activists have been right to emphasize the vast inequality of

institutional trade outcomes for rich and poor countries. At first, income inequality

among the membership did not seem to affect the performance of the WTO. But over

time, the power imbalance has been shown to have significant institutional side effects

34 "Numbers in the News: Stately Enterprises." Financial Times, March 10th 2006. 35 Liza Featherstone. On the Wal-Mart Money Trail [HTML file]. The Nation, 2005 [cited June 11th 2006]. Available from http://www.thenation.com/doc/20051121/featherstone. 36 Fred Bergsten. "Look Further Than Trade to Save Doha." Financial Times, December 8 2005.

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that lower the morale of the membership and nurture an environment of distrust and

recrimination.

After almost a decade, it is disappointing to learn that southern countries still do

not use the Dispute Settlement Mechanism (DSM) as much as developed countries;37

1997 was the year of greatest inequality at the DSM, with developed countries bringing

more than forty cases, and developing countries fewer than ten. By 2004, only twenty

cases were brought to the WTO, with developing countries initiating seven, or 35% of

total cases. This was down from 2003, when 28 cases were initiated and developing

countries accounted for 19 of them, or 68% of all cases. When four-fifths of the

membership is classified as developing, this is a significant commentary on the current

institutional arrangement.38 Of the 148 members, 81 have never used the DSM. Further,

278 of 329 cases taken to the DSM to date involve developed countries as complainants

or respondents. Dispute settlement has not been democratized in the least, and the

wealthiest traders ought to be alarmed by the failure to get the rules right for the poorest

members.

Retaliatory Dynamics

Global trade politics has developed its own institutional forms and challenges.39 Many of

the disputes brought by the developed north to the DSM have roots in previous cases.

Sometimes, as in the Bananas Case, they are the result of long-running bilateral disputes

that the WTO is unable to resolve. Other times, as in the Boeing/Airbus disputes between

the US and EU, they are the result of retaliatory litigation. This retaliatory dynamic is the

37 Walden Bello and Aileen Kwa. "The Stalemate in the WTO." Focus on the Global South, 2003. 38 Drache 2005

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result of clashing norms and standards. One area where this dynamic is most in evidence

is in the area of food safety because the EU has imposed extensive restrictions on

genetically modified organisms. It touches a raw nerve for civil society activists who

believe the WTO is unfit to decide “what we should eat, and what farmers should

grow,”40 as well as for heavily subsidized American agricultural producers who view

European markets as the next logical frontier of market expansion. It is a top priority of

the WTO to eliminate this rift. In fact, Lamy has staked his leadership of the WTO on

getting the Doha back on track by making substantial gains for the global south while

placating civil society with talk of ‘humanizing globalization.’41 He has given new

legitimacy to the fact that states bear the final responsibility for articulating collective

preferences and accommodating democratic choice.42

It is telling that north-north disputes are much more frequent (so far 127 cases)

than are south-south disputes (51 cases). In fact, north-north disputes by far surpass both

the number of north-south and south-north disputes. A developed country is nearly twice

as likely to initiate a dispute against another developed country as against a developing

country. Moreover, a northern country was sued only 40% of the time by a southern

country. In the future, with India and others becoming more active, this could change.

Out of the 329 cases taken to the DSM, 203 cases, or 62%, have been launched

against developed countries. When we look at the number of cases in which developed

39 In almost fifty years, the GATT heard more than 400 cases. The WTO had logged 329 cases in a single decade. See John Braithwaite and Peter Drahos. Global Business Regulation. Cambridge: Cambridge University Press, 2000. 40 Alan Beattie. "Food Ruling Will Keep WTO in Activists' Sights." The Financial Times, February 8th 2006. 41 Pascal Lamy. Humanising Globalization. World Trade Organization, 2006 [cited January 31 2006]. Available from www.wto.org/english/news_e/sppl_e/sppl16_e.htm. 42 Steve Charnovitz. "An Analysis of Pascal Lamy's Proposal on Collective Preferences." Journal of International Economic Law 8, no. 2 (2005): 449-72.

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members are involved as co-complainants or co-respondents, the number rises

significantly; 278 of 329 cases involve developed countries as complainants or

respondents. In percentage terms, this means that 85% of WTO disputes involve at least

one developed country. Only 15% of disputes (51 of 329 cases) involve only southern

interests. If the WTO is to survive future rounds, southern countries will need to buy into

the DSM in a way they have not in the past ten years.

So far, there is little optimism for a sea-change in DSM usage. Only 67 members

are on record as having participated in at least one dispute, and 33 of these have been

involved in three or fewer cases (see Figure 3). Canada, US, EU and Japan file the

largest number of complaints and responses – unsurprisingly they account for around

60% of the world’s merchandise exports. The US is far and away the biggest user of the

consultations system, filing at least 30% more complaints than the EC, and almost twice

as many responses. Most users of the DSM have almost no actual experience with the

panel process, and many developing nations are only tangentially involved in dispute

settlement although they have large interests at stake. For example many developing

countries were involved on both sides in the Bananas dispute, which, paradoxically was

actually a market access battle between the EU and US. The US succeeded in reasserting

its long-standing geopolitical interests in central and South American markets. The irony

is that the WTO system was supposed to empower small trading countries and mitigate

historic power inequalities. Instead it pitted poor African and Caribbean nations against

small economies in Latin America. This case is typical of current dispute settlement

dynamics in which developing countries are enlisted proxies for the hard power interests

of the global north.

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Figure 3 Membership Use of the Dispute Settlement Mechanism

81

33

34

Never Used Light Use Heavy Use

Why has southern participation in dispute settlement remained so low, despite the

rise of strong traders such as China, India, Brazil, Argentina and Mexico? There are two

simple reasons. First, for many developing nations, post-colonial sovereignty was hard-

won, and governments do not want to cede policy space to external experts. In this vein,

non-governmental organizations also argue that local capacities should be developed by

governments, not by multinational corporations that are more concerned with shareholder

value than they are with the quality of life of southern citizens.43 Second, the failures of

structural adjustment in the 1980s and 90s reinforce the view that supranational trade

governance is a risky endeavour with neo-colonial overtones.44 Developing countries

ceded a lot of ground in the Uruguay Round, trading services and intellectual property

liberalization for binding dispute settlement and promises on agricultural market access.

Over the past five years there has been little movement on Doha priorities (see Annex 1).

43 Drug Companies Vs. Brazil: The Threat to Public Health [RTF file]. Oxfam GB, 2001 [cited April 10th 2006]. Available from http://www.oxfam.org.uk/what_we_do/issues/health/drugcomp_brazil.htm. 44 Walden Bello. Why Reform of the WTO Is the Wrong Agenda [HTML File]. Focus on the Global South, 2003 [cited June 10 2003]. Available from www.portoalegre2003.org.

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And even the Joint Integrated Technical Assistance Program (JITAP), designed to

prepare developing countries to access WTO legal processes, has made very little

difference in the dispute settlement numbers.45

Figure 4 Disputes Initiated by Developed and Developing Countries

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Developed Countries Developing Countries

New Geographies of Power

How can we understand the WTO’s massive procedural imbalances in the context of

global trade politics? Up until the present round launched in 2001 the WTO operated like

the GATT club of elite nations, with little understanding of the new international

environment in which negotiating momentum has shifted away from the US and EU

towards Brazil, India, China, South Africa and Mexico (the BRICSAM bloc).46 Power

has also leached to dozens of side deals, regional trade agreements and bilateral

arrangements. In the prescient words of Sylvia Ostry, this new geography of power is the

45 JITAP has been widely supported by social democratic nations in Europe and by Canada. The US is much more reluctant to provide funds for technical capacity building. For more research on the difficult issue of technical assistance, consult www.jitap.org.

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end of the GATT-style multilateral system as we know it.47 The new configuration

taking shape is a curious hybrid of American unilateralism, European collective

preferences, Chinese market power, regional trade agreements, and an adjudicative

system that is a lawyer’s delight and a diplomat’s nightmare.

The WTO was supposed to represent the collective preference of democratic

societies for open markets, but now the Doha round is kept alive by clever legalistic

juggling and ambitious bureaucrats trained in the dark arts of public relations. Far from

being a rainmaker, the WTO has been plagued by a drought of good ideas about its place

in the international system. International public policy has powered ahead thanks to

international agreements on development and poverty reduction (UN Millennium

Development Goals),48 poverty reduction (UN Conference on Social Development),49

and human rights (A Duty to Protect).50

Some of the most impressive milestones are the international ban on landmines

(1997),51 the International Criminal Court (1998)52, and the Earth Summit in Rio de

Janeiro (2002),53 which spawned six international environmental agreements on the

issues of biodiversity, climate change (the Kyoto Protocol), desertification, and the

sustainability of migratory fish stocks among others.54 There has never been a

comfortable fit among the dozens of treaties, conventions, diplomatic understandings and

46 Antkiewicz, Agata, and John Whalley. BRICSAM and the Non-WTO [PDF file]. The Centre for International Governance Innovation, 2005 [cited June 12th 2006]. Available from www.cigionline.org. 47 Sylvia Ostry. "The Post Doha Trading System." Paper presented at the Pre-G8 Academic Conference, University of Glasgow, June 29-30 2005. 48 See www.un.org/milleniumgoals. 49 See www.un.org/esa. 50 See www.unhchr.org. 51 See www.icbl.org. 52 See www.icc-cpi.int. 53 See www.earthsummit2002.org.

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legal principles that comprise the body of public international law. International treaties

were meant to be the high standard of the international system with a capacity to bring

global governance to the next level. After a decade the WTO is still not pulling its

weight. Compare the faded glory of the most-favoured nation and non-discrimination

principles of global trade to other international milestones like the polluter pays principle

(1971) and the principle of cultural pluralism (2001).55 One can see how much a laggard

the WTO is, and how few and far between are its triumphs. It was intended to be the

epicentre of a new international order, but rather than presiding over a bigger and more

robust system of international public law, it has become a juridical silo.

It is telling that business has not rallied to the Doha round, and while there is still

time for business leaders to do so, the world’s largest economic actors are staying on the

sidelines because services, investment and intellectual property negotiations are all

stalled. It will require more than the exhortations of CEOs to resuscitate them. The

largest corporate actors are now backing bilateral deals which often do a better job of

integrating and harmonizing national regulations. Those who argue for deeper trade

integration at this point are clearly confused about the new geographies of power. The

information technologies are empowering individuals and groups in civil society.

Globalization, far from being the great leveller, has made politics intensely local.

Sceptical publics are electing governments that do not look to corporate power to tame

international markets.

54 Andrew F. Cooper. Tests of Global Governance: Canadian Diplomacy and United Nations World Conferences. New York: United Nations University Press, 2004. 55 "The Sustainable Development Timeline." Ottawa: International Institute on Sustainable Development, 2006.

23

One result of the lack of progress at Doha has been that multinationals are having

to rethink their strategies. These ‘globally integrated enterprises,’ to use the parlance of

Samuel Palmisano, IBM’s chief executive officer, are structurally and operationally

plugging into multiple national regulatory environments.56 It is very likely that trade

relations in the future will rely more on the procedures of private international law (those

national regulations that govern the bureaucratic relationships between states) than on the

sort of grand-treaty making of which the Doha round may be the last example. This is

the classic two-track approach the WTO has tried to discourage; but it continues to make

good business sense. The world’s largest corporations know that what happens at Doha

affects them, but the risks of throwing their political capital into the Doha round is not

equal to the limited rewards on offer.

As Doha inches along, it is entirely likely that progress will fall below even the

diminished expectations of trade diplomats.57 On agricultural export subsidies, the US

and EU have made progress but are still far apart. Domestic farm support and

agricultural tariffs remain deal breakers. After bitter wrangling, the US has made some

concessions on cotton subsidies, but not enough to call negotiations in this symbolically

important sector a win for West African producers. Talks on services and industrial

goods liberalization are at an impasse and there are no good deals on the horizon (see

Annex 1).

56 Samuel J. Palmisano. "The Globally Integrated Enterprise." Foreign Affairs 85, no. 3 (2006). 57 Guy de Jonquieres "Tentative Steps Forward Seen as Better Than None at All." Financial Times, December 19th 2005.

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Ruggie reminds us that the goals of trade liberalization have never been literally

free trade, but developing rules and norms to smooth international transactions.58 By

Ruggie’s measure the WTO is gasping for air.59 Woolcock, is deeply pessimistic about

the prospects for raising rule-related issues in WTO negotiations given the current lack of

consensus among members on textiles, agriculture and services.60 Making better rules

that will pave the way for growth and development is not something that members can

expect to debate, even in the medium term. In the final analysis the WTO needs better

rules to get better outcomes. But it needs better outcomes to stay aloft long enough to

make better rules. There are no champions of reform other than the many NGOs, and

trade bureaucrats do not listen to them. And so, as more deadlines are missed, it becomes

increasingly unlikely that the WTO will pull out of its long, slow descent.

Conclusion

The original goals of the WTO, as stated in the Marrakesh Agreement, were to raise

standards of living for the poorest nations and to develop trade strategies for sustainable

development.61 (see text box) It is worth recalling its expansive vision of open trade and

equitable outcomes. The GATT/ WTO set out to be a powerful voice in world affairs,

but is now a vision manqué. The three challenges discussed above – the WTO’s

antidumping procedures, its representational crisis and its silo mentality to international

law – suggest that the trading system is due for a major overhaul. So far no one has been

58 John Gerard Ruggie. "International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order." International Organization 36, no. 2 (1982): 379-415. 59 Jeffery M. Drope and Wendy L. Hansens. “Antidumping’s Happy Birthday?” The World Economy 28, no. 2 (2006). 60 Stephen Woolcock. "Making Multi-Level Rules Work: Trade and Investment Rules in Regional and Bilateral Agreements." United Nations University, 2005.

25

able to chart a successful course to renew the WTO. What are the obstacles in the path?

We don’t know if the US and the EU can reach a deal on agriculture, textiles and

services. We don’t know what leadership

role China will assert if any. We don’t

even understand whether global business

will spend scarce political capital to get

the Doha Round on track. We cannot

even predict what deal global south

leaders would be willing to accept on

cotton, agriculture and whether they

would be willing to trade off financial

services liberalization for agricultural

access. Global civil society is also a wild

card because no one knows the current capacity of the anti-globalization movement to

organize a worldwide backlash.

The prospects for salvaging the Doha Development Round are slim. A large

disconnect exists between trade orthodoxy and the realities of the international trade

regime. There is a great potential for framework agreements to be useful for small

countries because they are used to enhance the freedom states have to regulate property

61 "WTO Agreements and Public Health: A Joint Study by the WHO and WTO Secretariats." Geneva: World Trade Organization, 2002, p. 26.

Preamble to the Marrakesh Agreement Establishing the World Trade Organization Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development, [emphasis added]

Source: WTO legal texts at www.wto.org

26

rights.62 Economic property rights have a clear and fundamental role to play in

development, as Coase pointed out almost five decades ago.63

The failure to make the DSM accessible to all is a systemic failure on the part of

the WTO. If there is a generalization to be made, it is that the DSM has not created a

power-blind framework for dispute settlement. But WTO rules are not written in stone. If

they do not produce superior outcomes, they should be changed. This is the big idea that

needs to migrate from the margins to the centre of the WTO’s agenda.

Finally the WTO has to reflect the interests of the majority of its stakeholders.

This is the sine qua non of multilateralism and for building a sustainable democratic

international order. The global south is not onside, the EU and the US cannot bridge their

differences and with China and India flexing their muscles, trade Cassandras are

predicting a train wreck. Much is in flux. What is indisputable is that the WTO is in a

race against the clock and its institutional life is on the line.

62 Peter Drahos. An Alternative Framework for the Global Regulation of Intellectual Property Rights [PDF file]. Centre for Governance of Knowledge and Development, 2005 [cited June 3rd 2006]. Available from http://cgkd.anu.edu.au/menus/workingpapers.php. 63 R. H. Coase. "The Problem of Social Cost." Journal of Law and Economics 3 (1960): 1-23.

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